Is the loonie circling the drain? 22Jul16

Is the loonie circling the drain?

Michael O’Neill

FX Consultant / IFXA Ltd



· Oil price slide lifts USDCAD

· Strong Canadian data provides only "blink-of-an-eye" relief to Canadian dollar

· Beware a hawkish FOMC statement next week

By Michael O’Neill

USDCAD may have dodged a bullet on Friday. The dynamite was primed for a top-side blow-out. Oil prices were mushy and short-term and intraday technicals were bullish. All that was needed was a dose of weak data with CPI and Retail Sales to light the fuse.

That’s not what happened. Retail Sales and CPI handily beat the forecasts and provided a bit of an endorsement to last week’s rosy Bank of Canada outlook. Unfortunately, the euphoria didn’t last.

Retail Sales and CPI

Sources: Statistics Canada

A line in the oil sands

Oil prices are the “sword of Damocles” dangling over the loonie. The Canadian economy has shown evidence that it’s rebounding, and today’s data reinforces the view. The Bank of Canada is on board. Even the rebounding US economy is doing its part to drag additional growth out of its neighbor. Yet, despite all those positives, the loonie is suffering from a lack of energy, specifically energy price support.

Pumping up more oil – excessive US inventories haven’t been kind to the loonie. Photo: iStock

WTI prices have declined steadily throughout the month and breached, very briefly, key support in the $44.00 area. There is a school of thought that the down move was exaggerated by the monthly contract maturities on the IMM. If true, the rebound should have been more aggressive. The major concern is that US inventories are at excessive levels and the persistence of these stockpiles turned June’s bulls into bears.

On the other hand, the alphabet of oil interests, OPEC, EIA, and IEA expect the supply/demand equation to rebalance in Q3 and Q4, which should help to put a floor on WTI. A break below $42.35 would extend losses to 1.3950.

USOIL 4 hour

Source: Saxo Bank

Who pulled the plug?

USDCAD has already shrugged off the positive sentiment stemming from today’s better-than-expected Canadian data. USDCAD has recouped the post-data losses and is currently trading at levels not seen since May. It appears that traders are content to ignore all the Canadian dollar positives and focus only on oil prices.

Everyone is well aware of the perils of catching falling knives or standing in front of a train. There is another appropriate cliché and that is ”USDCAD always looks bid at the top and offered at the bottom”. It isn’t unreasonable to believe that until 1.3200 is decisively broken, the current 1.2700-1.3200 range is intact.

If so, then USDCAD may be in the twilight zone, but it is also in the sell zone.

USDCAD 4 hour

Source: Saxo Bank

The week ahead

Any week with an FOMC meeting in it is usually a wonky week for FX markets. This week will be no exception.

Wednesday’s FOMC statement has the potential to trigger an upward shift in US September rate hike expectations. You will recall that Janet Yellen and various committee members actively primed the pump for a June rate increase, only to be derailed by a weak nonfarm payrolls report and Brexit. Since then, the June NFP report blew the roof off, totally erasing the May disappointment, and a financial calamity from Brexit failed to materialise.

Furthermore, the US data since the last FOMC meeting has been on the strong side. A hawkish-sounding statement may catch traders off guard and send the US dollar soaring.

And the FOMC meeting isn’t the only game in town. The highly anticipated Bank of Japan policy meeting is scheduled for Thursday. The debate is still raging about a stimulus package. If there is one, will it be a shot-gun or a pop-gun? Prior to that, Reserve Bank of New Zealand governor Graeme Wheeler may use his speech on Monday to talk down the kiwi.

There is also a lot of data including US Durable Goods orders. This week has all the ingredients needed to ensure a volatile, choppy FX market.

The week that was

Measured against the previous four weeks, this week was rather mundane.

Monday opened with a snore. Japan was closed for Marine Day, which sucked a lot of liquidity out of the market. The failed coup in Turkey and the Nice terrorist attack dominated the chatter. Safe haven flows that drove USDJPY lower were reversed. The kiwi came under pressure due to soft inflation data. Oil prices were leaking lower.

On Tuesday, the aussie and kiwi were the stars of the Asia show. The RBA minutes were slightly more doveish than expected and AUDUSD sank. NZDUSD got spanked on new housing measures which gave rise to rate cut speculation. The day closed in New York with oil prices down on rising inventories and strong US housing data giving the dollar a bid.

Wednesday was pretty tame. Risk sentiment improved and global equities were higher, and the US dollar was modestly lower. EURUSD traded sideways ahead of Thursday’s ECB meeting. GBPUSD rallied after a Bank of England report said that there was no clear evidence of a Brexit hit. USDJPY was drifting toward 107.00 on anticipation of new Bank of Japan stimulus.

Thursday’s Asia session started with the kiwi being beaten like the proverbial red-headed step-child. The RBNZ’s economic assessment lowered the inflation outlook, warned that additional easing was needed and complained about the high level of the currency. EURUSD was choppy heading into the ECB meeting, and USDJPY was well above 107.00 in Europe.

Then it got exciting. BoJ Governor Kuroda reportedly ruled out ‘helicopter money’ in a BBC interview and USDJPY went into freefall. Mario Draghi didn’t unveil any surprises at his post-ECB meeting press conference, but reminded markets that the ECB is “ready, willing and able to act.” EURUSD was very choppy within a 1.0980-1.1060 range, but closed unchanged on the day. Oil prices continued to slide.

Friday is ending with the US dollar in demand across the G10 spectrum.

— Edited by D. Deacon

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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