Loonie over a barrel and FSR didn’t help-!0Dec14


Loonie over a barrel and FSR didn’t help

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

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  • Thin FX markets increases volatility
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  • Burger/doughnuts merger means only minor support for loonie

By Michael O’Neill

The “Ho-Ho Ho” sound that you hear is not originating from the North Pole but from the gods of FX who are chuckling heartily at traders who believe the notion that this week’s currency market volatility was anything more than “noise”.

Tuesday’s tumultuous twists and turns in the FX majors, particularly USDJPY, had traders scratching their heads and seeking justification for the moves, seemingly picking headlines out of the air as catalysts. These included year-end position adjusting, safe haven flows, ratings downgrades, Chinese growth concerns, oil price weakness and political uncertainty in Greece.

Today, all those troubles seemed so far away. Day traders may be longing for “Yesterday” and the trading opportunities that volatile markets provide. The majors are trading sideways for the moment with no US data to provide direction.

BoC Financial Services Review won’t support Loonie

This morning’s release of the Bank of Canada (BoC) Financial Services Review gave the Loonie another shot by highlighting household imbalances as the most important risk to financial stability. The BoC governor’s press conference at 16:15 GMT could do more damage. Mr. Poloz is highly unlikely to talk up the Canadian dollar, especially considering last week’s BoC statement. Deflation risks and falling oil prices are additional concerns to go along with household debt. Mr. Poloz’s speech on Thursday to the Economic Club of New York may have an even larger effect if he focuses on the negatives.

Burger King’s slice of the fast food market is about to get bigger with its likely
acquisition of Tim Horton’s by Friday afternoon. Photo: iStock

The oil market isn’t helping either

The Canadian dollar is struggling to make any gains. Recent attempts to push USDCAD lower have been stymied by oil price concerns. The Organisation of Petroleum Exporting Countries (OPEC) lowered its 2015 world oil consumption forecast by 300,000 barrels per day and WTI is down 2.5% on the day. That news helped push the US dollar higher against Canada even as the US dollar was retreating against both the Aussie and the Kiwi.

Burgers and doughnuts unlikely to provide sustenance for Loonie

Burger King (BKW:NYSE) and Tim Hortons (THL:TSE) have announced the share considerations for the merger which closes on December 12. Those hoping for a large FX conversion (me) will be sorely disappointed. The details, taken from the Burger King SEC filings, pertaining to Canada are as follows:

  • Holders of approximately 2,093,443 common shares of Tim Hortons, or approximately 2% of the outstanding common shares of Tim Hortons, made a cash election. At $8.50 per share, it equates to CAD$ 201,604,681.50.
  • Holders of approximately 95,703,801 common shares of Tim Hortons, or approximately 72% of the outstanding common shares of Tim Hortons, made an election to receive Restaurant Brands International common shares. At $65.50 per share it equates to CAD$ 2,278,019,718.50.

The implication is that the total Canadian dollar requirement to close this transaction, valued at CAD$12.5 billion is a mere CAD$ 2.5 billion. A prudent treasury risk manager would have already started accumulating the necessary Canadian dollars and USDCAD’s struggles to maintain momentum above the 1.1470-90 area suggests that is the case. However, it wouldn’t be a surprise if on December 12, a chunky bit of USDCAD selling occurs.

USDCAD technicals

The intraday and short-term USDCAD technicals are bullish while trading above 1.1400 looking for a break of minor resistance at 1.1480 to extend gains through 1.1500 to 1.1530. A move below 1.1400 suggests a test of 1.1350 is possible.

Chart: USDCAD hourly

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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