Loonie sinks on widespread US dollar demand 2Jan15

Loonie sinks on widespread US dollar demand

Michael O’Neill

FX Consultant / IFXA Ltd



  • Data and Draghi drive US dollar higher
  • USDX breaks above strong resistance
  • USDCAD outlook bullish

By Michael O’Neill

The calendar may have rolled over to 2015 but many market participants haven’t even rolled out of bed, perhaps still recovering from excessive New Year’s Eve party indulgences. Those who had to man their trading desks today were greeted by an understandably thin FX market and a desire to buy US dollars. And buy dollars they did. The greenback rose across the G7 spectrum with last year’s higher US rates lower Eurozone rates and currency devaluation themes expected to continue to be the main drivers of FX trading in the first part of this year.

Draghi boasts and Dragon boats

Dragon boat racing is a sport that pits teams of 20 paddlers plus a drummer and a person steering against other dragon boats. Success is predicated on timing and technique. Draghi boasting is a similar sport that pits the head of the European Central Bank (ECB) and his team against the various government agendas of the 19 Eurozone members. The key difference is that Dragon boat racing propels its members above water while Draghi boasts attempts to keep his membership from going underwater.

Draghi boasts were in fine form over the weekend. In an interview with Germany’s Handelsblatt, he warned that “the risks of the ECB failing to meet its own mandate of safeguarding price stability are higher than they were six months ago”. He also warned that the “ECB could launch its newest and most ambitious round of monetary easing in the early part of 2015”.

These comments were all traders needed to sell EURUSD and buy US dollars against everything else.

Mario’s game seeks to keep the Eurozone above water. Pic: Jorgen Udvang

USDX breaking higher

The USDX consolidation during the last few days of December ended decisively today with the break above resistance in the 90.90-91.00 area. The next resistance area is at 91.22-27 which is guarding additional resistance at 91.70, levels not seen since 2005. A move back below 90.90 suggests a return to 90.90-65.

Chart: USDX 4-hour with uptrend noted

Source: Saxo Bank

USDCAD outlook

The Canadian dollar is under pressure, mostly due to US dollar demand against the majors in a thin market lacking input from domestic data. The ongoing concerns about further oil price weakness combined with weaker commodity price indices has further added to the Loonies woes. The local financial press is warning that falling oil price revenues could jeopardise the Federal government’s promise of a balanced budget in 2015 although the government denies that this is the case.

A federal election is expected in October 2015 and a balanced budget and surplus is supposed to be the cornerstone of the campaign. There is speculation that an election could be called much earlier to avoid any negative repercussions from sliding oil prices. An election would be a Canadian dollar negative especially if the Liberals are leading in the polls. The Liberal leader has a lot in common with a sack of hockey pucks and his only qualification for the position is that his daddy was the Prime Minister of Canada for about 15 years 1968 to 1984.

Next week’s data should provide USDCAD traders with a better idea of how the US economic recovery is effecting Canada. Growth in manufacturing exports will help alleviate some of the concerns from lower oil prices. Friday’s employment report will be closely watched for evidence that the US recovery is positively impacting Canada.

USDCAD technical outlook

The intraday USDCAD technicals are bullish with the break above the two-week USDCAD trading band of 1.1555-1.1670 which sets up a test of resistance in the 1.1725-35 zone. However, the steepness of the rally, the thin markets ahead of the weekend warn that a profit taking induced retreat could see a retest of intraday support at 1.1640.

The short to medium term USDCAD outlook is bullish. The rally from September remains intact while trading above 1.1440. The 1.1680 level is important as it is the 61.8% Fibonacci retracement of the 2009-2011 range. Today’s move above this level suggests further USDCAD gains to 1.2210 representing the 76.4% retracement of the 2009-2011.

Chart: USDCAD daily with Fibonacci targets

Source: Saxo Bank

— Edited by Clare MacCarthy

Michael O’Neill is an FX consultant at IFXA Ltd

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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