May fades to black, Loonie just fades
FX Consultant / IFXA Ltd
- Soft Canadian GDP data clips Loonies wings
- US data releases are a wash
- Month-end flows churn FX markets
By Michael O’Neill
It has been an active day in FX markets with US dollar selling due to portfolio rebalancing needs evident throughout the morning. Despite the intraday flows, the US dollar has strengthened across the board against the G-10 spectrum, with the exception of the Swiss Franc. The dollar will kick off the last month of the first half of 2015 next week with US data including nonfarm payrolls competing with the Reserve Bank of Australia and the European Central Bank for attention.
BoC is befuddled, Loonie traders as well
The Bank of Canada (BoC) interest rate statement painted a picture of a central bank not sure if the economy is coming or going. On one hand, they believe that inflation is tracking on pace with their previous guestimates. On the other hand, the express some concern that the Canadian dollar has strengthened.
It remains unclear, what kind of picture of the Canadian economy its Central Bank wants to paint. Canadian nature is beautiful in any case. Photo: iStock
The fact that the statement even mentioned the currency convinced some analysts that the statement was doveish. Pshaw! The currency strengthened in step with the rally in oil prices and as long as that relationship holds, is unlikely to provoke a response from the BoC.
The Bank is content to rely on a sustained US recovery to reinvigorate the domestic economy. In the meantime, USDCAD direction will continue to be at the mercy of general US dollar sentiment and oil prices.
Loonie tarred on very weak GDP report
Canada’s Q1 GDP shrunk by to negative 0.2% vs expectations of a rise of 0.2%, month over month. The Loonie was tarred (it was already feathered) and USDCAD spiked to 1.2512 from 1.2440 on the news.
The magnitude of the move is a tad surprising considering that the number was expected to be weak due to the oil price collapse, lousy weather and a lack of US economic growth. It’s also stale data which should have already been reflected in the price. Having said that, today’s Canadian GDP data is still ugly.
Source: Statistics Canada
US GDP underwhelms
The US data was a shade less than good. In fact, it was mixed at best. Consumer spending was slower than expected and business spending declined by 2.8%.
The fact remains that the US economy is in better shape than the Canadian economy and expected to rebound sooner and faster providing all the ammunition that the Fed needs to raise rates in H2. In contrast, the Canadian economy is going nowhere with traders leery of another down move in WTI. These combined forces will limit short term USDCAD losses
The Canadian dollar is unlikely to have a good week to kick off the month of June. Today’s surprisingly poor GDP report may be a sign that the BoC’s optimism, evident in the Stephen Poloz speech last week, was misguided and no reason to buy Canadian dollars.
A Greek tragedy? Photo: iStock
Next week’s Canadian trade data will need a big surprise to the upside to counter the effects of US data if the expected economic recovery south of the border is reflected in the results. US data, including Friday’s nonfarm payrolls report, combined with the European Central Bank (ECB) meeting and the real-life Greek tragedy will ensure demand for US dollars against the majors and the Loonie by default.
USDCAD technical outlook
The intraday and short term USDCAD technicals are telling different stories. The intraday technicals are bullish, with a steep uptrend rising from the May 11 low which remains intact while trading above 1.2400-20. So far, further gains have been capped by resistance in the 1.2540-50 area. If broken, a return to the 2015 peak of 1.2820 is likely.
The short term technicals tell a different story. USDCAD is in a downtrend from the 1.2820 area with a series of lower highs containing gains. As long as 1.2530-60 contains the rallies, the risk is for additional USDCAD weakness back to the 1.2340-80 zone.
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Source: Saxo Bank
Cross purposes –CADJPY and EURCAD
The Canadian dollar may derive a bit of support from CADJPY demand. The intraday CADJPY technicals are bullish while trading above 99.10 representing an uptrend line from the end of March. Bullish USDJPY technicals supported by the widening of US and Japanese interest rate spreads and the risk of additional stimulus measures by the Bank of Japan are threatening to drive CADJPY through psychological resistance at 100.00 toward 102.50.
Source: Saxo Bank
At the same time, EURCAD is also looking to rise. A breach of major resistance at 1.3775 targets 1.4000 which could occur if next week’s US data is disappointing or on positive Greek debt developments. If so, it would offset the CADJPY demand.
Source: Saxo Bank
The week that was
When the big dogs are away, there’s no one left to play, which pretty much summed up Monday FX markets. Holidays in much of Europe, the UK and the US made for a dull session for those traders at work.
Tuesday was much better in terms of trading activity which is a given when all markets are open. A delayed reaction to Friday’s US CPI report and another Greece threat to default had traders anxious to sell US dollars; and they did, right across the board. USDJPY was particularly in vogue although no one could cite a specific reason. A string of solid US data releases including Durable Goods helped the US rally during the New York day.
USDJPY continued to climb on Wednesday, achieving levels not seen for eight years while the rest of the majors were content to consolidate Tuesday’s moves. Greece headlines continued to stoke markets with Bloomberg reporting progress on a Greece deal. The Bank of Canada left rates unchanged and some analysts believed the statement to be a tad doveish which didn’t do the Loonie any favours.
Thursday saw US dollar gains in Asia and Europe against AUD, JPY, GBP and CAD get reversed in a spirited New York session. In Asia, AUDUSD got spanked on a poor capex report and USDJPY touched a December 2002 peak. In Europe, a weaker than expected UK Q1 GDP report drove cable lower. Those moves were reversed during the New York day, in part due to anticipated selling of US dollars for month end portfolio rebalancing needs.
The week ahead
Those looking for the summer doldrums, won’t find them this week. The week ahead gets a later start than usual due to New Zealand traders off celebrating the Queen’s birthday (Elizabeth II), another UK monarch’s birthday ignored by the UK. But when it finally starts it will be frisky.
Chinese data including the HSBC Manufacturing PMI will give the commodity bloc traders something to chew on which will be followed by a rash of Eurozone and US PMI data.
The Reserve Bank of Australia’s interest rate announcement and statement will entertain Aussie traders on Tuesday while German employment data will be the focus in Europe.
Wednesday’s Opec meeting and the European Central Bank (ECB) statement will vie with US data to dictate dollar direction.
It’s the Bank of England’s turn in the spotlight on Thursday but by then traders will be fixated on Friday’s US employment data.
— Edited by Clemens Bomsdorf