Negative oil outlook will weigh on Loonie 30Dec15


Negative oil outlook will weigh on Loonie

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Canadian dollar weakest of the majors
  • Oil prices remain on the defensive
  • Beware a BoC rate cut (really!)

Canada and Norway: Spectacular scenery, poor currencies. Pic: iStock

By Michael O’Neill

The Canadian dollar is ending the year on an erratic note with intraday oil price movements leading to wild swings. In addition, the prospect of Canadian dollar selling due to year-end demand has renewed the focus on 1.4000.

And the winner is….

The Canadian dollar has won the distinction as the “worst performing” G10 currency in 2015, shedding 18.00% versus the US dollar. At least, as of this writing. Its second closest competitor is the Norwegian krone. And the common denominator to both is the price of oil.

Chart: USDCAD, USDNOK, OIL US continuous 1 year

Source: Saxo Bank

Are oil prices pumped for a rally?

In November, 2014, the Organisation of Petroleum Exporting Countries decided that defending market share took precedence over defending oil prices and oil prices collapsed.
The following December, the US Energy Information Administration predicted that in 2015, the average price for WTI would be $63.00/barrel. The actual average is $49.08/b.

The EIA prediction for 2016 is that WTI will average $50.89.

That forecast implies a pretty good rally for WTI which is currently trading at $36.79/b. The EIA admits that there is a lot of risk to its forecast. Those risks note that Russia is producing crude in record volumes, Iran is getting ready to ramp up exports when the sanctions are removed, which may be as early as the end of January 2016 and US shale production has not declined significantly. The EIA also acknowledges that the prospect of additional weak economic growth in China and emerging markets will weigh on prices in a high production environment.

A Bloomberg story suggests that Saudi Arabia’s latest budget assumes Brent at $37.00/b. That price is seen as evidence that the kingdom will continue to defend market share and not cut production. The Iran oil minister says that Iran is budgeting using an average price of $40.00/b.

Chart: WTI price projections

Source: EIA

Forecasts show pain trade is down

The WTI price negatives are well-known but according to the EIA Short-Term Energy Outlook, traders appear more optimistic for prices to increase rather than decline. If so, a move lower will be more painful than a move higher.

The following EIA chart shows probability values calculated using NYMEX market data for the five trading days ended December 3.

Chart: Oil price probabilities

Source: EIA

A rate cut in Canada – surely you jest!

There isn’t a whole lot of bank economists forecasting a Bank of Canada rate cut in 2016. In fact, four of the biggest domestic banks, BNS, RBC, BMO and CIBC, expect Canadian rates to remain unchanged during 2016.

Those forecasts may change. Last week’s disappointing Canadian GDP data was weaker than expected, exacerbated by the third consecutive month of soft manufacturing shipments and puts a downside risk on many Q4 forecasts. Further weakness in oil prices should already be making the Bank of Canada nervous. The January 8 employment report may be the tipping point. The forecast is for a loss of 5,000 jobs in December, on top of the 35,700 job losses announced in November.

BoC governor, Stephen Poloz, gave a speech on December 8 entitled "Framework for conducting Monetary Policy at Low Interest Rates". It may have been due to the time of the year, but his remarks did not attract the attention that they deserved. That may have been a mistake.

On December 8 WTI prices were in the $37.50-$38.00/b range, October GDP was forecast to rise 0.3% CPI was expected to rise1.5%, y/y and October Retail Sales was expected to gain 0.4%. Oil prices have remained steady but everything else missed the mark. The possibility that the Bank of Canada surprises markets with a rate cut on January 20 cannot be ignored.

USDCAD uptrend is your friend

USDCAD has traded erratically within the a 1.3770-1.3990 band for the past two weeks and tested both sides of that range. The uptrend from the beginning of December remains intact while trading above 1.3830 suggesting further gains to 1.4055 and then 1.4285. A move below 1.3830 would lead to further weakness to 1.3670.

Chart: USDCAD daily

Saxo Bank

The last word for 2015

USDCAD appears poised to rally and test the Canadian 70 cent level or 1.4285 due to poor domestic data and the risk of even lower oil prices. The problem is that the current level of USDCAD, 1.3900, reflects all those concerns. Jokers are wild and in this deck, the joker is the Bank of Canada. Rate cut speculation is still a fringe idea. It may go mainstream with a poor employment report but until then, oil price movements will dictate direction.

