It’s not the end of the world, just the quarter
FX Consultant / IFXA Ltd
- US consumer confidence good for dollar
- Japan half-year end creates liquidity issues
- The USDCAD trend is higher
Smiling because of that warm cuppa or because she’s got her money in yen?
The Japanese currency often gets a boost at this time of year. Photo: iStock
By Michael O’Neill
The financial world isn’t collapsing despite what the newspapers, TV and online media may lead you to believe. It is merely a quarter-end. And this quarter-end is a tad more significant than the previous two. Why? In Japan, it is a half-year end.
Historically, the Japanese yen has a tendency to strengthen during the last week of September due to repatriation demand and this year is no different. In fact, the yen has gained against all of the G10 currencies this week with the exception of the New Zealand dollar, which is flat.
Another reason for the September quarter-end volatility is the three-business day vacation that Japan enjoys in late September. Last week’s Japanese holidays combined with various religious holidays elsewhere greatly diminished the liquidity pool which exacerbated FX moves. That also exacerbated the equity market rout.
FX markets will return to some degree of normality next week with a series of central bank meetings/interest rate statements and fresh top-tier data which should provide some clarity and trading guidance.
Source: Saxo Bank
Tales from the dollar index crypt
The US dollar index (USDX) has been a tad less-than stellar indicator of US dollar direction for the past month. It is no surprise that it has been as rangebound and ragged as the currencies in the index.
However, if you ignore the 24-hour dip/rally around the September Federal Open Market committee meeting, the USDX is in a steady uptrend while trading above 95.70 which suggests further gains and a test of resistance at 96.87-97.15 area.
A move through this level would provide scope for a move to 98.30. A move below 95.70 would indicate additional 94.80-96.80 consolidation
Source: Saxo Bank
It’s not Halloween but loonie dressed up as a pig
Halloween is still a month away yet it seems like the Loonie is in costume, dressed as Porky Pig. The question is why?
Oil prices appear to have stabilised above $43.00/barrel. The September US rate hike failed to materialise as did Mario Draghi’s expected confirmation of additional stimulus by the European Central Bank. And speaking of vanishing acts, the latest polls show that the Federal NDP party (which had been leading polls at the beginning of the month) is back in their usual third-place spot.
Canadian economic data during the past month has also been mostly positive although today’s Industrial Product Price and Raw Material Price Indexes were soft.
The Canadian dollar has been collateral damage. The global equity meltdown in the past week has led to a rise in risk aversion sentiment. The stampede of traders looking to mitigate losses occurred during a period of reduced liquidity stemming from a series of national holidays globally and quarter end. In addition, there appears to be demand for US dollars for month end portfolio rebalancing which has boosted USDCAD.
If all of the above is true, it stands to reason that the Canadian dollar will rally in October on the back of continued strong data, elimination of election uncertainty, return to normal FX volumes and the end of the quarter-end flows.
But it won’t
For the Canadian dollar, October is the cruelest month. Arguably so is November while December sits on the fence. USDCAD tends to rally during the final quarter of the year for a couple of reasons.
October is year-end for all of the major Canadian Banks. The so-called “Big 5” control the lion’s share of Canadian business banking and by default, a large amount of domestic foreign exchange flows.
On the approach to year-end, these banks tend to close their books and greatly reduce trading and risk-taking. (Risk-taking is already greatly reduced thanks to the Volker Rule) FX traders pretty much just “quote and cover”, which negatively impacts Canadian dollar liquidity.
The last quarter of the year tends to see a lot USDCAD demand as the Canadian subsidiaries of US companies repatriate their earnings.
This year, there is the added wrinkle of the Federal election. At this juncture a minority government, led by the Conservatives appears to be the likely outcome. However, there has been some debate as to whether the Liberals and NDP could form a minority government, even if the PCs have the most seats (but not enough for a majority).
That would get real messy and the loonie would likely suffer.
USDCAD technicals are bullish
The short- and long-term USDCAD technicals are bullish. USDCAD is in a short-term uptrend while trading above 1.3180 and a long-term uptrend above 1.2610. The USDCAD rally that started with the July Bank of Canada rate cut remains valid above 1.3230.
Intraday, the break above resistance in the 1.3350-80 area set the stage for additional gains to 1.3460 and then 1.3570. A break below 1.3350 would extend losses to 1.3300-10.
Source: Saxo Bank