Bank of Canada cutting its way to prosperity 17July15

Bank of Canada cutting its way to prosperity

Michael O’Neill

FX Consultant / IFXA Ltd


  • Carney tripping over his tongue
  • Loonie rings the bell at 1.3000
  • Week ahead fraught full of mostly nothing

By Michael O’Neill

Mark Carney, the Bank of England governor, was once hailed a "rock star" when he took the throne at the UK central bank. As time has passed, he is proving to be more of the "Milli Vanilli" variety then Sir Mick Jagger.

This week he startled cable traders when he talked about rate increases. Yesterday he added fuel to the fire by adding the possible timing of a move to the equation. And today, he is back-pedalling, trying to unsay what he said earlier. Chalk up a win for the colonies.

It was rather slow in coming but USDCAD finally rang the 1.3000 bell, following the Bank of Canada rate cut, albeit with a little help from Janet Yellen, US housing starts and wobbly WTI prices.

USDCAD outlook

The Bank of Canada tossed in the towel, cut interest rates and admitted that their forecasts for a rebound in the second half may have been a tad optimistic. They had been expecting real GDP growth and a rebound in the domestic economy and now see real GDP contraction.

The BoC has “significantly downgraded” their outlook for growth in 2015 citing the following reasons in the governor’s opening statement at the press conference for the Monetary Policy Report:

• "Canadian oil producers have lowered their long-term outlook for global oil prices, and have cut their plans for investment spending significantly more than previously announced".

• "China’s economy is undergoing a structural transition to slower, domestic-driven growth, which is reducing Canadian exports of a range of other commodities".

• "Canada’s non-resource exports have also faltered in recent months."

At the same time as the BoC is chopping rates, the US is still on course to raise rates, with a September rate hike still favourite. Janet Yellen’s remarks last Friday and again on Wednesday and Thursday of this week reinforced this view. US rate hikes may be data dependent, they may be slow in coming, but they are going up and they are going up in 2015.

The Loonie won’t get any relief from its woes from next week’s data either. The key release is Retail Sales but since the BoC just cut rates, an upside surprise won’t have any effect while a poor number will reinforce the negative outlook.

The short term outlook for oil prices isn’t doing the Loonie any favours. WTI is under pressure and flirting with support at $50.00/bbl which if broken will lead to a test of $46.75/bbl. Ongoing Opec and US over production plus expectations that Iran oil will soon it the market have put a cap on short term gains.

It is fairly safe to guess that a lot of traders missed the move in USDCAD this week. Sure, there were plenty of predictions that the BoC would cut rates but many lacked conviction especially after last Friday’s Canadian employment report. If so, there will be plenty of USDCAD buyers on dips which will limit USDCAD downside next week.

The struggling Loonie can’t do right for doing wrong,

with next week’s retail sales unlikely to stop its decent. Photo: iStock

USDCAD technical outlook

The USDCAD rally above strong resistance in the 1.2780-1.2835 area was significant as it broke the top of the range that had survived numerous attempts since January. The currency pair is now returning to territory unseen since late 2008/early 2009. It also sets up a fairly unencumbered run to the 61.8% Fibonacci retracement level of the entire 2002-2007 range which is 1.3450.

The intraday technicals are bullish while trading above 1.2950 but will run into resistance in the 1.3000 and 1.3050 zone. A break of 1.3050 will extend gains toward 1.3400. A move below 1.2950 will lead to 1.2900-10 which if broken should see additional weakness to 1.2850.

USDCAD daily with projected trading range for next three months

Source: Saxo Bank

USDX muscle flex gives USD a bid

The US dollar index (USDX) broke above the downtrend line from early April at the beginning of July, after being thwarted on numerous prior attempts. That set the stage for further, choppy gains. The long-term uptrend from last June remains intact while trading above 95.30. A break of the 98.00 area argues for further gains and a retest of the March peak of 100.70.

Shorter term, the intraday technicals are bullish above 97.60 with a break below extending losses to 97.20 and then 96.50.

USDX daily

Source: Saxo Bank

The week that was

This week was not unlike a game of Piñata. FX traders played the role of a festively coloured basket and central bankers, politicians, auctioneers and sundry statisticians wielded the sticks.

Monday started with markets in a tizzy on news that Greece and the EU had reached a deal. It ended in New York on the same note. In between, EURUSD started a slide that lasted all week.

Tuesday was nuclear. News that the US and partners had reached an agreement to curtail Iran’s nuclear ambitions undermined oil prices and the Canadian dollar. Cable traders were rocked when Mark Carney felt the need for attention and started nattering about interest rate increases. GBPUSD soared. The US dollar shrugged off a weaker than expected Retail Sales report as traders waited for Janet Yellen’s testimony before Congress.

Wednesday, the Loonie took a turn as a piñata. The rate cut appeared to have caught FX traders under positioned and the Loonie was beaten every which way but loose. Janet Yellen even took a stick to the bird when she reiterated her opinion that US rates were going up in 2015. USDCAD soared from 1.2735 to 1.2955. US dollar buyers came out of the woodwork across the G-7 spectrum. A terrible GlobalDairyTrade auction curdled Kiwi and NZDUSD shed over 1.5%.

Thursday started with news that Greece’s parliament passed the bail-out proposals. The EU is giving Greece money to pay the EU. News video showed Greek citizens singing torch songs in the streets or maybe they just torched the streets; it was hard to tell through the smoke and riot police.

Central bankers, Yellen, Draghi and Carney were all talking. The first two sounded like an echo. Mr. Carney fined tuned Tuesday’s interest rate comments by throwing out the “turn of the year” as a possible rate hike time. GBPUSD barely reacted as the BoE governor has a history of talking out of both sides of his mouth.

The week that will be

After the tension, drama and volatility of the previous week, the week coming up will have all the thrills and excitement of a mime performing a one act play in a darkened theater.

Traders will remain alert to new Greece developments but for now, the timer on the ticking time bomb has been reset. Oil prices will be a wild card as a newly “reformed” Iran is eager to swap oil for access to Western ATMs.

Kiwi traders will eagerly await the Reserve Bank of New Zealand interest rate decision on Wednesday/Thursday Cable traders will be keenly interest in the Bank of England minutes as well as UK CPI.

US data is mostly second rate and Canadian Retail Sales data on Thursday is kind of irrelevant so soon after the BoC cut rates.

– Edited by Oliver Morrison

Michael O’Neill is an FX consultant at IFXA Ltd.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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