Tomorrow’s month end and year end portfolio rebalancing flows are rumoured to require USDCAD buying. If so, the lack of liquidity could see USDCAD touch 1.4000 tomorrow.

– Edited by Clare MacCarthy

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2015 in review


The WordPress.com stats helper monkeys prepared a 2015 annual report for this blog.

Here’s an excerpt:

A San Francisco cable car holds 60 people. This blog was viewed about 3,000 times in 2015. If it were a cable car, it would take about 50 trips to carry that many people.

Click here to see the complete report.

The 2015 Christmas Poem


T’was just days before Christmas

By Michael O’Neill (with apologies to Clement C. Moore)

T’was just days before Christmas, when all around the world

Not a trader was stirring, beneath desks they lay curled.

Their P&L sheets were hung on their monitors with care

In hopes that Saint Nicholas would put some winners up there.

.

The traders were restless, wished they were snug in their beds,

While visions of profitable trades danced in their heads.

Yellen in her kerchief and Draghi in his cap

Had both closed their books and settled in for a nap.

Central bankers don’t get much sun

The year had been crazy, January flowed with red ink.

Central Banks in Canada and Switzerland, raised quite a stink.

Canadian interest rates jumped, the EuroSwiss peg was abandoned.

And long positions in CADDollar and EuroSwiss became stranded.

The rest of the year was filled with the same sort of clatter

Draghi promised lower rates, below zero didn’t matter.

The Fed said that they would hike when the data was right

And repeated those words night after night.

The US dollar was bought by every Tom, Dick and Joe

But the market was choppy, profits would come and then go

And now December was here, the deeds promised were done

However the many mixed messages left profits un-won.

When out on the street there arose such a clatter

Traders sprang from their hidey-holes to see what was the matter.

Away to the windows they flew in a dash

Then Reuters and Bloomberg screens started to flash.

They turned their heads in an instant and then turned around

On their screens appeared St. Nick, Ms. Yellen as background.

Oh, their eye’s how they twinkled, their dimples how merry

Their cheeks were like roses and their noses like a cherry.

Their droll little mouths were drawn up like a bow

And the hair on their heads was as white as the snow.

They may have snow on the roof but there is fire in the furnace

St. Nick went to work while Yellen spoke from the screen

“Dollar bulls should beware of reversions back to the mean”

2016 is coming fast, the economy is on fire

And interest rates will keep moving higher and higher,"

" Iran will become friends, its Russia we’ll hate

Unless Mr. Putin will abdicate

Americans will choose between a frump and a chump

The White House will be occupied by Hillary or Trump"

The EU may be shaken right down to its core

If Greece or some other country heads out the door

There’s lots to worry about and plenty to trade

So put your money on the table, there’s cash to be made"

Then the screens faded to black but the sound was all right.

Merry Christmas to all and to all a good night.

Loonie rolling snake eyes 21Dec15


Loonie rolling snake eyes

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Canadian CPI disappoints
  • FOMC leaves EURUSD in limbo
  • Loonie partying like its 2003

Beware snakes. And the Canadian dollar too. Pic: iStock

By Michael O’Neill

This morning’s weaker-than-expected Canadian CPI data was just another kick to the head of the loonie while it is down and if the run of bad news continues, it won’t be long before the bird is out.

Sleigh bells ringing and the rate hawks are singing

‘Tis the season to be jolly. That should have been readily apparent after the Federal Open Market Committee raised US interest rates by 0.25 basis points. Yet, jolly people are hard to find, at least in FX land and especially EURUSD traders.

Short EURUSD positions were very large leading up to the FOMC meeting according to an admittedly stale Commitment of Traders report from December 11. Also, the fact that EURUSD was stuck in a 1.0800-1.1050 band between the European Central Bank and the FOMC decisions, suggests that positioning remained fairly static.

So when the big day arrived and the FOMC statement was released, instead of the highly anticipated “shock and awe” volatile reaction expected, EURUSD traders were greeted with “squawk and blah”. EURUSD jumped from 1.0880 to 1.1010 and then instantly reversed and dropped back to pre-announcement levels.

