It’s BBQ season and the Loonie’s on the grill 4Aug15


It’s BBQ season and the Loonie’s on the grill

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Canadian election campaign begins
  • WTI drop sinks Loonie
  • USDCAD stretch target is 1.4500

If China’s facing an uphill struggle, it will reverberate in Canada. Photo: iStock

By Michael O’Neill

The Loonie is on the grill. A series of weaker-than expected economic reports plucked its feathers, the Bank of Canada rate cut in July gutted it, plunging oil prices skewered it and the election call lit the coals. In this case, well-done is 1.45, not the usual 170 degrees.

1.45 happens if:

Oil: WTI prices dropped through important support in the $46.65/barrel area opening the door to further losses to the March lows in the $42.00/l area. A break of this level argues for a steeper drop to $32.88/b representing the 2008 floor.

But why stop there? If there is any truth to the story that the Saudi’s and Opec want to cripple the US shale industry, a move to $32/bbl would be a death blow.

Fed: There is still a 50/50 chance that the Federal Open Market Committee raises rates in September. Big Deal. But what happens if the long awaited US second half recovery returns with a vengeance raising the prospect of a second rate hike in 2015? Even talk of another hike is bullish USDCAD.

China: Chinese equity markets had a modest recovery overnight but they are still well off their June peak and in a downtrend. How much of the recovery is based on official market manipulation rather than a true belief of improving economic prospects? If China is unable to re-energise its economy, the outlook for commodities will remain soft and the Canadian dollar as well.

Election: If the New Democratic Party (NDP) manage to attain a majority, the Loonie would tank.

1.45 is just pie in the sky if:

Oil: If the March low in WTI contains further price drops and starts to recover, the Canadian dollar will garner a bit of support. A rally back above $50.00/b would probably put a cap on USDCAD gains in the 1.3450 area.

Fed: A Fed rate hike in September is far from a sure thing and the chances that it would hike twice appear remote. The Fed has maintained that any rate increases would be data dependent and the latest batch of US data barely improves the odds for one increase, let alone two.

China: China’s economy, according to China, is still growing at 7.0% annually. It has the resources to support the equity markets and still has many tools to stimulate their economy.

Election: The UK reminded the world how inaccurate polls can be. Why should it be any different in Canada? Another conservative majority and traders can return to fretting about other economies in other regions.

The ‘surprisingly’ easy victory for David Cameron’s conservatives rained on the pollsters’ parade and provides an object lesson for the upcoming Canadian elections. Photo: istock

USDCAD technicals

The intraday and short term technicals are bullish. The break of strong resistance at both 1.2850 and again at 1.3050 targets 1.3420, the 61.8% Fibonacci retracement level of the 2002-2007 range. A break through that level puts 1.4450 in play.

The intraday setup is bullish as well with the uptrend intact while trading above 1.2950. Failure to take out the overnight high of 1.3175 and a subsequent drop below 1.3110 could lead back to 1.3050. A break of 1.3050 could extend losses to 1.2850 and imply additional 1.2850-1.3200 consolidation.

USDCAD daily with uptrend and support

Source: Saxo Bank

They’re at the polls

Canadians go to the polls on October 19. A 77-day election campaign was officially kicked off on Sunday morning when Prime Minister Stephen Harper rolled up to Rideau Hall in a convoy of black SUV’s, Obama style, to meet with the Governor General and formally dissolve the 41st Parliament.

At the same time, Harper also kicked off “Loonie-palooza”. For the past 20 years, federal elections have been largely ignored by USDCAD traders. This time is different.

There are 30 additional seats to fill and his government isn’t polling well. In fact, the prospect of a tax and spend majority socialist government or a tax and spend socialist coalition government in a recessionary economy plagued by plunging oil prices, rising US interest rates and a slowdown in China is a possible outcome and a recipe for currency volatility. Traders will love it.

Canadian Political Party Primer

For the first time ever, perennial third place finishers, the New Democratic Party led by Tom Mulcair, is threatening to win the election. The latest data from the CBC’s Poll Tracker, shows the NDP leading with 33.2% support. The NDP is promising lower taxes for small businesses, a $15/day cap on child-care expenses, rolling back the retirement age to 65, clean air, and unicorns.

The incumbent Progressive Conservative party, led by Prime Minister Harper has been in power since 2006. It is showing signs that it is well past its best-before-date with five cabinet ministers having stepped down or declined to seek re-election. The PC’s campaign will tell Canadians that it is the best and only choice to protect the Canadian economy and defend the country from terrorists even as Harper goes out of his way to pick a fight with Vladimir Putin.

Justin Trudeau leads the Liberal party. Trudeau was elected leader mostly because his father was the Prime Minister of Canada for 16 years beginning in 1968. Liberal party backroom boys hoped that some of his father’s magic rubbed off on him. Unfortunately, he inherited his father’s money and last name but not his intellect. The Liberals are planning to lower taxes to the middle class by raising taxes for the wealthiest 1%. They contend that the Harper government has mismanaged the economy which is a questionable premise considering that Trudeau believes that the economy is how people fly who don’t inherit their Daddy’s millions.

Quebec’s Bloc-Quebecois party was decimated in the 2011 election losing 44 of the 47 seats its held. However, defeated former leader, Gilles Duceppe is taking another kick at the can and will attempt to win back the seats lost to the NDP.

Magic number is now 170

The government of Canada has expanded from 308 parliamentary seats in 2011 to 338 seats available in 2015. That means a majority government needs to capture 170 seats.

According to the Election Almanac, three polls on August 2 project a minority government and two of those polls point to an NDP minority government.

Source ElectionAlmanac

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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