Loonie in demand ahead of BoC April 14, 2015

Loonie in demand ahead of BoC

Michael O’Neill

FX Consultant / IFXA Ltd


  • Disappointing retail sales puts US dollar on sale
  • Loonie feeling the love
  • Oil is a slippery call

By Michael O’Neill

Retail Sales rise still disappoints

Today’s release of US Retail Sales data handily beat last month’s results and still disappointed FX markets. (Actual March: 0.9% vs. Actual Feb negative 0.5%, m/m.) The disappointment stems from the failure to meet or exceed the forecasts. The US dollar was promptly sold. EURUSD popped to 1.0638 from 1.0562.

It is probably a mistake to read too much into today’s data. It wasn’t bad – it just wasn’t terrific. The current best guess for when the Federal Open Market Committee (FOMC) raises interest rates is September and today’s retail sales number will have been long forgotten by then.

USDX contracting but uptrend intact

The USDX rally failed to crack through the March peak of 100.38 and the subsequent retreat through the steep uptrend line at 99.60 risks a steeper drop to 98.25. A break above 100.38 would hang a target on 102.60. However, the uptrend from October 2014 remains intact while trading above 95.00.

Chart USDX 4-hour showing broken intraday uptrend

Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more.

Conundrum in an oil drum

Oil prices are either going up or down. Everyone says so. One day, oil prices are on the verge of collapse from a glut of US Shale oil and renewed supply from Iran. The next day, a prediction by the US Energy Information Administration (EIA) of a decline in US shale production by 45,000 bbls per day is cause for celebration. That’s a bit of a stretch since the daily US output is 4.9 million barrels per day.

Saudi Arabia, the key architect of the November oil price collapse, expects oil demand to start rising. A story in the Wall Street Journal today supports that assertion citing renewed Chinese demand as that country builds emergency stockpiles.

The short term WTI technicals are bullish while trading above $51.06/bbl but need to break through resistance at $54.400/bbl to extend the rally toward $60.00/bbl. A move below $51.06 would lead to another test of $47.60

Chart: WTI oil daily

Source Saxo Bank

Bank of Canada bides its time

The risk arising from tomorrow’s Bank of Canada (BoC) meeting is not the threat of a rate cut, but from the Monetary Policy Report (MPR) and possible reductions in economic forecasts. The tone of the MPR is expected to be negative after Governor Stephen Poloz, in an interview with the Financial Times, on March 30, described the effects of the slump in oil prices on the Canadian economy as “atrocious”.

A Bank of Canada spokeswoman, Mary Poppins reportedly said that Poloz was misquoted. What he really said was; "Super,CanadasFragileEconomicsAreAtrocious”

Go ask Mary Poppins. She’ll give you the real deal on Canada’s economy. Photo: Disney

USDCAD outlook

The Canadian dollar is benefiting from a lack of bad news. Friday’s employment report was ugly as all the job gains were part-time. No one cares. The fact that the unemployment rate remained unchanged and the headline number was positive was a good enough reason to buy Canadian dollars. A rather downbeat Business Outlook Survey was ignored because it was expected to be downbeat. The BoC is widely expected to leave rates unchanged as they will take more time to assess the incoming data.

There is a risk that the all the bad news for Canada is out and more than reflected in the current exchange rate. Speculative short CAD positions are still stretched at around $3.2 billion on the IMM and it could get real messy if they all head for the exits at the same time. A rosier outlook in the Monetary Policy Report, could prompt such a move.

USDCAD technicals

The intraday USDCAD technicals are bearish while trading below 1.2570 with the move below 1.2510 reverting to resistance. A break below 1.2410 will extend losses to the 1.2330-60 area. A break here will be lights out-at least until 1.2050. A recovery above 1.2510 would argue for more 1.2410-1.2550 consolidation.

Chart: USDCAD daily

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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