In contrast, following the just-as-highly anticipated ECB announcement on December 3, EURUSD soared 0.0450 points and has never looked back.

As grand finale’s go, and this was the Fed’s grand finale for 2015, it was a bit of a dud. It was like going to a rock concert expecting laser lights and pyrotechnics and instead seeing a dude with a flashlight and a lighter.

The final full week of FX trading is ending with the two biggest events of the second half leaving traders disappointed and bewildered. The ECB is still adding stimulus, although less than expected, while the FOMC is hiking rates with a distinct lack of urgency. FX markets like to move in the direction where it will cause the most pain to traders and in the case of EURUSD the pain trade is a rally. Ho, Ho, Ho.

Party like its 2003

The Canadian dollar is on the cusp of changing big figures and taking a trip down memory lane to 2003. Do you remember 2003?

George W. Bush decided to invade Iraq in search of either the holy grail or weapons of mass destruction. He didn’t find either of them. Facebook didn’t exist and a billion people had no idea how to connect with people that they never wanted to connect with in the first place. Oil prices were trading in a $25.50-$39-80/barrel range.

In December 2003, the Bank of Canada interest rate statement said that “core and total CPI inflation had fallen below the 2% target and complained that economic growth in the third quarter had fallen below target. The added that " the US economy exhibited exceptional growth although this growth has yet to show up in Canada’s export performance". Sound familiar? And USDCAD was at 1.4000.

Here we go again.

Oil prices are below the mid-point of the 2003 range and falling. CPI is well below the 2% target and the Canadian economy hasn’t seen much benefit from renewed US economic growth.

Loonie rolling snake eyes

In the crap shoot that is the FX market, the Loonie is rolling snake eyes. There is plenty of news and it’s all negative. Oil and other commodity prices are falling, CAD/US Interest rate differentials are widening, inflation is falling, exports are declining, federal government deficits are expanding, global demand for US dollars is expanding and the USDCAD technicals are bullish. The good news cupboard is bare. The only factor preventing a blow-out to the top is the fact that the market is well long USDCAD already and may traders have called it quits for the year.

USDCAD technical outlook

The USDCAD, intraday, short and long-term technicals are bullish and looking are for a test of 1.4055 in the very near future. The long-term uptrend from November 2014 remains intact while trading above 1.2990. The short-term uptrend is intact while trading above 1.3340. The intraday technicals are bullish above 1.3820 supported by the break of 1.3845 and looking for a move above resistance at 1.3990 to test 1.4055. In addition, the break of 1.3465, which was the 61.8% Fibonacci retracement level of the 2002-2007 range targets the 76.4% retracement level of 1.4500. Intraday corrections should be halted at 1.3860.

Chart: USDCAD weekly with Fibonacci retracement

Source: Saxo Bank

The week ahead

Next week is a short week for everyone and an extra short week for all the other people who are able to book vacation time. It is also chock full of top tier data that in any other week, would attract all kinds of attention an analysis. The problem this week is that no one cares. ‘Tis the season to be jolly, and all of that.

The week that was

It was supposed to be a fairly quiet week until the afternoon on Wednesday as oftentimes, a looming Federal Open Market Committee meeting and press conference keeps traders sidelined. That wasn’t the case.

Monday started with the South African Rand (ZAR) hogging the spotlight. USDZAR tanked and retraced all of the prior Thursday-Friday gains in one fell swoop on news that the president back-tracked on his finance minister decision. G10 currencies were choppy but remained within their recent ranges.

Tuesday’s Asian session didn’t create much excitement and Europe wasn’t any better. The US dollar traded with a heavy tone as positions continued to be trimmed ahead of the FOMC meeting. EURUSD poked above 1.1000 but stalled at 1.1060. That move may have been helped by positive German ZEW data. GBPUSD ignored “as expected” inflation data and traded sideways. WTI oil prices hovered around $37.00/barrel and US equities closed higher.

Wednesday saw the US dollar catch a minor bid in Europe and EURUSD started the New York session near its lows. GBPUSD was sold despite large gains in employment because traders were put off by a drop in the average weekly earnings component. That was the morning.

