Flashback to the 60s for Canadian dollar 13Jan16


Flashback to the 60s for Canadian dollar

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Loonie having 60s flashbacks
  • USDCAD rally through 1.4300 coincided with WTI’s dip below $30.00/barrel
  • China turmoil shows signs of diminishing
  • WTI crude oil bias is still lower

Unlike this bus, the Canadian dollar is not on a magical mystery tour. Photo: iStock

By Michael O’Neill

This morning’s oil rally gave commodity currencies a lift right up until the Energy Information Administration reported another gain in US crude stocks. So far, oil’s plummet does not appear to be affecting US crude production. USDCAD rallied and WTI sank.

Throwing wind into the caution

What a difference a few days make. Last week traders feared that China’s economic slowdown, equity market meltdown and ham-fisted CNY knockdown would lead to another global financial calamity.

Those fears have dissipated modestly this week, and today traders are cautiously optimistic. The mood has been aided by relatively stable USDCNY fixes (unlike the recent shock and awe) and today’s better-than-expected China trade surplus ($60.1 billion vs forecast $52.0 billion).

In addition, China’s exports did not fall as much as expected, suggesting that perhaps the equity market crash did not accurately reflect the true state of the Chinese economy. A cynic would say that no Chinese data accurately reflects anything, but that’s another story.

Are the markets out of the woods? Has last week’s risk aversion rout run its course? If the August turmoil caused by China is any indication of how events will play out this month, then, maybe so.

January is the new August.

In August 2015, a Chinese equity market collapse and currency devaluation thrashed global financial markets. Global stock markets sank as did commodity currencies. The Dow Jones Industrial Average plunged to 15,666 points from 17,545 within just days. At the same time, FX markets were thin due to summer vacations, China data was soft, and there was a lack of top-tier data from the US. The September FOMC meeting loomed and kept traders sidelined.

After finding the bottom, the Dow recovered to 16,654 points and spent the next month consolidating those gains within a 16,000-16,700 range. By the end of November, the August plunge was just a bad memory, and the index had surpassed the August high and traded at 17,968 points.

The January global financial turmoil is extremely similar to the events of August. There was a dearth of key US economic data, and meaningful FOMC insight was still weeks away. It is still early days, but if today’s drift into risk-seeking takes hold, global equity markets will recover and the focus will shift back to the US rate-hike timing, the possibility of additional ECB stimulus and Middle East issues.

There are the sixties, and then there are the 60s. Photo: iStock


Loonie sinks into the 60s

The pop culture image of the sixties is of hippies, love and peace, and flower power. Far out, man! The Canadian dollar view of the 60s is not a whimsical nostalgic trip, but one of pain especially for consumers, US travelers and importers.

Yesterday, the Canadian dollar shattered the 0.70 cent level, a psychological barrier and dropped to 69.85 cents to the US dollar. That hit the headlines and hammered home to the average person how weak the currency is. On this date in 2015, USDCAD was 1.1950. A US$6,000 trip to Disney World in Florida for a family of four cost CAD$7,120. At yesterday’s USDCAD peak (1.4316, or Canadian 69.85 cents to the dollar), the cost for that same trip was $8,589.60. That’s almost the price of one extra person. Parents may face the uncomfortable choice of which kid stays at home.

In Canada’s oil patch, Calgarian’s were already well aware of the perils of a weak currency and global markets. They’ve been hurt. TradingFloor editor Michael McKenna recaps their troubles in his story “Oil boomtown going bust as crude staggers lower”.

Oil prices swamping Loonie

The Canadian economy is growing sluggishly. The much heralded H2 growth rebound did occur in so far as Canada was no longer in a technical recession in the summer. The Bank of Nova Scotia’s forecast for 2016 Canada GDP is 1.6%, while the US economy is expected to grow 2.5%. The US growth should lead to increased non-resource exports from Canada, aided by the weak Canadian dollar.

The commodity currency bloc (Aussie, kiwi and CAD) are the three worst performing G-10 currencies year-to-date. If China jitters fade, they should rebound. But the Canadian dollar, which has been the most resilient of the three currencies, remains vulnerable to oil prices.

The USDCAD rally through 1.4300 coincided with WTI’s dip below $30.00/barrel. Morgan Stanley has joined Goldman Sachs in forecasting $20.00/b, which, if correct, puts USDCAD close to 1.4800. Even worse, there is nothing on the horizon to suggest that Saudi Arabia and Iran will kiss and make up, so that will be a barrier to any Opec production agreements. US oil production is reportedly still going strong, and crude oil supplies are still nearing storage capacities.

USDCAD technical outlook

The intraday and short-term USDCAD technicals are bullish. The January uptrend remains intact while trading above 1.4160, a level supported by the move above 1.4220 this morning which snapped an intraday downtrend. That break re-targets yesterday’s high and keeps 1.4500 in focus.

USDCAD 30-minute chart

Source: Saxo Bank

– Edited by John Acher

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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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