Loonie churns in risk-on, risk-off climate
FX Consultant / IFXA Ltd
- Loonie soars on strong employment report
- Risk aversion fades into weekend
- Next week’s China data could be explosive
It may have been a strong week for the Japanese yen but that has left its troubled decision makers at something of a Shibuya crossroads. Photo: iStock
By Michael O’Neill
The week is ending and despite today’s modest correction, the Japanese yen is the best performing G10 currency against the US dollar and by a long shot.
In the past 24 hours the yen has gained over 3.5% on the back of a bout of risk aversion and comments from Japanese officials. The Federal Open Market Committee minutes didn’t help matters, either.
Canada delivered a robust employment report and that news combined with a bump in oil prices and weekend profit taking has USDCAD under pressure.
Will Poloz read from Yellen’s playbook?
Federal Reserve Chair Janet Yellen used the press conference after the Federal Open Market Committee on March 15 and a speech to the Economics Club of New York on March 29 to keep US dollar bulls at bay. She appears to have deliberately downplayed the positive developments in the US economy to highlight the risks to US economic growth from a global slowdown, notably China and falling commodity prices.
Bank of Canada governor Stephen Poloz, has a similar dilemma. The Canadian economy is humming along on about six of eight cylinders, as confirmed by the blow-out GDP report.
The 0.6% gain in January GDP (forecast 0.3%) served to remove any remaining risk of a domestic rate hike off the table. So if rates aren’t going down, they must be heading up. When, is another story. The directional shift in the rate outlook is enough to provide the Loonie with a smidge of support.
The term “competitive devaluation” has popped up a couple of times this week. Japan’s Prime Minister Shinzo Abe used it on Tuesday and this morning the European Central Bank’s Yves Mersch used the same term in an interview with CNBC.
He said. “Everyone should be living up to promises (on) how the international monetary system is being run and that means there should not be a competitive devaluation, there should not be beggar-thy-neighbour policies”.
In a nutshell, the term means that nations should not take measures to weaken their currency to bolster their economy.
Poloz is likely acutely aware that the US Treasury complained to the IMF last September, stating, according the to the Australian Financial Review, the [Office of the US Executive Director at the IMF] expressed concern over the authorities’ public statements on the desired direction of the exchange rate," the US Treasury said.
Such being the case, Poloz is unlikely to mention the Canadian dollar at all. However, it is not beyond the realm of possibility that he too, will focus on the downside risks to the global economy and the risk of lower commodity prices. That approach is a tad subtler than Reserve Bank of Australia governor Graeme Steven’s approach, but the result would be the same — a weaker currency.
Jobs, jobs and more jobs
It is hard to find fault with this morning’s Canadian employment report. Canada gained 41,000 jobs and the unemployment rate dipped to 7.1%. 35,000 of the 41,000 jobs gained were in the full-time category. USDCAD dropped to 1.2995 from 1.3070 on the news.
Although the Canadian jobs report is known to be fickle, today’s data, combined with pre-weekend position-squaring/profit-taking should leave USDCAD under pressure for the balance of the day.
Source: Statistics Canada
USDCAD direction has been driven by two key forces for the past couple of weeks, oil price movements and general US dollar sentiment vs. the majors. Position jockeying ahead of the BoC meeting on Wednesday may add another dimension to trading prior to the statement but any moves will be fleeting.
Weaker-than-expected China data could lead to another bout of risk-aversion trading like was seen this week and if so, USDCAD may drift toward the top of its two-week range. The other major catalyst will be rhetoric ahead of next weekend’s non-Opec/Opec meeting in Doha. WTI appears to be supported in the $35.00-20 area and as long as that level holds, USDCAD gains should be limited.
More than likely, the BoC meeting will be a non-event and have a minimal impact on the currency. However, today’s Canadian employment report will keep the positive Canadian dollar sentiment intact and the focus on the downside. However, possible surprises from China data and Opec headlines may limit USDCAD losses.