Wednesday’s New York afternoon began at 1900 GMT. Janet Yellen announced a 0.25% hike in US interest rates and for a very brief moment FX markets went wild. The reaction was similar to a light being turned on in a cockroach infested kitchen. The roaches are startled and scurry every which way. As soon as darkness returns they are back to doing whatever cockroaches do in the dark.

The FX market reaction wasn’t a whole lot different than the cockroaches. The activity abated and the FX majors returned to the levels they were at prior to the news. (except for USDJPY, it held on to its gains.) New York traders left for the day thinking “is that all there is”?

Well it wasn’t. On Thursday, the USD dollar saw modest demand in Asia and Europe although EURUSD performance was lack-luster. That changed in New York. A whole mess of data and a rethink of the FOMC’s actions created a stir. News that the brand new freely floating Argentina peso dropped 35% sparked a bout of risk aversion. Commodity prices were already wobbly when another huge build in US crude inventories was reported. Oil prices tanked as did the commodity currency bloc. All the moves were aggravated by poor liquidity which promises to get worse.

– Edited by Clare MacCarthy

ECB and FOMC moving opposite, together 15Dec15


ECB and FOMC moving opposite, together

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US CPI as expected – no reaction in FX
  • EURUSD defying gravity
  • USDX bearish but holding support

This is not the FOMC. But the Fed Force is awakening too. Photo: StarWars.com

By Michael O’Neill

This morning’s US data did nothing to derail the US interest rate hike debate. EURUSD traders may be reconsidering their desire to buy euros with the failure to extend gains above 1.1100 and the risk of a steeper slide on a close below 1.0940.

The FOMC force has awakened, too.

The most highly anticipated movie of 2015, “Star Wars – The Force Awakens” premiered in Los Angeles yesterday to great fanfare, hoopla and adults wearing costumes. Tomorrow’s Federal Open Market Committee has all the anticipation of the movie. It just lacks the hoopla and costumes.

But why the anticipation? Janet Yellen, chair of the Federal Reserve, has pretty much pre-announced a rate hike so a 0.25 basis points increase shouldn’t surprise anyone. The Federal Open Market Committee has taken a number of hits to its credibility this year due to its penchant for flip-flopping on guidance and members delivering contradictory statements. Announcing a rate hike, which Yellen has strongly hinted at, would be a redemption of sorts and allow the FOMC to wrap up 2015 with a tidy little bow.

2016 will begin just like 2015 with traders wondering “when will the FOMC hike rates”. And that debate will begin Wednesday afternoon with the release of the Economic Projections and new “dot-plot”.

EURUSD down, up and now…..?

It appears that European Central Bank president Mario Draghi’s grand plan for a new “whatever-it-takes” stimulus package was sharply curtailed by other powerful interests, particularly the German Bundesbank. The result was that traders expecting large and instant profits from short EURUSD positions had to scramble to protect rapidly shrinking gains and even booked losses when EURUSD soared in a massive short squeeze.

The FX market was disappointed because the ECB only cut rates by 10 bps and didn’t increase the amount of bond purchases. Big deal. That move didn’t signal the end to the ECB’s stimulus plans, it actually opened the door wide for additional action in the months to come. Mario Draghi said the same thing in a speech in Bologna on Monday. According to the Financial Times, Draghi remains very concerned that headline inflation remains well below the ECB’s target and he insists that additional monetary stimulus is still on the table.

Meanwhile, the Federal Reserve is about to raise interest rates in a bid to “normalise” monetary policy. Policy normalisation implies that more than one increase is in store in 2016. CNBC reports that over 70% of CNBC Global CFO Council members expect at least 2 rate hikes.

Surprisingly, EURUSD has rallied despite the fact that ECB rates are going lower for longer while US rates are heading higher which is counter-intuitive and in my mind, the current levels are unsustainable.

The sharp gains, post ECB meeting are understandable. The FX market was extremely short EURUSD and didn’t get what it wanted. Those positions were squared up either to take profits or limit losses.

But that was then, this is now. The prospect of additional ECB stimulus and a couple of Federal Reserve rate hikes in 2016 should put the EURUSD focus back on parity. EURUSD and USDX technicals support that view.

