Loonie tarred and feathers plucked-30Jan15


Loonie tarred and feathers plucked

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US data keeps economic recovery story alive
  • Canadian data tells a different story
  • USDCAD sees 1.3000 in its future

By Michael O’Neill

An exciting and volatile week in FX land is ending in an exciting and volatile way, especially for USDCAD traders.

The Canadian dollar has won the dubious honour of being the worst performing currency in the G-10 in January, down an eye-opening 9.3% and catching more than a few investors of guard.

Rubbing salt into the wound was this morning’s worse-than-expected November GDP data. (Actual negative 0.2% vs forecast 0%, month over month). A weak manufacturing sector completes the trifecta of weak energy and mining. The weakness in Canada became more pronounced beside the US data which was, arguably, in line with expectations.

Chart: Weak Canadian Manufacturing

Source Statistics Canada

BoC no friend of the Loonie

The Bank of Canada’s decision to cut interest rates by 0.25% was far more than a surprise to the economists at Canada’s “Big Five” banks, they were astonished. Almost all of them had interpreted Deputy Governor Lane’s speech expressing concern over falling oil prices to mean that the expected BoC rate hikes would be delayed until Q1 2016. Ouch! They are now scrambling to completely re-write their 2015 forecasts and the year is only 30 days old.

The other victims of the rate cut were those investors/corporations needing to buy USDCAD who were patiently waiting for a retracement back to 1.1750-1.1800 from 1.2050. Now they are worried.

USDCAD has rallied nearly two big figures since yesterday’s Toronto close (1.2615-1.2795) mainly due to month-end portfolio rebalancing flows with a dash of extremely negative economic data thrown in. That would be bad enough by itself.

Unfortunately, the Loonie is being crushed by external forces as well, the key one being the ever widening gap between the Canadian and US growth outlook and interest rate differentials. Persistently, low oil prices will ensure the negative outlook continues.

USDCAD technical outlook

You need to step back into history to glean some insight into the current short-term outlook for the Canadian dollar and it isn’t pretty. (Unless you are long from much better levels or a US dollar seller).

The last time that USDCAD was in this area was March 2009. The financial crisis was in full-throttle and wild currency moves were the norm. A daily chart ( Chart 1) from March 2009 sees minimal resistance from 1.2750 to 1.3050.

The short-term outlook is also bullish while trading above 1.2470 representing the intraday trendline from the post BoC rate cut rally. It also highlights the fact that USDCAD can experience a nasty correction while remaining in an uptrend. For the week ahead, USDCAD resistance is at 1.2830 and 1.2910. Support is at 1.2710 and 1.2650.

USDCAD March 2009

Source: Saxo Bank

USDCAD 4 hour

Source: Saxo Bank

The week that was

It was another lively and entertaining week. Central bankers from Singapore, New Zealand and America provided the drama while New York State and city officials provided the comedy.

Monday opened with the results of the Greek election known but very few people to trade on them as both Australia and New Zealand were closed for national holidays. Understandably, liquidity was poor and EURUSD dropped to 1.1100. It didn’t last and EURUSD was soon back above 1.1200 and remained the main focus in Europe.

New York ignored financial markets and ran to strip grocery stores of anything edible in anticipation of a super blizzard dumping three feet of snow on the city that night and the next day. All city roads and subways were closed as of 11:00 pm and citizens told to stay off the streets.

Tuesday’s Asian session was all about choppy and erratic JPY trading. In Europe, EURCHF moves were just as erratic and choppy, giving rise to speculation that the Swiss National Bank wasn’t finished with having its way with that market. The New York trading session was pretty much non-existent and so was the blizzard. “Gee, a New York official over-reacting; who woulda thunk it?”

Wednesday started dazed and ended confused. An article by Terry McCrann in the Melbourne Herald Sun stating that the Reserve Bank of Australia would cut rates on February 3 kicked the feet out from under AUDUSD. FX markets remained skittish until the FOMC statement.

Meanwhile, New Yorkers were glumly staring at the mound of groceries in their kitchens asking “what will we do with all this food?” Confusion reigned after the FOMC statement. It had something for everybody-hawks, doves, bulls and bears. Asia opened with news that the RBNZ left rates unchanged, but an extremely doveish statement trashed NZDUSD.

Thursday, traders sucked up US dollars like a Dirt Devil on dust. Commodity price pressures and pre-dealing for month-end portfolio rebalancing were partially responsible for the moves. USDCAD soared, gaining 0.0150 points just as London was getting ready to leave for the day. Hmm, is the pre-fix in?

The week that will be

The RBA will be one of two representatives of the Central Bank fraternity making interest rate announcements next week and Tuesday’s rate decision and announcement has already garnered a ton of attention among AUDUSD traders. The other representative is the Bank of England.

One has to wonder if Mark Carney is itching to make an impact on Thursday, like his cronies in the central bank club.

There will be no shortage of Central Bank speakers to provide their insight in recent activities, actions and outlooks, especially on Tuesday. St Louis Federal Reserve Bank (Fed) President Bullard speaks as does the Minneapolis Fed President and later on Governor Wheeler of the RBNZ takes to a podium. Forget about the dollar, all that hot-air could see a spike in global warming forecasts. Buy carbon credits, perhaps?

Wednesday’s US ADP employment data will put the spotlight on Friday’s nonfarm payrolls report while another Fed speaker attempts to shed light on the previous FOMC statement.

Friday will be lively starting out with the RBA Monetary Policy Statement leading to Canadian and US employment reports.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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