The Loonie – befuddling both bulls and bears 14Nov14

The Loonie – befuddling both bulls and bears

Michael O’Neill

FX Consultant / IFXA Ltd



  • Decoupling of WTI and USDCAD may be occurring
  • Death of the Loonie may be exaggerated
  • Next week primed for volatility with large scale data dump

By Michael O’Neill

What G-10 currency looks bid at the top, offered at the bottom and trades erratically in between? If you guessed USDCAD – full marks! Although both Aussie and Kiwi would probably be correct as well.

USDCAD has been mired in a 1.1260-1.1480 range since the beginning of the month. Attempts to push above the ceiling or break through the floor have failed miserably.

The Canadian dollar negatives are well documented and for the most part as stale as two-week-old bread. These include but are not limited to: 1) Expected economic growth lag between Canada and the US. 2) A possible housing market bubble. 3) The perception that Canadian interest rate hikes will lag those south of the border. 4) Soft commodity prices including oil. 5) The perception that the Bank of Canada is doveish.

The Canadian dollar positives are out there but appear to be overlooked. Canada is already, or about to, become the first G-7 nation with a budget and trade surplus since the 2008 financial crisis. According to the Canadian Finance Department, the expansion in Canada’s real GDP has outpaced that of the G-7.

Canada real GDP growth

Source: Department of Finance

The Canadian Finance Department also notes that Canadian employment growth is second, only to the US since the 2008 financial crisis.

Canadian employment growth since 2008

Source: Department of Finance

The Bank of Canada (BoC) may not even be a doveish as the market thinks. Last month, the BoC governor, Stephen Poloz, made a point of telling markets that the bank does not target the exchange rate. They also acknowledged the possibility of higher inflation in the recent Monetary Policy Report.


It is time to put the USDCAD bullish story out to pasture. The Bank of Canada isn’t doveish and they are not encouraging a weaker currency. Fears that Canadian economic growth would lag that of the US have dissipated as evidenced by both the recent employment figures and the trade data. The soft commodity price story is already reflected in the current exchange rate. As for oil, the drop in prices may not be sustainable as winter is not just coming, it appears to have arrived today. (At least in a large swath of Ontario and Alberta.) It might not mean the start of a huge USDCAD sell-off, but perhaps it means that the 2014 high of 1.1480 will cap US dollar strength.

WTI and the Loonie-time to decouple?

The latest plunge in WTI oil prices through support at $75.00/bbl lifted USDCAD from 1.1305 to 1.1390 and is now the most legitimate reason to buy USDCAD. But is it? The following chart notes that the last time WTI was trading below $75.00/bbl, in September 2013, USDCAD was trading in the 1.0200-1.0300 area. The weak oil prices and the strong Canadian dollar weren’t all that beneficial to the Canadian economy then, but it took a while for the Loonie to weaken. Today, USDCAD is almost 11% higher than it was last September with WTI at the same level. Arguably, the current USDCAD exchange rate may be high enough for the current or even lower WTI price allowing the existing relationship between WTI and USDCAD to decouple.

WTI and the Canadian dollar

Source: Saxo Bank

The week that was

This week had a bit of everything with high level political gamesmanship competing for attention with a doveish sounding Bank of England, a hint of a snap election in Japan leading to erratic FX price moves.

Monday was mostly a nothing day with APEC headlines providing a distraction for the Asian session but no fodder for trading.

Tuesday should have been quiet with Canada and the US closed for Remembrance Day/Veterans Day. It wasn’t. USDJPY soared to 116.05 from 114.70 on a rumour of a snap election call in Japan and a delay of the next sales tax increase. It subsequently declined and European traders turned their focus to the Bank of England’s Quarterly Inflation Report (QIR) the next day.

Wednesday was a sterling day. The Bank of England lowered future forecasts for GDP and CPI and FX traders lowered GBPUSD. Governor Mark Carney took a page from his US Federal Reserve chair Janet Yellen’s handbook and emphasized that the interest rate outlook would be data dependent. (Apparently interest rate outlooks based on gut feelings and coin flips weren’t working.)

Thursday was a busy day for Eurozone data but not really for EURUSD. An Assistant governor of the Reserve Bank of Australia (RBA) said “intervention was a possibility” and AUDUSD was sold, but only briefly and then it recovered fully. Cable remained soft on fallout from the previous day’s QIR and USDCAD climbed nearly 0.0070 points, in part because WTI fell through support at $75.00/bbl.

Australian PM Tony Abbott: What’s Russian for

‘misunderstanding’? Photo: Stefan Postles

The week that will be

The Federal Open Market Committee (FOMC) and US data return to the center ring under the Big Top next week following the weekends G-20 meeting in Brisbane, Australia. At the same time, key data from Europe and the UK will be vying for attention ensuring a lively trading week.

Monday could see volatility from G-20 headlines. The Australian prime minister, Tony Abbott, promised to “shirt-front” President Vladimir Putin for the Russian involvement in shooting down the Malaysian jet. Matt Gurney in the National Post writes that the “reciprocal Russian shirt-fronting delegation should be arriving off the coast of Australia shortly in the form a Russian war ship task force." Abbott is quickly learning the Russian word for “misunderstanding”. Monday will also be about New Zealand Retail Sales and Japanese GDP data.

Tuesday is “data dump’ day. It starts with the minutes from the RBA, providing Putin hasn’t stuck them in an orifice on Abbott, rendering them unavailable. The Eurozone and the UK release a tonne of important data including UK CPI, German ZEW survey and Eurozone PMI’s. If that wasn’t enough data to chew on, the US adds PPI and the NAHB Housing Market Index to the mix.

On Wednesday, the Bank of Japan interest rate decision and statement will dominate the Asia session while the BoE minutes do the same for Europe. The rest of the day will be quiet until the New York afternoon release of the FOMC minutes.

Thursday should be entertaining as traders digest the previous days BoJ decision, Eurozone, UK and US data and the BoE and FOMC minutes. And to add fuel to the fire, there are more Eurozone PMI data releases, UK Retail Sales and US CPI and housing reports.

Friday is a day of rest. There isn’t anything in the way of data (except from Canada) and the US market will be planning their escape for Thanksgiving week.

– Edited by Oliver Morrison

Michael O’Neill is an FX consultant at IFXA Ltd. Follow Michael or comment below to take part in Saxo Bank’s social trading platform

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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