EURUSD technical outlook

The short-term EURUSD technicals are bearish while trading below 1.1340 a level guarded by resistance in the 1.1100-10 area. The intraday downtrend is intact below 1.1130. A break of minor support in the 1.0920 area should lead to a re-test of the 1.0485-1.05 area which if broken points to parity.

Chart: EURUSD daily with downtrend

Source: Saxo Bank

US dollar index finds support

The intraday USDX technicals are bearish while trading below 98.05 but have been unable to break support at 98.05. The bounce from support is approaching the downtrend line, that if broken should extend gains 98.80. Above 98.80 targets the 2015 high. A break of support at 98.05 suggests further losses to 96.50

Chart: USDX daily with downtrend and support

Source: Saxo Bank

– Edited by Clare MacCarthy

Crude weakness leads loonie to the abyss 11Dec15


Crude weakness leads loonie to the abyss

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • China formally introduces CNY basket
  • Oil prices hit new multi-year lows
  • Loonie heading to 1.4000 versus USD

By Michael O’Neill

China formally announced a trade-weighted CNY index which analysts consider just another baby step towards loosening the peg to the US dollar. EURUSD popped immediately but quickly reversed the move as the Federal Open Market Committee meeting next Wednesday is the bigger and more current risk.

The FOMC meeting also provided markets with an excuse to ignore the US data today, which for the record were pretty close to expectations.

Loonie neck-deep in oil

Last Friday, Opec failed to announce a production cut and this week reported that crude output was at the highest level in three years. The benchmark Brent and WTI prices made new multi-year lows today after the International Energy Agency forecasted that crude oversupply will continue throughout 2016.

It just keeps coming. Photo: iStock

WTI touched $35.78/barrel, well below the previous $37.75-80/b support level with nothing to impede its slide to the March 2009 lows.

Unholy matrimony

USDCAD and oil have always been closely linked, but this week saw the two assets get closer than newlyweds on their honeymoon.

One of the main reasons for the tightened link is that there hasn’t been a whole lot of anything else going on. The Opec meeting and the decision to not cut production, combined with various reports of record crude production, has largely been the only game in town.

The Swiss National Bank and the Bank of England interest rate meetings were total non-events for traders this week, and key US data releases have been in short supply. With the highly anticipated FOMC meeting not rolling in until Wednesday, oil and the loonie were thrust into the spotlight.

EURUSD demand on last week’s European Central Bank disappointment has resulted in a bit of EURCAD demand as well, which exacerbated the USDCAD move on weak oil.

That relationship is unlikely to change next week as the only major release from Canada is a CPI print that won’t be enough to overshadow oil price movements. The Bank of Canada will hold a press conference following the release of the Financial System Review, and will also be a snooze-fest – especially with the FOMC meeting the next day.

One-hour USDCAD and oil overlay

:

Create your own charts with SaxoTraderGO click here to learn more

Source: Saxo Bank

USDCAD technical outlook

“To the moon” may not be a conventional technical analysis term but the expression seems appropriate – especially if the moon is considered to be 1.4000. With the break above 1.3680 today, there are only four daily resistance levels until 1.4000 and you have to go back to 2004 to see them.

The short-term and intraday setup is bullish as the USDCAD uptrend remains intact while trading above 1.3570. This level is in turn being guarded by support in the 1.3620-30 zone.

This latter area may contain intraday retracements.

USDCAD daily (2004 daily tops highlighted):

Source: Saxo Bank


Pulling a fast one, perhaps?

Did Bank of Canada governor Stephen Poloz try to sneak a dovish bomb past markets in the guise of the “always at the ready” speech delivered on Tuesday?

Think about it… the ECB had just announced additional stimulus measures on the previous Thursday, sending interest rates deeper into negative territory and extending the bond-buying program was extended…

So what was Mr. Poloz attempting to accomplish when he delivered a speech about “unconventional monetary policy measures”?

