US data trumps Canadian data, loonie sinks
FX Consultant / IFXA Ltd
- US dollar rallies on data and short squeeze
- Short week ahead due to many Monday holidays
- Loonie and oil appear to be fair-weather friends
By Michael O’Neill
The US dollar is ending the week on a strong note having rallied strongly against the G10 currencies. Earlier, losses in Asia and Europe were recouped (and then some) when domestic CPI data came in as forecast. The data served to reduce another barrier to the Federal Open Market Committee raising interest rates, with many analysts expecting a move in September.
Loonie’s feathers get plucked
USDCAD bears are feeling a little pain following the post-data dollar rally which triggered stop losses above 1.2260 even though the Canadian data were positive.
USDCAD is marching higher and has decimated the downtrend line from March and appears to be setting its sights on the previous multi-month floor that contained US dollar weakness from mid-January to mid-April. That floor, located in the 1.2340-75 area, will now become the next ceiling (which also represents the 50% Fibonacci retracement level of the March-May range).
The question that arises now is whether today’s move is sustainable if – and it’s a big if – WTI oil prices remain above $57/barrel.
Investors trading USDCAD always need to keep an eye on crude. Photo: iStock
In addition, today’s Canadian data were far from being negative. The inflation number is close to the Bank of Canada’s forecasts while the retail sales data suggest that consumers are opening their wallets.
It is an election year (with a vote expected around October), implying that next week’s BoC interest rate statement will emphasize the positives.
USDCAD technical outlook
The intraday USDCAD technicals are bullish while trading above 1.2190. Today’s decisive break of the March downtrend line in the 1.2240-60 area opens up scope for a visit to the 1.2350-75 area.
This area represents major support for USDCAD from mid-January to mid-March and, when combined with the 50% Fibonacci retracement of the 2015 range, should prove to be a formidable level of resistance.
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Source: Saxo Bank
Loonie and oil taking a time out
The Loonie and USOil (WTI) correlation appears to have taken a timeout during the month of May. USOIL has been trapped within a $57.70-$62.20/b trading band with a modestly bullish bias.
At the same time, USDCAD appears to have ignored the firmer oil prices and rallied as well.
The outlook for oil prices in the short term is about as clear as barrel of crude. On one hand, oil bears cite storage capacity constraints, ongoing over supply due to US shale production and Opec’s unwillingness to curtail output in a slow global growth environment as key factors pointing to lower prices ahead.
Oil bulls believe that the current reduction in US rigs, the short-shelf life of a shale well (high production early, then greatly reduced output), escalating tensions in the Middle East, and the US driving season will keep the price firm.
A MarketWatch story yesterday highlighted five scenarios for oil prices as seen below:
The week that was
It was a short week for Canadians and a bit of a surprising onefor traders, especially US dollar bears.
Monday started off quietly in Asia and Europe but showed signs of life during the New York session. Negative sentiment toward s a Greek debt resolution combined with a report from the San Francisco Fed suggesting that GDP may be underreported lifted the dollar across the board.
EUR, CAD and Kiwi shed nearly 1.3% each.
And many headlines were built around the kiwi’s flightless nature. Photo: iStock
Tuesday’s session was lively in all time zones. The Reserve Bank of Australia minutes appeared to have left the door open to further easing and AUDUSD popped. Not to be out done, the Reserve Bank of New Zealand tweaked its inflation forecasts higher and the kiwi took flight.
Comments by a European Central Bank official about front-loading bond purchases sank EURUSD during the European session and that theme continued throughout the New York day. Concern that Wednesday’s release of the FOMC minutes could be viewed as hawkish helped to underpin the dollar.
Wednesday was fairly quiet in Asia although USDJPY traded higher. European traders were mostly sidelined awaiting the FOMC minutes but aterling saw a little excitement on what were seen to be hawkish Bank of England minutes.
The US dollar drifted higher against the majors in the New York session ahead of the FOMC minutes release, which ulktimately proved underwhelming. The Fed won’t be hiking in June and remains data-dependent.
Thursday didn’t deliver the same sort of excitement, although in Europe cable traders went for a 0.0150 point ride to the top on a stellar retail sales report. EURUSD gains in Europe were given back during the New York session and the US data were mixed.
The week ahead
The week ahead will be another short one. USDJPY traders may see a bit of volatility with the release of Japanese trade data but any excitement will dissipate rapidly as there will be very few traders who give a whit.
(And Whit Monday holidays in France and Switzerland, coinciding with the UK Spring Bank Holiday and Memorial Day in the USA will ensure a quiet day.)
For many, Tuesday is the official start to the week. Traders will be greeted with the release of the ever-volatile US durable goods report as well as a slew of data.
The Bank of Canada interest rate decision and statement will entertain USDCAD traders on Wednesday and the week will end with a bang as key US GDP data and the Chicago PMI report (plus Canada GDP) compete for attention with the usual month-end portfolio rebalancing flows.
Sprinkled throughout the week will be speeches from various Fed members.
— Edited by Michael McKenna