Loonie’s feathers may get plucked 26Apr16

Loonie’s feathers may get plucked

Michael O’Neill

FX Consultant / IFXA Ltd


  • Weak Durable Goods data undermines US dollar
  • "Voodoo" chart points to USDCAD rally
  • Canada data overdue to disappoint

If history is anything to go by, this bird is in for a plucking. Image: iStock

By Michael O’Neill

The US dollar is heading into tomorrow’s Federal Open Market Committee meeting on the defensive. This morning’s weak durable goods data is helping to dispel any notion that the FOMC statement will hint at a June interest rate increase. Meanwhile, USDCAD continues to drift lower but if history is any indication, the market’s love affair with the Loonie may be at risk.

Too good to last

The USDCAD decline following the January Bank of Canada meeting has been fast and furious due to a neutral BoC, a rebound in oil prices, surprisingly strong and domestic data. The downgrade of US rate hike expectations from four moves in 2016 to just two rate increases, turbo-charged the move due to wide-spread US dollar weakness.

The problem is “that was then; this is now”. Arguably, all the good news for the Canadian dollar is out and it is reflected in the price.

Oil prices have rebounded from the low of $26.10 to $44.05 this week, a 70% increase and very little has been done to curb the over-supply/reduced demand issue. The Doha, Qatar meeting failed because Iran had zero interest in participating in a production cap. Last week’s US crude stocks reports showed that inventories remained at very high levels.

The International Monetary Fund and the Organisation for Economic Cooperation and Development have downgraded their global growth outlooks which suggests that the oil imbalance issue will continue for some time.

Canadian data releases have been surprisingly strong and helped drive the Canadian dollar higher. Canada is due for some payback.

Last week’s retail sales report was solid but were Canadians really spending more money in January and February than they did over Christmas? The data says “Yes”; logic says “No”.

The last Canadian employment report was very strong but the details were a tad dubious. Stats Canada would have you believe that Alberta, still reeling from the energy market collapse gained 19,000 jobs. Still, the headline gave the Loonie a lift.

Even the Bank of Canada is starting to take notice. Apparently BoC Governor Stephen Poloz took off his rose coloured glasses in a Q and A session following a speech in New York this morning. Bloomberg headlines reflect a more dovish stance with comments like" Neutral rates could be even lower if headwinds persist", "neutral rates will be lower for a very long period" and "another year to get to full capacity".

Red ink stink

Alberta, the oil capital of Canada and a major part of Canada’s economic growth engine blew a gasket. Moody’s announced that Alberta’s long term debt has been downgraded to AA1 from AAA following the 2016 budget posting a $10.4-billion-dollar deficit. That rating is still better than Ontario’s AA2 rating since Ontario boasts a net debt of $296.0 billion. The Federal government’s new spending initiatives will give them a $30 billion budget deficit in 2016/17.

None of these deficit announcements even made a ripple in FX markets even though it is evidence that perhaps the BoC’s optimistic outlook for a H2 economic rebound may be misplaced.

FOMC counting down to lift-off

The Canadian dollar, along with its G10 peers, benefited greatly from the diminishing rate hike expectations in the US. Last December, the FOMC led the world to believe that rates would rise four times in 2016. Today, there is a large contingent in the market that believes the Fed will be hard pressed to increase rates even once. And that’s because a gaggle of Fed speakers including Janet Yellen, are telling them that.

In the past few days’ there has been a lot speculation that Wednesday’s FOMC statement will allude to the possibility of a hike at the June meeting. This morning’s Durable Goods report goes a long way in dispelling that notion. March Durable Goods orders came in at 0.8% for March, well below the 1.9% that was forecasted.

Despite all that, US rates will be going up in 2016. As time decays toward year end, the probability of a rate move will increase which will provide support for the US dollar and USDCAD by default.

USDCAD chart says rally coming soon

The high flying Loonie may soon get is feathers plucked if recent history can be a guide. For 5 out of the last 6 years, USDCAD weakness from January through April has reverted to USDCAD strength in May.

This phenomenon is explained away as “seasonal” Canadian dollar strength although the catalysts for the strength are as vague as is the term “seasonal”.

Nevertheless, the charts don’t not lie and as the following daily chart clearly shows, USDCAD could start to rebound as early as next week.

Chart: USDCAD from January 2010

Source: Saxo Bank

– Edited by Clare MacCarthy

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Categories FX, Foreign Exchange, Currency, Canadian Dollar

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