Loonie going the way of the dodo
FX Consultant / IFXA Ltd
- BoC could well cut rates at next meeting
- US retail data miss forecasts, raising growth concerns
- Sub-$30/b offers no respite to battered CAD
By Michael O’Neill
FX markets are ending the week the way they started: choppy with a bearish bias to the commodity bloc currencies.
NZD and CAD are the worst performing G10 currencies while NOK and JPY are the best. EURUSD is slightly higher on the week while Brexit concerns and poor data keep GBPUSD under pressure. Today’s US Retail Sales data were worse than expected and had the added woe of negative revisions. How sustainable is domestic US growth, really?
Rate cut fever fells Canadian dollar
A fair number of bank economists are forecasting that the Bank of Canada will cut interest rates by 0.25 basis points at its January 20 meeting. In the same breath, however, the same economists are adding the word “maybe”. That way, no matter what the BoC does they can claim to have nailed it.
Nevertheless, the 2016 landscape is eerily similar to last January when the BoC surprised markets with a rate cut. At that time, the bank stated that “the decision is in response to the recent sharp drop in oil prices which will be negative for growth and underlying inflation in Canada”.
Central bankers’ hands were forced because WTI prices had dropped from $104.60/barrel in July 2014 to $44.25/b by the end of the year, a 58% decline.
Today’s oil price picture is very similar. WTI was at $56.80/b in July 2015 and today it is $29.65/b, a 48% decline. Arguably, $29.65/b oil is far more damaging to the Canadian economy than $44.25/b.
The outlook for the Canadian economy will remain frozen over for as long as the
The January 2015 statement also predicted that the oil price decline would boost global economic growth, particularly in the United States, and the bank got that half right. The US economy grew by an annualised 2.0% by the end of Q3 2015.
When the BoC cut rates again in July 2015, it was concerned by Canada’s poor economic growth and downside risks to inflation while playing lip service to slowing Chinese growth as it “rebalances to a more sustainable growth path”. The China equity market crash and CNY devaluation in August had not even yet occurred. The Chinese meltdown in August could have been chalked up to an “anomaly” but then January 2016 happened, which has to have an impact on the BoC decision.
There is no reason to believe that Canada will get any relief from oil prices in the near term. US Energy Information Administration reports continue to show rising crude oil supplies, indicating that low prices haven’t done much to curtail US production. Any US production cuts may be countered by fresh Iranian production, which is rumoured to hit the markets by the end of January.
Canada is in a worse position today than it was in at policy meetings in January and July of 2015 when interest rates were cut, supporting the view that the BoC would reduce rates further.
Voodoo technicals and the Canadian dollar
The BoC rate cut on January 21, 2015 resulted in USDCAD rising 0.745 points within six trading days. If history repeats itself, and using the current 1.4500 price as a starting point, USDCAD will be dealing at 1.5245 by the month’s end.
The long term Fibonacci retracement levels support additional gains. The break above 1.4500, (the 76.4% Fibonacci retracement level of the entire 2002-2007 range) targets a 100% retracement at 1.6190.
In January 2000, the world was relieved that the Y2K calamity had been avoided. Computers didn’t shut down and dates were able to roll over from 1999. January 2000 also saw USDCAD at 1.4310, the lowest level seen for the next three years. Back then, 1.4570 and 1.4780 capped gains which may provide similar resistance in 2016.
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Source: Saxo Bank
Back to reality
USDCAD has risen for 10 consecutive days, racking up gains over 0.700 points. That leaves it ripe for a correction which may occur on January 20 if the BoC leaves rates unchanged or if WTI prices climb back above $34/b.
The steepness of this year’s rally could see a pullback to 1.4095, the 61.8 Fibonacci retracement of the January range.
Source: Saxo Bank
The week that will be
The week ahead is unlikely to provide any relief from market turbulence. Monday may be a tad quiet ahead of potential fireworks on Tuesday when China releases GDP, Retail Sales and Industrial Production figures. Later in the day, a slew of UK data may keep the downward pressure on sterling, although the EU CPI data will be the major focus.
There are a ton of US data on Wednesday including CPI and the BoC interest rate decision. Thursday’s European Central Bank meeting may have a bigger impact than originally thought due to the tone of the minutes released on January 14
The week will end with headlines from Davos attracting attention although there won’t be any comments from the North Korean delegation as they were uninvited following the H-bomb test.
The week that was
The turmoil and chaos that characterized the first week of January should have made it a tough week to follow.
Monday started out as nervous as a man using a match to find a gas leak. It didn’t help that Japan was closed for Coming of Age day, seriously reducing liquidity. Friday’s blowout US nonfarm payrolls report gave the US dollar a bit of a bid to start the day while China’s SHCOMP index closed down 5% leading to dips in other Asian indices. A steep drop in oil prices got most of the attention during the New York session.
On Tuesday domestic Chinese issues were both calm and stormy. The calm was due to the SHCOMP closing flat on the day while USDCNY was fixed a mere 2 basis points higher. The storm was in USDCNH where overnight funding spiked to 66%. The government of China was rumoured to be behind the move in an effort to make shorting USDCNH too expensive to consider – and it seems to have worked.
Beijing’s efforts at the Shanghai Composite, however, have been less successful. Photo: iStock
The highlight of the European session was GBPUSD tanking and hitting a 5/12 year low. Oil was the story during the New York session as WTI punched below $30/barrel for the first time in a dozen years.
Wednesday’s Asian session was rather tame compared to the previous two days, helped by a modest improvement in Chinese trade data. The European session was also fairly quiet as EURUSD remained rangebound and GBPUSD consolidated the previous day’s losses.
The tranquility didn’t last in New York, however, as oil price weakness led to a sea of red in US equity indices and launched USDCAD to 1.4375.
Thursday, Asian markets followed US equity markets lower and AUDUSD didn’t get much of a boost from a better than expected jobs report. By the time Europe walked in, however, equity markets were higher and EURUSD was enjoying the weather above 1.0900 on a headline suggesting additional ECB stimulus was likely in the near term.
Traders disputed that headline after reading the ECB minutes and EURUSD dropped back to the 1.0810 area. The Bank of England minutes were not as dovish as expected and GBPUSD took off. Numerous predictions of a Bank of Canada rate cut next Wednesday kept USDCAD underpinned.
— Edited by Michael McKenna