Loonie settling in for a summer siesta 21Jun16


Loonie settling in for a summer siesta

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • UK referendum polls driving G10 trading
  • US election bigger FX risk than Brexit
  • USDCAD will remain rangebound with oil

By Michael O’Neill

Today is the first full day of summer and markets are still waiting for the lazy, hazy, crazy days of summer that Nat King Cole sang about in 1963.

Fortunately, the UK has most of it covered. FX traders will be pretty lazy while they wait for the British to vote on Brexit; the poll results are still very hazy; and the aftermath will be crazy.

The only sure thing is that when the vote is tabulated, GBPUSD will not be where it is sitting now.

We expect the charts to be less "rolling hills of England" and more "Zhangjiajie National Forest". Photo: iStock

Picking your poison

What is more destabilising? A European Union without the UK or the USA with President Donald Trump? For Brits, it is obviously the former as leaving the EU will have repercussions that they will have to deal with for years, both good and bad. For all others, President Trump has to be seen as a nightmare from a stability perspective.

For starters, Trump wants to build a wall between the US and Mexico and make Mexico pay for it. Mexico, of course, is part of the North American Free Trade Agreement, or NAFTA, as is Canada – and it is rather difficult to see how building a wall promotes free trade.

Further field? Well, put up your dukes, China, as Trump will pick a fight with Beijing by declaring the country a currency manipulator which would allow him to impose countervailing duties on all Chinese imports.

He will also demand that China put an end to intellectual property theft or face “robust and unequivocal responses”. He plans on telling China to raise its labour and environmental standards.

One thing I am sure of is that China will not sit back and say “Whatever you want, Mr. President”

And that’s how it plays out, from my perspective. The UK leaving the EU has both pros and cons for both sides, while the idea of president Donald Trump is just plain bad. He’s bad for global prosperity and he’s bad for geopolitical stability.

USDCAD in focus

The loonie had its turn in the spotlight twice this year. The first time was when oil prices were plunging and WTI hit $26.02/barrel in February, and the second time was when oil probed resistance at $51.80/b two weeks ago.

That spotlight has burned out and a search is on for a replacement bulb. Until then, USDCAD will be an afterthought for global traders, providing WTI remains rangebound and that range appears to be $45-51/b. If true, it reinforces the floor and ceiling on USDCAD, which currently appear to be 1.25 and 1.31.

Bank of Canada governor Stephen Poloz delivered a fairly upbeat assessment on the economy last week. He scaled back the forecast for the impact of the Alberta wildfires on GDP and expects a decent pickup in growth in the second half of the year, in part due to the government’s fiscal stimulus plan.

A lot of the H2 growth is tied to expectations that the US economy will continue to grow. A stronger US economy leads to higher exports for Canada. The risks to his outlook were from a slowing of consumer spending and reduced spending in the energy sector.

There is nothing in his remarks that would lead to USDCAD breaking out of the range.

Looking south: The relatively sunny Canadian forecast depends rather heavily on US cooperation. Photo: iStock

Technically speaking

The intraday USDCAD technicals turned bullish with this morning’s breach of the minor downtrend channel at 1.2790. The break points to additional gains to 1.2870 which represents the 50% retracement level of the June 1.2652-1.3082 range.

The bullish sentiment is supported by the rejection of USDCAD losses below the 1.2750-60 area which represents the base of the uptrend line from the June 8 low.

Longer term, the uptrend line from the January 2015 BoC surprise rate cut day remains intact while prices are above 1.25-30, supporting the argument that USDCAD is locked in a 1.25-1.31 trading band for the time being

The 1.2860 area will act as a pivot; above targets 1.3100 while below keeps 1.2500 in play.

USDCAD (one-hour chart):

Create your own charts with SaxoTraderGO click here to learn more

Source: Saxo Bank

— Edited by Michael McKenna

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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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