Sure, he prefaced his remarks with the following lengthy caveat: “I need to be absolutely clear about two things. First, today’s remarks should in no way be taken as a sign that we are planning to embark on these policies. To reiterate, our base case sees the Canadian economy returning to full capacity around mid-2017 and the risks to the outlook are roughly balanced. We don’t need unconventional policies now, and we don’t expect to use them

But EURCHF traders do not need to be reminded about the dangers of taking a central banker’s words at face value. I’m sure they all remember SNB vice president Jean Pierre Danthine’s remark assuring traders that minimum exchange rates are a cornerstone of SNB monetary policy just four days prior to the EURCHF floor being abandoned.

Poloz is insisting that the BoC does not need unconventional policies now and doesn’t expect to use them. If so, why talk about them and why talk about them so close to the ECB stimulus announcement? Does he not have much confidence in the bank’s own forecasts?

He did say forward guidance was the first tool in the toolkit… but is talking about unconventional policies forward guidance? A made-in-Canada quantitative easing programme in the face of plummeting oil prices would hang a target on the 2002 USDCAD peak.

If you live outside of Canada and have ever wanted to visit, a dovish BoC might just be the excuse you need. Photo: iStock

The week that will be

Nothing will matter until Wednesday. Sure, commodity currencies will stay under pressure if oil prices continue to slide but that’s it. The data prior to 1930 GMT on Wednesday will be ignored and the data afterwards will be overshadowed by questions and comments about what is next for the Fed. And then the Christmas holiday season starts in earnest – Ho Ho Ho!

The week that was

This week was expected to lack the drama and excitement of the previous week and it lived up to expectations. Despite three central bank meetings and speeches from the governors of the Bank of Japan, the BoC, and the Bank of England, FX moves were mostly noise inside of recent ranges.

There are always exceptions, however, such as USDJPY which broke a four-week low and USDCAD which made new highs.

Monday saw a sleepy Asian session ignore a BoJ speech but came to life in Europe. Traders sold US dollars against everything without any apparent reason. Then New York had good reason to sell commodity currencies and did just that as oil prices tumbled in a delayed reaction to Friday’s Opec announcement.

Tuesday’s Asian and European sessions saw a continuation of the soft commodity currency theme due to plunging iron ore prices, weak Chinese data and soft crude prices while the USD lost ground against the European currencies. EURUSD traded sideways in a low-volume environment.

Wednesday’s Asian session saw a bounce in WTI prices due to late New York news from the American Petroleum Institute which reported a larger-than-expected crude inventory drawdown. The positive sentiment led to widespread US dollar selling in Europe and New York. Kiwi soared in the New York afternoon/early Asian session on a hawkish statement from the Reserve Bank of New Zealand, despite the fact that it cut rates by 0.25 basis points.

Thursday’s Asian session had analysts concerned with the accuracy of Australia’s blowout employment data.while AUDUSD traders weren’t puzzled and bought the currency. The US dollar rallied against all the European currencies (except NOK) in part due to dovish ECB comments.

The GBPUSD headed lower after the BoE statement didn’t give traders reason to buy while the Swiss National Bank meeting was a snooze-fest as well. New York traders drove EURUSD well above its 1.1000 resistance as the ongoing short squeeze continued. Oil prices continued to leak lower as the New York session ended.

— Edited by Michael McKenna

The loonie has the ‘crude oil blues’8Dec15


The loonie has the ‘crude oil blues’

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Oil and loonie bears are in the driver’s seat
  • USDCAD at 1.4500 is not out of the question
  • Further surprise, price swings likely before year-end

Opec’s Saudi Arabia-favouring decision continues to empty out Canada’s energy sector and the Albertan economy. Photo: iStock

By Michael O’Neill

“What goes around, comes around”. On October 17, 1973, the Organization of Petroleum Exporting Countries, or Opec, implemented what it called “oil diplomacy”. The decree banned Opec countries from selling oil to all nations that supported Israel in the Yom Kippur War. Oil prices quadrupled to $12/barrel and led Jerry Reed to sing “Crude Oil Blues”. Today, oil-producing nations are the ones singing the crude oil blues” and for Opec, it is a self-inflicted trauma.

Last Friday, Opec made the decision to ditch its production cap which set the stage for a renewed selloff in crude oil. The 2015 low in the $37.75-80/barrel area shattered this morning, clearing the path to $34.75/b, at a minimum, and if the Goldman Sachs analysts are correct, $20/b.

