Loonie binned as BoC plots its next move 5Jan16


Loonie binned as BoC plots its next move

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • More weak data from Canada add to loonie’s woes
  • Traders awaiting FOMC minutes for hike path clues
  • Bank of Canada’s Poloz may be ‘priming the pump’

By Michael O’Neill

FX markets are becalmed relative to yesterday and US equity indices are flat (at the time of writing), but that is unlikely to last.

Markets will be hoping to find out clues as to the next US rate hike (many are guessing March) from the Federal Open Market Committee minutes due tomorrow, although yesterday’s ISM data raises questions about the strength of the US economy.

US manufacturing can barely catch a break. Photo: iStock

Skyrockets in flight

At the stroke of midnight on December 31, the new year is heralded by impressive pyrotechnic displays in cities around the world. This year, FX markets rang in 2016 with a fireworks display of their own, promoted by a meltdown in Chinese stocks.

That collapse erased 7.02% of the value of the Shanghai Composite, triggered circuit breakers that halted trading, and led to a series of government moves to prop up the markets.

And that was just day one.

There are still another 253 (give or take) trading days remaining in 2016, leaving plenty of time for additional madness and mayhem.

Let the mayhem begin

In Canada, the mayhem may begin at 1140 GMT on January 7 when the text of a speech by Bank of Canada governor Stephen Poloz is released.

The title of this speech is “Life after Liftoff: Divergence and US Monetary Policy Normalization”. True, it sounds about as boring as a bylaw but if you consider it in the context of his December 8 speech entitled “The Evolution of Unconventional Monetary Policy” and October 12’s “Integrating Financial Stability into Monetary Policy”, a theme begins to emerge and that theme is that Canada’s economy is at risk.

If correct, the consequences will be anything but boring – at least for USDCAD traders.

In the first two entries of this apparent trilogy, Poloz discussed the risk management options on hand in the case of financial imbalances destabilising the economy and reminded markets of the unconventional monetary policy tools available to the BoC. Now, it seems, he will talk about the issues and risks of diverging Canadian and US interest rate policies.

Making matters worse, Canada’s economic outlook took a turn for the worse since the December 8 address. Not only were the fourth-quarter GDP and October retail sales prints both weak and below forecasts, but WTI oil prices are slightly softer at $36.74/barrel versus 37.74/b on December 8.

Also? The Federal Reserve hiked rates. So here we are.

No room of one’s own

Yesterday’s equity meltdown reminded the world of the fragility of market sentiment while the dispute between Saudi Arabia and Iran elevated risks in the Middle East and added to oil price uncertainty in the process.

Faced with renewed Chinese economic risks, Middle East geopolitical risks, widening Canadian/US interest rate differentials, and soft oil prices, what is Poloz to do?

Last year he surprised markets with a rate cut.

This year? Let’s just say the Rockies are likely to remain

well ahead of Ottawa as a hiking destination. Photo: iStock

USDCAD technical outlook

The short, medium and long term technicals are bullish USDCAD while the intraday technicals are neutral.

The short term uptrend remains intact while trading above the 1.3830-50 area which guards triple bottom support in the 1.3770-80 zone. Topside resistance in the 1.3980-1.4010 area, however, has capped all rallies since December 14.

USDCAD four-hour highlighting uptrend lines and support:

Source: Saxo Bank

The long-term outlook doesn’t bode well for USDCAD and is likely the source for those forecasts predicting a 1.4500 USDCAD rate. This weekly chart shows USDCAD in a steady uptrend since July 2014 as well as displaying key Fibonacci retracement levels.

November 2015’s decisive break of 1.3466, representing the 61.8% Fibonacci retracement level of the entire 2002-2007 range, is a bullish indicator projecting additional gains to the 76.4% Fibonacci level at 1.4500.

USDCAD weekly with Fibonacci retracement levels:

Source: Saxo Bank

As a matter of interest, the range of USDCAD forecasts for Q1 2016 is 1.3500-1.4500 which is also very close to the range between the 61.8% and 76.4% Fibonacci retracement levels.

The prospect of a BoC rate cut, lower oil prices, higher US rates, and geopolitical issues will keep the Canadian dollar on the defensive – at least for the next month.

Latest USDCAD forecasts and graph of forecasts:

Source: Bloomberg

— Edited by Michael McKenna

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Author: Loonieviews

In the past 30+ years, I have been an FX interbank market making trader, a high performing FX and Derivatives Sales person, creator of simple and complex risk mitigation strategies and a manager of high performance FX teams. The Trade of the Day is a culmination of that experience. Retail FX traders have access to a well-crafted and carefully researched FX trade strategy designed to generate FX profits while mitigating losses.

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