Loonie up on the week but range remains 27Mar15

Loonie up on the week but range remains

Michael O’Neill

FX Consultant / IFXA Ltd


Original post on TradingFloor.com

  • US data fails to inspire
  • Fed President Yellen will close out the week
  • USDCAD will remain home in the range

By Michael O’Neill

The US dollar has given up gains won in Europe as the latest batch of data is not a rousing endorsement for a policy change by the Federal Open Market Committee. In fact, it supports the argument that the outperformance of European data compared to the US means a more prolonged period of consolidation in EURUSD. At the same time, the US dollar retreat could be merely position adjustment ahead of remarks by Ms Yellen at the end of today.

BoC rate cut in April unlikely

The Bank of Canada will not be cutting rates in April, which some had expected, if the governor’s remarks on Thursday are any indication.

The BoC is quite happy with the results of the January cut with financial conditions easing and oil prices stabilising close to the January projections. Stephen Poloz, Governor of the Bank of Canada said in his speech on Thursday, “The negative effects of lower oil prices are beginning to appear; the positives will take longer to emerge. So we need to watch these competing forces play out in the economy, and the January rate cut has bought us some time to monitor the situation as it evolves”.

That statement implies a longer period of watching the data.

The BoC is quite happy that oil prices are stabilising. Photo: Statoil

BoC won’t spoon feed markets, either

The governor also admitted in the speech on Thursday that he “knew financial markets would be surprised by the rate cut in January, and we generally prefer to avoid surprises. But we will do what is necessary to fulfill our inflation-targeting mandate”. He went on to say that they would continue to watch the data closely and added that “we will look to market participants to keep watch on the same data, and form their own opinions about what they mean”.

Poloz, like many central bankers, is not a big fan of “forward guidance” believing that it handicaps the decision making process. He is likely a bigger fan of the Alan Greenspan school of communications, who is famously quoted as saying “I know you think you understand what you thought I said but I’m not sure you realise that what you heard is not what I meant”.

Central Bank baffle gab and Orwellian double-speak will be the language du jour in many policy statements, going forward.

Loonie continues to circle within broad band

USDCAD has been trapped within a broad 1.2340-1.2680 trading band since January 22 and there doesn’t appear to be any domestic data releases next week to break it out of the range. Two key pieces of data, GDP on Tuesday and Merchandise Trade figures on Thursday won’t have enough “oomph” to change the course of the medium term outlook for the domestic economy. Just as the oil price collapse sideswiped the Canadian dollar, an oil price recovery is needed to bolster the Loonie. The ongoing oil glut in the US suggests that relief isn’t in the cards any time soon.

USDCAD direction is still a US dollar story and that story may get very interesting next Friday when the US payrolls report is released. The US is almost the only market open on Good Friday. An outsized number in either direction would have an outsized impact due to poor liquidity. Until then, the current USDCAD range will remain.

USDCAD technical outlook

The intraday USDCAD technicals are bearish while trading below 1.2550 looking for a break of support in the 1.2410-40 area to extend losses to the 1.2340-60 zone. A break here could get messy with a quick plunge to 1.2050. A move above 1.2550 would suggest further 1.2410-1.2680 consolidation.

Chart: USDCAD 4-hour

Source: Saxo Bank

USDX still pointing lower

The US dollar index is still pointing lower and a decisive break of support at 96.35 would suggest steeper losses to 93.40 were likely. The intraday downtrend from the March 13 peak has survived multiple probes and remains intact below 98.20. Minor support at 97.20 guards the short-term uptrend line at 96.80 which is protecting the March bottom of 96.35.

Chart: USDX 4-hour

Source: Saxo Bank

The week that was

It was a choppy, sloppy week in FX land and although the violent currency pair swings seen in the previous week were missing, it wasn’t for lack of trying.

Kiwi traders got a lively start to the week with a better-than-expected consumer confidence number which gave NZDUSD a lift. Traders may have got to thinking about the vulnerability of their short EURUSD positions as EURUSD got squeezed rather hard in Europe, a trend that continued throughout the New York day.

On Tuesday, following soft China manufacturing PMI data a modest AUDUSD rally was nipped in the bud. In Europe, modestly better Eurozone PMI’s may have supported another EURUSD rally. US CPI didn’t create much of a stir with traders maintaining their post FOMC bias to trim positions.

Wednesday saw a disappointing New Zealand Trade number undermine NZDUSD which was the highlight of a dull Asian session. USDJPY traded sideways ahead of the March 31 fiscal year-end. Europe saw more demand for EURUSD on decent German IFO data. US Durable Goods missed the mark but for the most part, the G-7 currencies just traded sideways in New York.

Thursday held to its recent trend of being the most volatile day of the week. The Saudis launched an attack on insurgents in Yemen and traders launched an attack on short oil positions. USDCAD tanked as did USDCHF and USDJPY. That move occurred during the Asia and Europe sessions.

The bottom feeders were out in full-force throughout the New York session and the US dollar recouped most, if not all of the Asia/Europe losses. The BoC governor, Stephen Poloz’s speech didn’t create a ripple in USDCAD trading although it may have disappointed those looking for another rate cut in April.

The week that will be

The week will start with European traders a little crankier than usual after forgoing an extra hour of sleep following the switch to daylight saving time. The usual month end portfolio adjustments will take place on Tuesday with small demand for US dollars expected. It will end a day earlier with most of the market closed for Good Friday, although New York will be open and that will make it interesting as it is also a nonfarm payrolls day.

– Edited by Clare MacCarthy

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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