Weak ahead will be dead 19Dec14

Week ahead will be dead

Michael O’Neill

FX Consultant / IFXA Ltd


  • Canadian data halts Loonie gains (for now)
  • USDX a nice present for US dollar bulls
  • Week ahead will be quiet

By Michael O’Neill

This week’s wild ride is ending in the slow lane, in part, due to a lack of data to provide trading inspiration and because of the annual "head for the door, it’s Christmas" sentiment permeating markets.

Canadian data fails to inspire

There hasn’t been much in the way of Canadian data to help provide traders with short-term direction since last week’s Bank of Canada Financial Stability Report. That left the Loonie vulnerable to the ebbs and flows of oil prices and US dollar sentiment. Today’s Retail Sales and inflation data could have changed all of that. It did not.

November headline inflation was slightly weaker than expected (Negative 0.2% vs. forecast of negative 0.1%). Core CPI missed as well, coming in at 0.0%. On the other hand, Retail Sales slightly beat the forecasts, which suggests that one cancels the other.

FX traders didn’t see it that way and drove USDCAD to 1.1630 from 1.1605 before it retreated. Today’s inflation data further validated the Bank of Canada’s (BoC) view that inflation gains were temporary. However, even if there may be no danger that the BoC matches a Fed rate move, Canadian rates aren’t going south either as the BoC is neutral. This data won’t change that stance.

Canadian dollar outlook

Looking forward, the outlook for USDCAD is likely to be 60-40 in favour of a move higher, predominately driven by oil prices. However, the lack of data next week, the holiday season and the proximity to year-end rebalancing flows, in addition to the large gains already achieved this month is, in my view, evidence that we have seen the high for USDCAD (at 1.1674) for 2014, barring a collapse in WTI prices below $50.00/bbl.

USDCAD technical outlook.

The short-term USDCAD technicals are bullish while trading above 1.1440 with the move above 1.1505 supporting an acceleration of gains towards 1.1775-1.1830. The intraday technicals are also bullish while trading above 1.1590. However, a failure to move through intraday resistance at 1.1630-35 could extend the current short-term consolidation phase. Below 1.1590 targets the 1.1525-35 area.

Chart: USDCAD with possible Christmas week trading range shown

Source: Saxo Bank

USDX still supports US dollar gains

The USDX embarked on another moonshot this week, aided and abetted by the FOMC statement and press conference. The short-term technicals are in a rising channel above support at 89.44, targeting further gains towards major resistance in the 89.90-90.30 area. These are levels that have not been seen since 2009. In addition, the steepness of the post-FOMC rally and the time of the year risks a correction back to support in the 89.10 area. However, at this time of year, the shortage of liquidity tends to greatly reduce the validity of any short-term technical analysis.

Chart: USDX 4 hour with uptrend channel

Source: Saxo Bank

The week that was

A treasure trove of data from around the world did not provide traders with enough riches to distract them from their laser-eyed focus on the Federal Open Market Committee (FOMC) statement and Janet Yellen’s press conference. However, as usual, different regions took a turn in the spotlight with the one constant theme throughout the week being poor liquidity.

Monday was all about Japan and the super majority win by the incumbent prime minister, Shinto Abe. Not to be outshone by Tokyo, the European Central Bank’s Ewald Nowotny tried to stimulate interest in EURUSD by hinting at potential quantitative easing.

The fall in yen will undoubtedly have an impact on festive Japanese retail sales.
Photo: iStock

Tuesday was still about Japan in the early going as USDJPY, EURJPY and other yen crosses rode an out-of-control rollercoaster. Orderly selling of US dollar vs. the majors turned into a rout during the European session despite lacking a clear catalyst for the move. The Russian ruble was on everyone’s radar as it dropped into an abyss despite the Central Bank hiking interest rates to 17% from 10.5%, sparking fears of an emerging market contagion.

Wednesday was an odd trading session for an FOMC meeting day. FX markets were volatile before and after the FOMC statement and press conference. During the European session, Russian ruble currency moves captured the lion’s share of the attention with the Russian Ministry of Finance reportedly intervening. GBPUSD whip-sawed on the back of a weaker-than-expected employment report and the Bank of England (BoE) minutes. After the FOMC statement and Janet Yellen’s press conference, traders looked for "patience" after losing a "considerable time".

Thursday was the previous three days on Valium, unless you lived in Switzerland or were short EURCHF. The SNB’s announcement of negative rates on sight deposits gave a boost to EURCHF. Traders ignored German IFO data but jumped all over GBPUSD on news that Retail Sales beat forecasts by a wide margin.

The week that will be

The week that will be, won’t be much. Christmas holiday celebrations will shut down most of the major markets from Wednesday afternoon to the rest of the week. Sure, some poor mopes will be at their desks on Boxing Day but they will be far more active raising their levels in Candy Crush then trading FX. Still, for those who didn’t book off next week, there is a lot of data to digest at the start.

Monday will start off slow and is likely to stay that way if the FX moves will be data dependent, since there isn’t anything on tap anywhere to get traders’ hearts pounding.

Tuesday is data day for this week. It will start slow with Japan closed for the Emperor’s birthday but will improve during the European session. UK GDP data may be enough to get sterling traders away from the egg nog bowl with an upside surprise likely giving GBPUSD a lift. A slew of US data releases including Durable Goods, GDP, and Michigan Consumer Sentiment could reignite US dollar demand if they combine to show that US economic growth is accelerating.

Wednesday is Christmas Eve and pretty much wraps up the trading week (except for Japan). The sparse data releases will be ignored in favour of holiday wishes and travel plans.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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