For whom the Loonie bell tolls 2Oct15


For whom the Loonie bell tolls

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Weak NFP supports Loonie gains
  • Putin takes shots at USA via Syria
  • Central bankers in focus next week

By Michael O’Neill

Fed chief Janet Yellen and her colleagues on the Federal Open Market committee have gone from forward guidance to providing forward misdirection. Yellen flipped from dovish at her post-FOMC press conference to hawkish in a speech the next week while a series of Fed speakers are simultaneously advocating rate hikes and leaving rates unchanged. And then they blame China for their indecisiveness. Even Charley Brown was never as wishy-washy.

And what did we learn from today’s nonfarm payrolls data? We learned that Jeffrey Lacker’s comment yesterday, that an October rate hike was still a possibility, was, if not a barefaced lie, an accidental miss-communication by an ill-informed committee member seeking attention.

Who will answer the bell for the Loonie?

The Canadian dollar has shrugged off a steep, post nonfarm payrolls plunge in WTI prices and squeaked out a modest gain. The Loonie has been a favourite whipping boy for the US dollar bulls and justifiably so. Oil prices were in a steady decline which was mirrored by the Canadian economy. The poor bird got its feathers plucked during the last two weeks of equity turmoil predicated on the belief that the outlook for growth in the global economy was on life support.

That sentiment shifted slightly a week ago. The Commitment of Traders reported indicated that speculative short Canadian dollar positions were cut as of September 22. Canadian economic data in September showed evidence of an improving economy. GDP has grown in the past two months, employment was higher and retail sales and CPI met forecasts.

If this trend to improving data continues next week, it should insulate the Canadian dollar from the on-again, off-again global growth concerns. The release of merchandise trade, Ivey PMI data, housing starts and employment data will determine whether a Canadian bull or bear answered the bell.

USDCAD technical outlook

The intraday technicals are bearish while trading below 1.3290 supported by the addition move below 1.3240. The down move has already bounced off major support in the 1.3180 level which stems from the intraday 61.8% Fibonacci retracement from the September 18 low. Coincidently it is also the 38.2% Fibonacci retracement from the July Bank of Canada rate cut low of 1.2734 to the to the 1.3555 September peak. There is additional uptrend line support from June which comes into play at 1.3150. If this level breaks, it wouldn’t take much of an effort to drop to 1.3000.

USDCAD 4-hour with Fibonacci retracement highlighted:

Source: Saxo Bank

Cold War getting colder

The temperature is dropping rapidly in the USA/Russia relationship. Never the best of friends, Russia, perhaps tired and annoyed with American meddling in Ukraine and Crimea aggressively changed the dynamic of the Syrian civil war.

Earlier this week Vladimir Putin announced that Russia would launch air-strikes against ISIS targets in Syria, in a fight to stem the spread of the religious zealots. And then he acted almost immediately.

To say that the US was pissed, would be an understatement. In a single bombing raid, Russia changed the entire diplomatic and military landscape in Syria, highlighting the failure of the American effort.

The US administration and Secretary of State, John Kerry were quick to claim that Russia was attacking the American supported rebels in the guise of an anti-ISIS raid. However, the American administration once announced to the world that Iraq had “weapons of mass destruction”.

At the same time, it is hard not to believe that the Russian air-strikes aren’t Putin’s way of exacting a pound of flesh out of President Obama as payback for America’s leading role in gutting the Russian economy through sanctions.

Russia may be short on cash but it still has a formidable military. Russia can kill two birds with one stone, providing military support to its Syrian ally, President Bashar al-Assad under the guise of fighting terrorists while exposing American’s inept and ineffective role in the Middle East.

Putin visiting his chums in Serbia last year for a military parade.

He rather enjoys those. Pic: iStock

The week that was:

This week was a little bit country and a little bit rock n’roll and that didn’t just depend upon the day it included the asset class as well.

Monday was a day for equities, actually for unloading equities, with major global indices finishing down across the board while FX markets were contained to their recent ranges. The commodity company Glencore (GLEN:LN) spooked markets with a 30% drop in its share price following a note by analysts at Investec, according to the BBC.

Tuesday saw a continuation of equity market selling in Asia in a move that didn’t carry forward into the European session. GBPUSD traded choppily ahead of Bank of England governor Mark Carney’s speech much later in the day. The speech was on climate change which makes sense for the minister of the environment. For the governor of the central bank, not so much. The other major speech of the day was Vladimir Putin’s address to the United Nation’s Syria Summit. He kept his shoes on, unlike another Russian President in 1960.

Wednesday was month-end and quarter end and a choppy, somewhat volatile day. Asian equity markets recovered Tuesday’s losses. The European session had a lot of data releases but not a lot of FX movement although EURUSD traded heavily. The US dollar was in demand against the G-10 currencies for the 1600 GMT fix with the exception of JPY equities and oil prices finished the day higher.

Thursday gave a fairly decent impression of a “risk on” day in Asia. Commodity currencies rallied as did the Nikkei. Europe was a tad less active. In fact, compared to Wednesday, it was very quiet. Not so in New York. Trading was choppy, volatile and in some cases erratic. Oil prices soared on storm warnings and plunged just as quickly when the warnings disappeared. Weak ISM data had analysts lowering GDP forecasts. EURUSD was bid throughout the day and Russia and the US were at odds, again.

The week that will be

There will be no shortage of volatility next week. Monday will likely start off slowly due to the China holiday.

Things should change on Tuesday. On tap is the Reserve Bank of Australia and a speech by European Central Bank president, Mario Draghi.

Wednesday leads with the Bank of Japan monetary policy meeting followed by the release of the FOMC meeting minutes.

Thursday is the Bank of England’s turn to shine providing Carney can pull himself away from the Weather Channel.

In between there will be enough major data from around the world to keep things interesting.

– Edited by Clare MacCarthy

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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