USDCAD aims for 1.4500

For USDCAD, the break of major resistance in the 1.3450-70 area yesterday is significant in terms of Fibonacci retracement. The 1.3465 level represents a 61.8% retracement of the 2002-2007 range. The break sets a new target of 76.4% which comes in at 1.4500.

Unrealistic? Not at all. Canadian economic growth is sluggish at best. The manufacturing industry hasn’t recovered from the 2008 financial crisis. The closed factories and lost jobs are gone forever, replaced by coffee shops and Uber drivers.

The largest province in Canada, Ontario, has a provincial government dedicated to the destruction of the balance sheet. In July, the National Post reported that Ontario has the dubious honour of being the most indebted sub-sovereign borrower. Ontario has double the debt of California and only a third of the population. The current government plans a series of “revenue tools” (a public relations firm suggested they avoid the word “tax”) that will stifle growth. These include new taxes on taxes, road tolls and the sale of prime assets for short-term gain.

And Ontario is just one issue, as Opec has decimated the formerly oil-rich Albertan economy. Energy investments have evaporated and job losses are huge.

The drop in oil prices has put a serious dent in the government of Canada’s finances as well. But that hasn’t deterred incoming prime minister Justin Trudeau from his promised spending spree. Lower revenues and higher spending… what could go wrong?

Bank of Canada may favour a weaker loonie

The renewed plunge in oil prices will have a deflationary impact which will irritate the Bank of Canada. BoC governor Stephen Poloz expressed concerns about declining inflation many times over the past year. Last January, the mix of falling oil prices and deflation led him to cut interest rates and the planets are aligning for a similar move this January.

As a former head of the export development corporation, Poloz is well aware of the advantages of a weaker loonie. We will know more later today after his speech and press conference, scheduled for 1750 GMT.

Uncle Sam to the rescue

Canada’s economic growth is intertwined with that of the US but Canada is no longer America’s largest trading partner as that mantle has been passed to China. Regardless, an improving US economy in 2016 will lift the Canadian economy. Or not.

US economic growth, to date, has been sluggish and uneven but the Federal Reserve will still hike rates next week. That will set the stage for chatter about the timing of hike number two at the same time as Canadian rates risk going lower.

Uncle Sam will be exacerbating the weak loonie problem, not alleviating it.

USDCAD technicals

There is no getting around it, the USDCAD technicals are bullish in both the short- and long-term.

Intraday/short-term outlook: The USDCAD uptrend from Friday’s low remains intact while trading above the 1.3490-1.3520 area, a zone reinforced by support from prior support/resistance levels and today’s break above 1.3550. Resistance is hard to find and you need to refer back to 2004 where 1.3640 capped gains.

30 minute USDCAD noting bullish setup:

Create your own charts with Saxo Trader click here to learn more.

Source: Saxo Bank

Long-term outlook: The long-term outlook is bullish with uptrends from 2012 and 2014 still intact. The 2014 uptrend doesn’t even get tested until 1.2950-70 on a weekly chart, which happens to be where the long term downtrend from 2001 ended back in July.

The 1.4150-70 area capped short-term rallies in the second half of 2003 and will likely be resistance in 2016.

USDCAD weekly with uptrend lines and resistance:

Source: Saxo Bank

‘Tis the season to beware

December is both the start of the holiday season and the end of the year. Trader bonuses are paid (for those banks with a December year-end) on profits up to and including December 31… in theory.

Traders are always sure of two things at any given time: their positions and their profit year-to-date, usually down to the penny. Profitable traders are unwilling to risk their bonuses this close to payout and losing traders do not want to make it any worse. Neither group has any incentive to trade and they don’t.

The same holds true for traders at pension funds, hedge funds and the like. Corporate traders have learned over the years that slippage increases drastically as December wanes and as such they try to get all their FX requirements taken care of early in the month.

In December, liquidity dries up. FX price swings are exaggerated and moves occur on the most ridiculous fragments of speculation. Those moves also makes mincemeat out of intraday technicals, rendering them useless.

These are just a few of the reasons why December traders should look at intraday technicals with a jaundiced eye.

The slightest weather conditions can make any move hazardous. Photo: iStock

— Edited by Michael McKenna