Rhetoric next week running into Opec’s April 17
meeting in Doha could move CAD. Photo: iStock
USDCAD technical outlook
Short-term USDCAD technicals are in a downtrend while trading below 1.3160 looking for a break of the 1.2970-00 zone to extend gains to the 1.2850-1.2900 area which has contained downside moves since the middle of March. At the same time, the 1.3280-1.33 area has capped rallies. Such being the case it makes sense to assume that the existing trading band will remain intact next week.
Source: Saxo Bank
The week ahead
As we have seen lately, FX traders do not need a lot of top tier US data to get themselves in a lather. Volatility can arise from anywhere. And in the week ahead, the volatility may be made in China. China PPI and CPI data start the week. Trade data is in the middle and GDP data ends the week. A major surprise with any of these reports could light the fuse on the dynamite.
Oil prices may become extra volatile near the end of the week due to rhetoric ahead of the Doha Opec meeting.
There are two Central Bank meetings. On Wednesday, the Bank of Canada interest rate decision is due followed by the Bank of England interest rate decision on Thursday. Eurozone inflation data, also on Thursday, will compete with the BoE for attention.
In between, there is a trio of Fed speakers which includes, San Francisco Fed President John Williams, on Tuesday, Atlanta Fed President, Dennis Lockhart on Thursday and Chicago Federal Reserve President Charles Evans on Friday.
The week that was
There wasn’t a lot of anything scheduled this week that should have disconcerted markets but markets had a yen to be disconcerted and USDJPY delivered.
Monday opened up and the US dollar was offered. USDJPY hit a low in Asia at 111.32 which held through the New York session as well. It helped that trading was extra thin due to numerous national holidays in Asia.
AUDUSD dropped on weaker-than-expected retail sales data but the focus was on the next day’s RBA interest-rate meeting. US data releases (Durable Goods, and Factory Orders) fueled a negative US dollar bias although not a lot of actual US dollar selling.
Tuesday was busy, all over. The RBA left interest rates unchanged as expected and delivered a slightly hawkish statement. USDJPY dropped below 111.00 and the Nikkei was down over 2%.
Rumours that the Bank of Japan and the Ministry of Finance were meeting had little lasting effect although Abe’s comments against competitive currency devaluations appeared to green light USDJPY sales.
In Europe, EURUSD was probing support at 1.1340 and GBPUSD followed the single currency lower. Brexit concerns may have helped sterling’s decline. The risk-off shift continued throughout the New York session. USDJPY touched 109.94. USDCHF rallied and cable and the commodity currency bloc sank.
Wednesday was fairly subdued in Asia and Europe. A large draw down in API crude oil stocks reported at the end of Tuesday helped lift commodity bloc currencies. That data was later supported by the EIA Crude stocks report during the New York morning.
The New York session was choppy, perhaps due to pre-FOMC minutes position adjustment. GBPUSD was under pressure early, which was not sustained. However, selling pressure in USDJPY was sustained and that currency pair closed with a bearish technical setup. The FOMC minutes appeared to tell a different story than what Janet Yellen was telling for the past two weeks and the Fed outlook remains murky.
Thursday was a full-fledged risk aversion day. The FOMC minutes were seen by many as doveish and taken together with Abe’s comments on Tuesday, took USDJPY off at the knees. USDJPY hit 107.65 in New York. European and US equity indices were down leading to additional risk-off sentiment. Oil prices started to climb in the afternoon.
Friday saw a drift back towards risk-on trades or at least profit taking following the week’s risk-off moves. The Canadian dollar was the best performing currency thanks to a stellar employment report. USDJPY rallied due to position adjustment ahead of the weekend.
Markets will be well aware that there could be some distinctly spicy data emanating from China next week. Photo: iStock
— Edited by Martin O’Rourke
Michael O’Neill is an FX consultant at IFXA Ltd