Loonie ripe for plucking and US dollar is bid
FX Consultant / IFXA Ltd
- US dollar loses day, wins month
- Loonie ends the month a lot worse for wear
- ECI data confuses September rate hike debate
By Michael O’Neill
It was a wild and woolly end to a somewhat wild and woolly week with surprisingly soft US Employment Cost Index (ECI) data playing havoc with month end rebalancing flows. Traders had to be nimble and quick or else they got burned by the candlestick.
The US dollar erased earlier gains and is ending the day down across the board. However, since the beginning of the month, the US dollar has rallied against all the G-10 currencies.
Downbeat US wages data weakened the dollar today,
but it’s been a good month for the greenback. Source: iStock
Canada GDP-recession bound
Canada GDP posted its fifth consecutive monthly decline, falling 0.2% in May and tipping Canada ever so close to a “technical” recession. A poor result wasn’t entirely unexpected although declines in manufacturing, mining, oil and gas and wholesale trade cannot be good things.
Source Statistic Canada
Ontario is Canada’s Greece
The weak national data also underscores the precarious financial state of affairs for the province of Ontario, Canada’s manufacturing centre. The Financial Post notes that “with twice the debt of California (and 1/3 the population), Ontario is the most indebted, sub-sovereign borrower in the world.
Ontario has lost almost half of its manufacturing jobs in the past 15 years on aprovincialgovernment policy of extremely high electricity rates to prevent global warming. ( I feel cool already.)
If Greece could nearly take down the Eurozone, imagine the damage that Ontario can do to Canada.
Vote for me, we’ll set you free (of your cash)
A recession is bad news for a government seeking re-election and planning to campaign on their successful efforts to balance the budget, especially if the surplus has disappeared. Stephen Harper and the Conservative party are seeking to avoid that issue. Numerous rumours suggest that the prime minister will dissolve parliament this weekend with an election scheduled for October 19. That means over two and half months of campaigning and polls. The Loonie will be as vulnerable to polls as Sterling was during the UK election.
Canada is flirting with recession. Photo: iStock
Last week’s rate cut left the Loonie in the lurch. In was a none-to-subtle way for the Bank of Canada to jump start a sputtering economy. The BoC were on record forecasting that rising manufacturing exports would propel economic growth. That wasn’t happening so a currency devaluation was the next move. Today’s GDP data validated the move.
There are two key reports next week (Employment and Trade) which will either lead to an extension of gains above 1.3110 or else additional 1.2900-1.3100 consolidation. But that’s it for domestic influences.
There are three other key drivers for USDCAD direction; US data, WTI oil prices and China. The US data needs to be consistently better than forecast to dilute the effects of today’s ECI report. A well-above consensus US NFP print will go a long way in repairing the ECI damage and keep a September rate hike on the table.
Oil prices are the another wild card. This week’s bounce in WTI from $46.75/barrel to $49.45 was in part due to rumours that Opec would cut production quotas. Apparently Opec indicated that wasn’t the case and prices dropped but are well off the week’s low. The intraday charts indicate that as long as WTI is below $50.00/b the trend is still lower.
China’s equity market instability and rising questions about a continued economic slowdown will keep commodity prices soft and weigh on the Canadian dollar.
USDCAD technical outlook
USDCAD technicals are bullish while trading above 1.2900 representing the uptrend line from June 22. At the same time, USDCAD gains have been capped in the 1.3050-1.3100 area. A move above this top could extend to 1.3466, the 61.8% Fibonacci retracement of the 2002-2007 range. A break below 1.2900 would lead to further losses to the 1.2800 which is where USDCAD rallied from when the BoC cut rates.
For the week ahead, expect a 1.2900-1.3100 range with a bias for an upside break.
Source: Saxo Bank
The week that was
It was a typical FOMC trading week. There was a lot of noise ahead of the statement and then even more noise after it was released. At the end of the week, FX markets only think that they know more about the committee’s intentions then they did at the beginning of the week.
Monday started with another plunge in Chinese equity exchanges which only had a minimal impact on currencies. The US dollar was offered and was down across the board when New York walked in. It didn’t get any better. A soft Durable Goods report helped drive EURUSD to 1.1120.
Tuesday, China equity markets behaved themselves helping AUDUSD make some headway. Sterling rallied on strong GDP data. It was a mixed session in New York with all the Queen Elizabeth’s currencies posting gains while the rest of the majors retreated.
Wednesday should have been a typical FOMC day with little pre-statement price movement. It wasn’t. Prior to the statement, kiwi sprouted wings when a speech by the RBNZ governor was less dovish than expected. WTI prices drifted higher putting downward pressure on USDCAD. After the statement, the dollar caught what started out as a reluctant bid. The FOMC changed the wording about the labour market which was good enough for the hawks.
Thursday saw further demand for dollars in Asia but it was more of a moonlight stroll rather than a stampede. The pace picked up after the release of US GDP data. The headline missed the forecast but a big upward revision to Q1 led to renewed dollar demand.
The week that will be
It is shaping up to be a very busy week and for Canadians, a short one, as Monday is a holiday. The FOMC interest rate statement has left the door wide open for a September rate increase which makes this week’s US data that much more important. However, this morning’s ECI report questions the rate hike premise.
Aussie traders will be eagerly awaiting the Reserve Bank of Australia interest rate decision and statement on Tuesday and employment reports on Thursday. Also on Thursday, the Bank of England releases its interest rate decision and quarterly inflation report.
US and Canadian employment reports on Friday will ensure a volatile end to a busy week.
– Edited by Oliver Morrison
Michael O’Neill is an FX consultant at IFXA Ltd.