Loonie defying gravity 19Feb16


Loonie defying gravity even as oil declines

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

(Original post on TradingFloor.com)

  • US data gives rate hawks hope
  • Oil rally petering out
  • Keep your eye on geopolitical tensions

By Michael O’Neill

The second-last week of February is fading to a memory, a good one for US dollar bulls and a bad one for the bears. The US dollar has gained against all of the G10 currencies with the exception of the Canadian dollar. EURUSD and NZDUSD were the biggest losers. EURUSD was undermined by a bearish technical shift, dovish comments from European Central Bank chief Mario Draghi and better than expected US data. Weak domestic data and the prospect of a rate cut kept Kiwi on the back foot.

Loonie on defensive

This morning’s Canadian retail sales data was expected to be weak. It lived up to its advance billing. The 2.2% decline in December retail sales, ex-food and energy was worse than the 0.6% decline expected, reminding markets that the Canadian economy is not all that healthy.

Chart: Canada Retail Sales

Source: Statistics Canada

The Organization of Economic Cooperation and Development (OECD) sees the same thing. It cut its forecast for Canada GDP growth in 2016 to 1.4% from their November forecast of 2.0%
.
Oil prices continue to dominate USDCAD trading and even though they are well above the low of $26.03, the rally has been less than impressive. The hopes that Russia and Opec would agree to a production cap have been proved to be just wishful thinking. Neither Iran nor Saudi Arabia are on board. Weak Canadian fundamentals, low oil prices and the risk of higher US rates point to a higher USDCAD in the next week.

USDCAD technical outlook

USDCAD has tried and failed to crack major support in the 1.3630-50 area which is also support from the May 2015 uptrend line on the weekly chart. The intraday chart shows that the USDCAD downtrend from January 20th remains intact while trading below the 1.3840-60 area guarding additional resistance in the 1.4000-50 range.

USDCAD is almost exactly in the middle of the 1.3650-1.4050 trading band which is likely to contain trading for the next week.

Chart 4 hour with potential trading range shown

Source: Saxo Bank

Tensions stewing in the cauldron

There is a large cauldron full of geopolitical tensions that are stewing above an open flame. The Syrian civil war is sucking in global powers with a complex weave of alliances and interests muddying the waters. Syria is not alone; its allies include Iran, Russia and China.

NATO is flexing its muscles ostensibly to help quell the exodus of Syrian refugees that are swamping European nations. NATO is also in Syria as part of their war against the Islamic State of Iraq and Syria (ISIS) or Daesh, as many Arabs (and the US administration) call them. Russia is a Syrian government ally and it is also fighting Daesh.

The US is also backing Kurdish fighters as is Russia. That brings Turkey into the equation and they have their fez’s in a fizzle. The Syrian Kurdish Democratic Union Party (PYD) is viewed by Turkey as terrorists and they are actively fighting them, despite the fact that the Kurds, like Turkey are US allies.

Add China to the mix. China, a Syrian ally is also, not so subtly, annexing the South China Sea and has claimed the major part of this sea as its territory. It has built a series of man-made islands and this week, reportedly deployed missiles on an island. Naturally, the US is opposed to the move however it’s US election year so China has free rein.

China is also the only ally of North Korea. The US invaded Iraq, destabilizing the Middle East in the process, in a futile search for “Weapons of Mass Destruction”. Yet, the US gave North Korea a pass, despite the fact that Kim Jong-un gives “crazy” a bad name.

It is not a stretch of the imagination to see how the current mix of tensions could spill over with the US and NATO on one side and Russia and China on the other. Forget risk aversion, find a bunker.

The week ahead

There isn’t any major central bank event for traders to fret over but there will be plenty of second tier data. Monday is chock-full of PMI reports. “Brexit” discussions will dominate GBPUSD trading as the EU Summit/UK discussions get reviewed. Weak Eurozone data particularly CPI on Thursday, will keep EURUSD on the defensive due to Mario Draghi’s hints of additional stimulus in March. The week will end with Australia closed for Australia Day and US GDP.

The week that was

In the context of other week’s this year, this week was a Sea of Tranquility. There were fireworks but the displays lacked dazzle.

China’s return from a week of Chinese New Year celebrations and their domestic data releases didn’t create any havoc. Japan enjoyed a Nikkei rally of 7.6%. Mario Draghi addressed the EU Parliament and reminded markets that additional stimulus was possible in March. US and Canadian markets were closed.

Tuesday was oil rumour day, at least in Asia and Europe. Reports that Russia and Saudi Arabia would meet to discuss production drove oil currencies and oil prices higher. That news also bolstered risk sentiment and lifted equity indices. New Yorkers didn’t buy the hype. By the New York close, oil prices had retreated and commodity bloc currencies were lower. Sterling was in its own “Brexit” world and earlier gains became losses as the EU summit meeting drew nearer.

Wednesday was a bit of a “risk-off” day in Asia. That sentiment helped drive USDJPY lower and EURUSD higher. European traders saw the world in a different light and reversed the Asia FX moves. Equities and oil rallied. The UK employment report headlines were soft but derived some support from the details. New York traders weren’t overly convinced by either the Asia or Europe moves and were content to let EURUSD and USDJPY consolidate within the recent range. Mexico surprised markets by hiking interest rates 50 bps. WTI rallied on more production cap rumours which lifted the Canadian dollar. The FOMC minutes failed to deliver any surprises but confirmed that the Committee was concerned with global market turbulence.

Thursday, Asia markets took a step back. A weak Australian employment report was quickly forgotten and both EURUSD and USDJPY traded sideways. The European session was similar with the EU parliament meeting being the main distraction. GBPUSD got a lift from some comments by EU Commission President Juncker about keeping the UK in the EU. New Yorkers weren’t so laid back. News that Iran wouldn’t participate in any production cap, a report that Saudi Arabia flatly opposed any production caps and data showing a large build in US Crude stocks, crushed WTI prices and helped US equity indices end a three day winning streak.

Friday’s New York session started with no news from the EU/UK discussions which kept GBPUSD on the defensive. EURUSD was trading with an offered tone but well above key support in the 1.1030-60 area. US CPI data provided some support to those expecting a more hawkish sounding FOMC in March.

The week ahead

There isn’t any major central bank event for traders to fret over but there will be plenty of second tier data. Monday is chock-full of PMI reports. “Brexit” discussions will dominate GBPUSD trading as the EU Summit/UK results get reviewed. Weak Eurozone data particularly CPI on Thursday, will keep EURUSD on the defensive due to Mario Draghi’s hints of additional stimulus in March. The week will end with Australia closed for Australia Day and US GDP.

– Edited by Clare MacCarthy

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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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