A witch’s brew of trouble brewing for the Loonie 7jAN15


A witch’s brew of trouble brewing for the Loonie

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Friday’s NFP report matters more than FOMC minutes
  • ADP report today of 241,000 additional jobs supports NFP gains
  • USDCAD aiming for 1.2160

By Michael O’Neill

The US dollar was is in demand during the early North American session from both a weaker Eurozone inflation report and a stronger ADP employment report.

The ADP employment report for December beat expectations, posting a gain of 241,000 jobs compared to forecasts for 225,000. This result may raise expectations that Friday’s US nonfarm payrolls report may surprise to the upside.

The pressure is mounting for further European Central Bank stimulus measures following today’s slightly lower-than-expected Eurozone CPI data. (actual negative 0.2% vs. forecast, negative 0.1%).

The EURUSD reaction was understated because ECB action is already expected and the currency pair has already shed another 0.0250 points since the start of the year on anticipation of such an outcome.

NFP will overshadow FOMC minutes

The Federal Reserve Open Market Committee minutes are due this afternoon. Those expecting a major reaction to the release should demonstrate "patience" since there has been "considerable time" to digest the previous monetary policy statement.

The Committee insists that any interest rate moves will be data dependent and there hasn’t been a whole lot of data since the statement to support any change in the timing of a move.

However, Friday’s NFP data is a different story. If (and it’s a big if) NFP posts gains anywhere close to November’s blow-out 321,000 gain and the unemployment rate comes in at 5.6%, the forecasters will penciling in a first-quarter rate hike. Friday will be fun, today will be a write-off.

All the indications are that the US economy is putting everything in place for an impressive 2015 and this Friday’s NFP should do nothing to change that view. Photo: Thinkstock

Trade balance unbalances Loonie

USDCAD traded erratically overnight; rising in Asia and retreating in Europe. The European gains were mostly erased with the release of today’s Merchandise Trade data for November when USDCAD bounced back to 1.1850 from 1.1815.

The deficit expanded to $600 million (forecast negative $200 million) in part due to a 3.5% decline in exports. In the past, the Bank of Canada cited weak exports as a major impediment to a sustainable economic recovery and today’s data won’t have made them very happy even though lower crude prices are to blame.

November Merchandise Trade

Source: Statistics Canada

Double double oil and trouble

There is a witch’s brew of trouble for the Loonie bubbling in the cauldron. The oil sands have turned to quick sand for the Canadian dollar.

The perception of high cost domestic production amid a low price global glut has fueled a further rise in USDCAD, which was already rallying on the view that local economic gains and interest rate hikes would lag that of the US.

That view has gotten additional support this week due to weaker than expected data. Today’s Merchandise Trade report was weak, the December Ivey PMI was worse than the November report, but better than expected at 55.4 (Forecast 52.3) and Tuesday’s Raw Materials index missed forecasts.

Looking ahead, USDCAD direction will take a backseat to domestic data and get its cues from oil prices and general US dollar sentiment.

USDCAD technical outlook

The short term and intraday technicals are bullish. The 2015 rally from 1.1560 remains intact while trading above 1.1810, looking for a break of the intraday high at 1.1865 for a test of 1.1890 and then 1.1930 enroute to 1.2000. A move below 1.1810 would argue for additional 1.1730-1.1860 consolidation.

Longer term, the move above 1.1660 was a break of the 61.8% Fibonacci retracement level of the entire 2009-11 range and it suggests further gains to the 76.4% level of 1.2160.

USDCAD 5 year daily with Fibonacci

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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