Loonie on the brink after Aussie and Kiwi tank 3July15

Loonie on the brink after Aussie and Kiwi tank

Michael O’Neill

FX Consultant / IFXA Ltd


Original post on TradingFloor

  • Weak Australian and Chinese data crushes AUDUSD
  • NFP report keeps US rate hike fires burning
  • Loonie is on the brink over GDP, oil and rate outlook

GDP decline, the heightened chance of a rate hike and weak oil prices

all add up to a glum outlook for the Canadian dollar. Photo: iStock

By Michael O’Neill

The lower-than-expected HSBC China Services PMI combined with very weak Australian Retail Sales data to crush AUDUSD which is now threatening to move through long-term support in the 0.7530 area.

Yesterday’s US nonfarm payrolls report caused a bit of a backlash when it missed ever rising forecasts but the actual gain of 223,000 was close enough to the mark to keep 2015 rate hikes alive, according to Jon Hilsenrath, Fed watcher at the Wall Street Journal.

The Greek referendum will set the tone for trading early next week. The Canadian dollar will be vulnerable to general US dollar movements with moves mitigated by CAD cross demand.

Canadian dollar outlook

The Canadian dollar has taken a beating this week and its short-term prospects aren’t looking very good.

1) For starters, this week’s GDP data registered a decline of 0.1% in April. That is the fourth consecutive decline and if the next two months are negative, Canada would be in a technical recession.

2) The weak GDP print also raised the risk that the Bank of Canada (BoC) would cut rates. The Reserve Bank of Australia (RBA) has chopped rates twice this year and on June 11 the Reserve Bank of New Zealand made the first of an expected three rate cuts.

Both central banks cited weaker economic data and lower commodity prices as part of the rationale for the moves. Canada, often lumped in with the antipodeans, is suffering similar woes. Economic growth has weakened and oil prices are looking vulnerable to further declines. The next BoC meeting, slated for July 15, may be governor Poloz’s last chance to act until December, due to the federal election sometime in the fall.

3) Next Friday’s Canadian employment report won’t help the situation. Canada posted an unbelievable 58,900 gain in jobs for May. June will be payback time. The employment numbers have alternated between down and up since December which suggests June will be a down month. A negative number would add to the prevailing negative Canadian dollar sentiment.

4) Tuesday’s Canadian trade data could tip the BoC’s hand. A widening of the April $2.97 billion deficit with a weaker non energy export component would put a damper on the BoC’s expectations of an export led recovery.

5) Oil prices have been on a steady, intraday decline for over a week, breeching the first line of support at $56.70/bbl on Thursday, the first sign that the April-July trading band may be breaking down. A move below $54.50, representing the 38.2% Fibonacci retracement of the March-June range warns of further losses toward $49.70/bbl. The world is still awash in oil.

The US Energy Information Administration (EIA) reported that inventories increased by 2.4 million barrels as of last week while Baker-Hughes, an oil services company, reported an increase in the oil rig count. In addition the US and allies are apparently very close to a deal with Iran which would lift trade sanctions and unleash another 40 million barrels of oil that are currently floating in oil tankers.

On the plus side for the Loonie, the Bank of Canada Business Outlook Survey may reflect a more positive outlook for the economy supported by the recent stability in oil prices.

The ever interesting Ivey PMI could surprise to the upside and add another layer of support to the Loonie, at least intraday.

Finally, USDCAD broke above key resistance in the 1.2590-1.2605 area but has since retraced back below this level. The lack of additional upside momentum may be a sign of further consolidation ahead.

USDCAD technical outlook

The intraday technical are bullish while trading above 1.2530 looking for a recovery above 1.2590 to extend gains to 1.2630, the Thursday peak. A move above that level opens up further gains to 1.2680 and then 1.2820. A move below 1.2530 would retrace back to 1.2490 and argue for 1.2490-1.2630 consolidation

Longer term, the break of the 1.2490-1.2505 area on June 30 snapped a downtrend that had been intact since March. It also represented the break of the neckline of an inverse head and shoulders pattern which implies gains to the 1.3300-1.3400 area. However, there will be heavy resistance in the 1.2850-1.3000 area. A break of support in the 1.2440-60 area would argue that a short-term top is in place at 1.2820 and suggest additional 1.2240-1.2540 consolidation ahead.

Chart: USDCAD daily showing break of March downtrend line

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

The week that was

For Canadians and Americans it was a short work week. For Greek citizens it was a short withdrawal week. For the International Monetary Fund it was a short-changed week and for all other markets, it was the nonfarm payrolls report (NFP) coming up short.

Monday was a doozy. The weekend’s news out of Greece led to a severe bout of risk aversion. The dollar gapped higher against most of the majors when FX trading started on Monday. EURUSD was particularly nasty, making a low of 1.0960 after closing in New York on the previous Friday, at 1.1165. By the time Europe got to their desks, EURUSD had gained over 0.0100 points. The dollar spent the rest of the day consolidating the overnight moves with traders ignoring data and watching Greece headlines.

Tuesday was a good day for the EURUSD (all things considered) and a bad day for a couple of birds, the Loonie and Kiwi. Kiwi got hammered on soft data and rate cut fears while a weaker than expected Canadian GDP and sizeable USDCAD buying for month-end portfolio rebalancing plucked the Loonies feathers. Tuesday ended with the IMF waiting for the till to ring but to no avail. Greece defaulted on its debt.

Wednesday, Canadians celebrated Canada Day while the rest of the world digested the news of the Greek default. It was not a lot of fun for long GBPUSD traders who got crushed when UK PMI data hit a 26 month low and cable dropped over 0.0120 points. The New York session was spent preparing for a large US data dump on Thursday including a NFP report which was expected to surprise to the upside.

Thursday started with a weak Australian trade report leading to AUDUSD selling. The rest of the Asian session and the European morning saw traders jockeying for position ahead of the US payrolls data. Once again, the anticipated NFP strength failed to materialise and the US dollar was sold. The day ended a tad earlier than usual as the New York traders who could, left to get an early start on the long July 4th weekend which starts Friday.

Many New York traders left work early on Thursday for the July 4th holiday.

But the Greenback didn’t celebrate the NFP data. Photo: iStock

The week that will be

It is pretty much a no-brainer to suggest that the results of Sunday’s Greek referendum vote will dominate trading on Monday and that the fallout and renewed negotiations will dominate European trading. The Reserve Bank of Australia’s interest rate decision and statement will kick off a busy Tuesday. The UK gets a healthy dose of data including the GDP estimate and a Bank of England interest rate decision. And, the icing on the cake will be the Federal Open Market committee meeting minutes on Wednesday.

– Edited by Clare MacCarthy

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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