Loonie outlook turns positive 15Jul16

Loonie outlook turns slightly positive

Michael O’Neill

FX Consultant / IFXA Ltd


· US Retail Sales rise, rate hike expectations don’t

· Profit-taking forces USDCAD decline to pause

· The week ahead may lack drama


By Michael O’Neill

This morning’s US Retail Sales data surpassed expectations and bode well for stronger US growth for the balance of the year. Still, the uncertainty surrounding Brexit and the possibility of increased market volatility will keep the doves on the Federal Open Market Committee firmly in control and US rates anchored.

Bank of Canada bullish on economy

The outlook for the Canadian dollar was rather bleak at the end of last week. "Buy USDCAD" strategies were everywhere and the technicals were pointing to a break of resistance at 1.3050, putting 1.3400 in play. Once again, however, the 1.3145-80 area proved to be formidable resistance. FX sentiment switched to risk-seeking on Tuesday and USDCAD pulled back from the brink.

The retreat was viewed as merely a correction which appeared to be accurate ahead of what was expected to be a dovish Bank of Canada interest rate statement and Monetary Policy Report.

Surprise! The Bank of Canada painted a very rosy Q3 outlook, forecasting a whopping 3.6% gain in real GDP, a far cry from its April forecast of 2.2%.

The surprise outbreak of good news gave the CAD a bid, too. Photo: iStock

The economic impact from the Alberta wildfires is expected to be completely reversed in Q3 while the boost from the federal fiscal stimulus has yet to be felt.

The BoC expects solid US domestic demand to increase exports and be a major contributor to Canada’s growth. The solid US demand were not evident this morning. Canadian manufacturing shipments declined 1.0% which was not totally unexpected with some of the decline blamed on supply disruptions. At the same time, the decline in inventories is a positive.

Canada real exports:

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Source: Bank of Canada MPR

USDCAD technicals getting bearish

The intraday USDCAD technicals are bearish while trading below 1.2920 and looking for a test of major support in the 1.2820-60 zone. That support is derived from the uptrend line from the May 1.2462 low, a double bottom at 1.2830 in July, and the 50% Fibonacci retracement level of the May range at 1.2822.

A daily close below 1.2820 would negate the uptrend and suggest that a revisit to the 1.2462 low is likely. A move back above 1.2980 would negate the downtrend and keep the focus on the 1.3080 resistance level.

USDCAD daily:

Source: Saxo Bank

The week ahead

The European Central Bank meeting on Thursday headlines what looks to be a fairly innocuous economic calendar, which should make for a dull week. The Bank of England didn’t adjust policy at its July 14 meeting and it is likely that the ECB will follow suit.

There aren’t any top-tier data available from the US which keeps the trading focus on sterling and UK issues. Tuesday’s UK data may have limited impact due to expectations of August policy action by the Bank of England.

A holiday in Japan on Monday will put a damper on the Asia session although New Zealand CPI data may be extra important ahead of the reserve Bank of New Zealand economic outlook on Thursday. The week will start out slow and likely end the same way.

The week that was

Blow-out nonfarm payrolls numbers would normally be the main focus in Asia markets on the following Monday. But these aren’t normal times and NFP took a back seat to politics and central banks.

Monday, Asia traders forgot about US data and focused on Japanese politics. Prime minister Shinzo Abe secured a “supermajority” and his comments about accelerating Abenomics propelled USDJPY from 100.50 to 102.90 by the end of the New York session.

Not to be outdone, sterling took centre stage when Tory leadership candidate Andrea Leadsom bowed out of the contest leaving Theresa May to run unopposed. GBPUSD took off from 1.2854 and ended the day at 1.3010, and just to keep things interesting, the health of some Italian banks was keeping EURUSD traders on their toes.

The risk-on sentiment helped drive the S&P 500 to a record close despite oil prices hitting a two-month low.

Tuesday’s positive vibe from the rallying S&P 500 continued in Asia. AUDUSD headed higher on decent business confidence data. USDJPY added to Monday’s gains but the rally stalled in New York, at 104.97. Pokémon Go took the Nikkei by storm and raised Nintendo’s market cap by $7.9 billion in just two days.

Sterling continued to rally as markets warmed to the idea that there was no longer a risk of a prolonged and nasty Tory leadership race with rumours that Theresa May would be sworn in as Prime Minister on Wednesday. The rally continued throughout the New York session.

China’s claim on the South China Sea was ruled invalid; Beijing was irked but FX markets didn’t care.

Wednesday, the risk-on rally ran out of steam. USDJPY traded between 104.00-80 but could not crack 105.00. The GBPUSD rally petered out at 1.3335 and the currency pair traded sideways with a negative tone until the bottom fell out in NY trading, finishing the day at 1.3125.

The other story was a surprisingly optimistic Bank of Canada Monetary Policy report which led to a big selloff in USDCAD. WTI prices sank on an International Energy Agency report that said inventory levels were still extremely high. Later on, the EIA announced a 2.5 million-barrel drawdown in crude stocks but a build in other distillates sank WTI.

Thursday, the Asia session was very chaotic. A strong employment report boosted AUDUSD. NZDUSD got spanked on news of a RBNZ announcement of an economic update on July 21. It was a surprise and raised concerns of a looming interest rate cut. USDJPY finally cracked 105.00, came close to 106.00 and then settled at 105.20 by the end of the New York day.

European traders were waiting for the BoE interest rate decision with about 60% of the market expecting a rate cut. They didn’t get it. GBPUSD soared from 1.3208 to a spike high of 1.3475 before retreating back to the 1.3300 area where it spent most of the day.

EURUSD continued to chop around in a 1.1030-1.1130 band which contained moves for the week except for a brief spike to 1.1160 in European trading. The Fed’s Dennis Lockhart talked out of both sides of his mouth, saying that the Fed should remain cautious and patient regarding future interest rate hikes and then going on to say that it is still possible for the Fed to raise rates two times this year. FX traders ignored him.

Friday ended in Asia with USDJPY posting a three week high. Risk sentiment was upbeat on positive China economic data. News of another terror attack in France dominated the European session. Strong US data sparked a bout of pre-weekend profit-taking.

Another direct strike at Europe’s heart, this time in Nice, saw the risk-on trend

set against security fears in today’s session. Photo: iStock

— Edited by Michael McKenna

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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