Loonie takes it on the beak
FX Consultant / IFXA Ltd
· Weak Canadian data crush Loonie
· Next week’s FX moves down to data, not central banks
· USDCAD breaks out of six-month range
By Michael O’Neill
It has been an interesting week. The Bank of Canada opened the door to a rate cut and the European Central Bank (sort of) put tapering on the table. The loonie took the news on the beak while the single currency reluctantly inched lower.
The loonie just can’t seem to keep its head above water… Photo: iStock
BoC doves swarm loonie bulls
USDCAD bears were firmly in control on Wednesday. Oil prices were steadily sliding after making a new 2016 high at $51.91/barrel (WTI) and the currency pair was fresh off of shredding support levels at 1.3180 and 1.3070. At the time, it appeared that the key pivot area of 1.2990-1.3010 would give way.
Suddenly, a dove swooped down from the heavens (or rather Ottawa) and took a huge bite out of the USDCAD bears.
“Given the downgrade to our outlook, [the] Governing Council actively discussed the possibility of adding more monetary stimulus at this time, in order to speed up the return of the economy to full capacity” – BoC MPR Opening statement
With these words, BoC governor Stephen Poloz turned the tide of dollar selling and hung a target on the 1.3575 level. A Canadian rate cut, previously seen as a very remote risk, became a very distinct possibility.
That view was reinforced on Friday morning. Canadian Retail Sales were forecast to rise 0.3%, month/month in August with the risk that the data outperformed the forecast. They didn’t. Instead, Retail Sales declined 0.1%.
Making matters worse, the expected gain in inflation for September, not only failed to materialise, but missed the forecast. It was still better than the August result but that was only a minor consolation.
CPI and Retail Sales:
Source: Statistics Canada
The future is grim for the Canadian dollar. USDCAD has a historical tendency to rally in Q4, which could be exacerbated by rising expectations for a US rate hike. The prospect of widening CAD/US interest rate differentials should keep USDCAD bid.
The wild card is oil prices. WTI has made fresh 2016 highs on talk of production caps or cuts. The ability of oil to extend gains is uncertain as higher prices will attract new supply even as demand remains soft.
USDCAD technical outlook
USDCAD technicals are bullish, both short- and medium-term. The decisive break above the 38.2% Fibonacci retracement level of the 2016 range (1.3315) has turned the spotlight on the 50% level at 1.3575.
The short-term uptrend line from the September low remains intact while prices are above 1.3020. The long term uptrend line from the May 2016 low comes into play at 1.2940.
Intraday trading should see USDCAD retracements restricted to the 1.3260-1.3315 support area.
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Source: Saxo Bank
The week ahead
The FX week will get a later start as New Zealand takes the day off to celebrate Labour Day. The release of Japanese trade data should give USDJPY traders something to work with. There are a slew of Manufacturing PMI reports to be released, as well as a couple of Fed speakers
FX activity should increase on Tuesday due to German IFO data, a rash of US economic reports and speeches from Bank of England governor Mark Carney and his European Central Bank counterpart, Mario Draghi.
Australia CPI data will be the focus in Asia markets on Wednesday. The European and US sessions should be relatively tame unless there are more surprises from the Energy Information Administration’s weekly crude report.
New Zealand trade data will dominate early trading in Asia on Thursday. Sterling traders will be watching for Q3 GDP data. The US Durable Goods report, jobless claims, and home sales could make for an entertaining Thursday during the New York session.
Friday, Eurozone Consumer Confidence, US GDP and Michigan consumer sentiment could make for an choppy end to the weak if the reports deviate substantially from the forecasts.
The week that was
The highlight of the week in the US was the third presidential debate. For most, that was a scrape the bottom-of-the-barrel selection and of little importance to FX markets. The ECB meeting was eagerly anticipated and this meeting was worth the wait.
Monday, Asia traders digested Janet Yellen’s comments from the October 14 speech and didn’t like what they ate. (heard) The initial move was to buy US dollars and they did. The move didn’t last. European traders bought EURUSD supported by Eurozone inflation data and in anticipation of the upcoming ECB meeting on Thursday.
The normally ignored NY Empire State Manufacturing report also had a moment in the spotlight. The far weaker than expected data triggered a rash of US dollar selling versus the majors. Fed vice-chair Stanley Fisher’s speech didn’t offer anything new…
Tuesday’s Asia session led off with a speech by Reserve Bank of Australia governor Phillip Lowe, who appeared to adopt a more cautious approach to lower interest rates. AUDUSD rallied. Kiwi followed suit on higher-than-expected New Zealand inflation. USDJPY couldn’t get traction outside of a narrow 103.65-104.20 band.
US CPI data were slightly below forecasts but didn’t appear to have much of an impact on FX markets. GBPUSD soared on a short-squeeze move triggered by news that the UK parliament would debate Brexit. EURUSD and USDJPY see-sawed within narrow bands. Kiwi climbed following a strong Global Dairy Trade Auction result.
The day ended with the API crude stocks report showing a healthy drop in inventories and lifting WTI.
Wednesday, sterling retreated on profit-taking after a big rise during the previous New York session but that move was reversed in Europe. Kiwi extended its GDT-induced rally with an added boost from rising oil prices. China, somehow managed to deliver Q3 GDP data right on the numbers that were forecast, avoiding an embarrassing miss.
The AUDUSD rally ran out of steam at 0.7730 and drifted lower in a move that continued right through until the end of day in New York. There was chatter about a massive Saudi Arabia bond offering. At the time it was expected to be $15.0 billion but when it closed, $17.5bn had changed hands.
The Saudi bond issue was the story of the week in fixed income markets. Photo: iStock
In Europe, GBPUSD went on another tear higher when a government lawyer said that not only would parliament debate Brexit, they have to ratify the deal. EURUSD traded in a 1.0955-1.1005 range with traders content to wait for Thursday’s ECB meeting .
In New York, the Energy Information Administration (EIA) announced a 5.2-million-barrel decline in crude stocks which sent oil and the Canadian dollar skyward. Oil managed to keep its gains but the loonie got smoked when the BoC governor admitted that a rate cut was discussed at the day’s policy meeting.
Thursday, weaker than expected Australian employment data drove AUDUSD from 0.7730 to 0.7630 by the end of trading in New York. The US dollar inched higher as traders concluded that Hillary Clinton won the third debate. Weaker than expected UK retail sales data weighed on Sterling while EURUSD just marked time until the ECB policy decision and press conference.
During the press conference, Super Mario became Marble-mouthed Mario when he mangled his message. That resulted in erratic EURUSD trading. After the dust had settled, EURUSD was threatening to revisit the March 9 low of 1.0820
On Friday, Asia and European FX markets did not deliver up any surprises although EURUSD dropped to a seven-month low as Mario Draghi’s insinuation that the ECB would entertain some kind of tapering.
All traders heard was “lower rates for longer”.
— Edited by Michael McKenna