FX landscape filled with bears and goats 6Oct.15

FX landscape filled with bears and goats

Michael O’Neill

FX Consultant / IFXA Ltd


  • Loonie defies soft data on rising oil
  • USDX is stuck in a range
  • End of Golden Week may elevate risk aversion

USDCAAD was hobbled by hopes that Russia and the Saudis would connive to increase the oil price. Really? Tomorrow’s EIA status report might be a better barometer. Pic: iStock

By Michael O’Neill

USDCAD has traded heavily, supported by a surge in WTI prices due to a weaker US dollar and speculation that Russia and Saudi Arabia along with other big producers will act to support prices. Meanwhile, weaker than expected domestic data may be acting as a drag on gains. At the same time, a 9.9% rise at the Global DairyTrade auction gave NZDUSD a lift.

China gets your goat.

The Urban Dictionary defines the phrase “to get one’s goat” to mean “irritating or annoying someone to the point of anger”.

It is also an apt description for China. Eight months ago, China ushered in the Year of the Goat, number eight in the Chinese zodiac. The goat’s personality is described as gentle, mild-mannered, shy, and stable.

None of those attributes applied to China’s impact on financial markets this year. August was particularly nasty for investors. China surprised FX markets in early August when the Peoples Bank of China devalued the yuan by 1.9%, ostensibly to make the exchange rate more market oriented. That triggered a bout of risk aversion.

By mid-August, questions surrounding the health of the economy sparked a 6% plunge in equities. Those fears went viral and equity indices around the world plummeted. At the same time, the economic slowdown has crushed commodity prices and undermined commodity bloc currencies.

The uncertain outlook for China combined with an indecisive Fed greatly diminished risk appetite throughout September.

More tricks than treats in October

October tells a different story. The month is only six days old and last month’s fear and loathing has given way to joy and loving in what is definitely a case of premature adoration.

China’s problems did not go away. They just went on a Golden Week holiday along with domestic economic data releases. The tentative foray into risk-seeking trades so far this month may be in for a rude awakening next week if Chinese data is on the soft side of forecasts. The data includes, Trade Balance, PPI, CPI, Retail Sales, and Industrial Production.

The Chinese data carries more weight than usual due to the Federal Open Market Committee’s (FOMC) concerns that the China slowdown is negatively impacting US growth and hampering their ability to raise interest rates.

No FX direction from USDX

The US dollar index hasn’t been much of a guide for FX market direction. In fact, it reflects the same degree of confusion as the rest of the markets. Excluding the FOMC date, USDX has bounced erratically within a 95.00-97.00 band. At the same time, the long-term trend for USDX is higher while trading above 94.85. The intraday technicals are bearish below 96.20 looking for a move below 95.80 to extend losses to 95.50. Above 96.20 suggests a test of 96.50

Chart: USDX 4-hour with trading band

Source: Saxo Bank

Canada trade data misleads

Canada reported rather ugly looking Merchandise Trade data this morning. The August merchandise trade deficit widened to $2.5 billion from the $817 million deficit reported in July with a sizable 3.6% decline in exports.

At first blush, it is a very weak report which helped lift USDCAD from 1.3092 to 1.3132 immediately after the release. As usual, the devil is in the detail and these details were not as bad as the headline would lead you to believe. CIBC economists point out that weak energy prices were responsible for a big part of the decline as was the rolling off of a “one-off” miscellaneous export surge tied to gold. Traders quickly got the message and USDCAD returned to below pre-data levels.

Chart: Canada Merchandise trade balance

Source: Statistics Canada

Loonie bears hibernating

Loonie bears roamed the FX landscape since May, fattening up on steeper declines in oil prices, Fed rate hike concerns and a Bank of Canada (BoC) rate cut. It appears that they have had their fill and are getting a head start on the annual hibernation ritual.

Since peaking at 1.3455 on September 28, USDCAD has declined to a low of 1.3061 and is currently resting a mere 10 bps above that level. What has changed?

Nothing. In fact the prospects for the Canadian economy have got worse, not better. The pending federal election threatens a Liberal/NDP coalition government which would be a fiscal time-bomb just waiting to explode. Oil prices may have stabilised within a $43.00-$49.00 trading range but overproduction concerns persist.

The Canadian dollar usually gets spanked on bouts of global risk aversion as evidenced during the August China equity indices meltdown. Next week’s Chinese data could lead to a replay of that move.

This morning’s Ivey PMI index was weaker than forecast (Actual 53.7 vs. forecast 54.0). This data series is rather volatile and therefore is questionable, however it does highlight that the economy is struggling.

Friday’s employment data will likely reinforce that view. The consensus forecast is for a gain of 10,000 jobs which may prove to be optimistic. Canada’s employment data rose then fell every month from January to July. The pattern was broken in August which produced a back to back gain. Perhaps September data will be payback time and report a hefty negative number.

Chart: Change in Canadian employment

Source: Trading Economics

– Edited by Clare MacCarthy

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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