Feta up with Greece? – worry about Canada 26Jun15


Feta up with Greece? – worry about Canada

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US dollar ending week higher
  • Week ahead will be choppy and for some, short
  • Loonie vulnerable to an NDP government

By Michael O’Neill

The US dollar is closing the week with gains across the board due to a resurgence of interest rate divergence concerns and a dose of EU/Greece fatigue. However, just because the talks have dragged on and on, it doesn’t diminish the impact that a default could have on the Eurozone.

There are numerous articles, filled with astute arguments, as to why a Greek default isn’t as big a deal in 2015 as it would have been in 2010 but when (if) a default occurs, watch for new articles explaining why the previous articles got it wrong.

Stiffing creditors on a €450 billion plus debt will leave a big mark and the fall-out will be nasty.

Will CAD take a ride on the wild side? Photo: iStock

USDCAD outlook

Tuesday will be a big day for FX markets and the Canadian dollar. For most, the biggest risk is the June 30th deadline for Greece to make a payment to the IMF. For USDCAD traders its GDP and month end portfolio rebalancing flows.

GDP could surprise to the upside and coupled with rumoured USDCAD selling for the “fix”, would lead to a weaker USDCAD. In addition, Canadian and US holidays later in the week, may impact liquidity.

USDCAD technical outlook

The intraday USDCAD technicals are bullish while trading above 1.2325 with the break above 1.2370 pointing to further gains to 1.2395 and then 1.2420. A break below 1.2325 would suggest further weakness to 1.2280.

For the week ahead, USDCAD remains locked within a 1.2160-1.2560 trading band and it has been hovering around the middle of this range all week.

Chart: USDCAD 4 hour with trading band shown

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

Canadian election will destabilize Loonie

It is still early days, however, the Canadian Federal election which is expected to be held in September or October may lead to increased USDCAD volatility, not unlike that experienced by GBPUSD in the run-up to the May 7th election.

Cable was continually rising and falling with every shift in the polls and that may be how the Canadian dollar trades once the election is officially called.

Already, the three major political parties (Incumbent Conservatives, (PC’s) Official Opposition NDP, also-rans Liberals) are releasing ads touting their vision and slamming the other guys. The one major difference with this election is that the leftist NDP party, led by Thomas Mulclair, is leading in the polls. If he was to prevail, it would be a disaster for the Canadian dollar and the country as a whole.

Seat projections as of June 25 -NDP (orange) Liberals (red) PC’s (blue)

Source: Global News/LISPOP

Loonie (truly) timeline of Canadian politics since 1985

The province of Ontario (with 1/5 the population of Canada) accidentally elected an NDP government, led by Bob Rae, in 1990. Mr. Rae found an enormous budget deficit and tripled it while hiking taxes and giving big raises to unionized (their support base) civil servants. Ontario is still suffering the effects of the NDP fiasco.

If the NDP wins in the Federal election, imagine, the delight of Mr. Mulclair and his colleagues in finding a balanced budget at their fingertips. In the blink of an eye, they would make Greece look like the poster child for fiscal restraint.

The Canadian dollar would tank. USDCAD would reach the all-time high of 1.6183 (on Dec. 21/2001) in no time. Check out the following chart for a snap-shot look of how the Canadian dollar performs under various political regimes. There is a grain of truth to the currencies performance vis a vis each party.

Chart: Canadian governments and the Canadian dollar since 1985

Source Saxo Bank

The week that was

“Should I stay or should I go? That’s what The Clash were singing in 1982 and that is the tune crooned by Greece PM Tsipras all week long.

Monday started with optimism that a Greek deal was imminent following a report that Athens had submitted new proposals with concessions. EURUSD was flirting with 1.1400.

Oops, Greece bureaucrats submitted wrong proposals and EURUSD quickly retreated. New York spent most of the day awaiting news from the EU/Greece meetings and ignored domestic data releases.

Tuesday the dollar turned bid and rallied across the board. Positive soundings developments from the EU/Greece negotiations, solid US data releases and interest rate hike warnings from a Fed governor were all important drivers of the dollar throughout the day.

Wednesday opened in New York with news that the EU/Greek talks had failed. For some reason, that was an excuse to buy US dollars, initially. The day ended on a mixed note in part because the Greek PM, Tspiras and EU Commissioner Juncker were still talking. The dollar gained against GBP, AUD and CAD but faded against CHF, JPY and NZD. Liquidity was described as “poor”.

Thursday was a day of consolidation for the US dollar. Greece was still the focus but traders were getting feta-up with it and so were the negotiators. The EU and Greece scheduled a meeting for Saturday for more talks. US data releases (Consumption and Expenditures, Jobless Claims) were mostly positive but ignored.

The week that will be

Whether the Greek drama becomes a Greek tragedy may get decided early next week if Athens fails to pay the IMF €1.5 billion on June 30th.

June 30th will be exciting for another reason as well; it is month end, quarter end and ½ year end which likely means volatility ahead of the 16:00 GMT fix.

It is also a short week for Canadians and Americans. Canada is closed for Canada Day on July 1st while the USA celebrates Independence Day on Friday July 3rd.

Sandwiched in-between is the always interesting US nonfarm payrolls release on Thursday. Aussie traders will be on alert on Tuesday as the Reserve Bank of Australia governor will be giving a speech and he is unlikely to champion the local currency. The week will end quietly with the US closed.

– Edited by Clemens Bomsdorf

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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