A litany of woes weigh on the Loonie and Trump is just one 11Nov16


A litany of woes weigh on the Loonie and Trump is just one

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

· Sterling outperforms in week of strong US dollar gains

· USDCAD technicals are bullish but beware a correction

· Election fallout will overshadow data next week

· Trump has an aggressive energy policy and wants to make US energy independent

· Shale production is set to increase

· Russia and Opec already producing crude at record volumes, world is awash in oil

US president elect Donald Trump promised to unite his country. We’ll see. Photo: iStock

By Michael O’Neill

The Loonies feathers are being plucked one by one. The bird is not quite bald but it is sporting a “mohawk” .

The Canadian dollar is being buried under a blanket of negatives that have hung a target on 1.4000. The threat of NAFTA is real although there is a rising chorus that believes the threat is more real for Mexico than Canada. Granted, that chorus is composed largely of Canadian’s which may skew the bias.

More telling, is that, as of this writing, Donald Trump hasn’t bothered to call, text or even tweet to Canada’s Prime Minister, Justin Trudeau and Canada is America’s largest trading partner. (Justin called Donald to congratulate him on his victory)

That could be because, according to the Burrard Street Journal, Mr. Trump (who says he follows Canadian politics) called Justin Trudeau “Canada’s worst President yet” (Canada doesn’t have a president). He also called Mr. Trudeau “an embarrassment”.

“Worst President yet” Source: Burrard Street Journal

Mr. Trump has an aggressive energy policy. He wants to make America energy independent and declare American energy dominance a strategic economic and foreign policy goal.

The Energy Information Administrationsays that US crude oil production is 8.6 million barrels per day as of November 4. That volume will grow on continued Shale extraction technology advances.

Source: Energy Information Administration

Russia and Opec are already producing crude at record volumes and the world is awash in oil. The International Energy Agency (IEA) forecast that the 2017 oil market will be similar to the 2016 oil market. If accurate, WTI prices will remain soft and that is not good for the Canadian dollar

The Bank of Canada downgraded Canada’s economic growth outlook in October blaming slower exports and slower resale housing activity. Governor Stephen Poloz actively sought to weaken the Canadian dollar when he announced that at the policy meeting, “rate cuts were discussed”. He was successful. Economists and strategists have raised the odds for a BoC rate cut (they are still very low) which has boosted support for USDCAD.

USDCAD technical outlook

The short and medium term technicals are bullish. The USDCAD uptrend from the May low remains intact while prices are above. 1.2980. The September uptrend is valid above 1.3140 supported by the break of resistance at 1.3308 (38.2% Fibonacci retracement of 2016 range. The table is set for a return to 1.3835 (61.8%) Fibonacci level).

However, resistance at 1.3570 (50% Fibonacci level may prove sticky). USDCAD has climbed well above the short-term trend line at 1.3140 which leaves a lot of downside room for a correction while leaving the dominant trends intact.

USDCAD with Fibonacci

Source: Saxo Bank

The week ahead :

The US election results and chatter about Mr. Trump’s proposed cabinet will over-hang markets all week. Regional data may have a heightened importance depending upon how it’s future performance could be impacted by a new Trump government. To that note, China’s Retail Sales and Industrial Production data on Monday, could lead to some risk aversion trading if it is weaker than expected. A China/US trade war would exacerbate the situation.

There is a lot of key data releases around the globe.

German GDP data, Eurozone GDP and trade as well as a slew of UK data on Tuesday may shift the focus (temporarily) back to Brexit and the Eurozone. US data (retail sales) will keep US rate hike hopes alive.

UK employment and US data will provide the entertainment on Wednesday. Thursday is inflation day, first in the Eurozone and then in the US.

The week will end with a Mario Draghi speech

The week that was :

The UK vote to leave the European Union should have been the preeminent event of 2016. It won’t be. That story got trumped by Trump.

Monday started with US dollar buying on news that the FBI had cleared Hillary Clinton of any wrong-doing pertaining to her emails. The news boosted global stock markets and the Trump-win proxy, Mexican Peso. At the time, Hillary’s correspondence was a big deal. If we had only known.

EURUSD gapped down at the Asia open, falling from 1.1142 to 1.1038, bouncing back to 1.1100 and then spent the European and New York session drifting back to 1.1025. The USDJPYreaction was more subdued. It rallied from 103.30 to 103.70 and traded sideways. The commodity currency bloc initially rallied but retraced those gains quickly. Eurozone data was a tad soft but FX traders ignored it.

Tuesday was US election day. Everyone knew that Hillary Clinton would win. The New York Times, on Monday, reported that Mrs. Clinton had an 84% chance of becoming the first woman president of the United States. Talk about a Chicago Daily Tribune, “Dewey Defeats Truman” moment.

The US dollar drifted higher against JPY and EUR, but lost ground against the commodity currency bloc on improved risk seeking sentiment. US equity indices all closed with gains. API reported another rise in US crude inventories and oil traded lower, after New York had closed.

Wednesday. Surprise! Millions of Trump followers came out of the closet (metaphorically speaking). They had hidden from pollsters and their neighbours, perhaps too embarrassed by Donald’s bombastic. rhetoric, crude language and accusations of sexual abuse to openly support him. But they didn’t have any problem voting for him. Donald J. Trump became the 45th President of the United States.

Asia traders reacted and their first reaction proved wrong. USDJPY plunged from 105.45 to 101.20. EURUSD soared to 1.1300 from 1.0990. Sterling rallied to 1.2550 from 1.2350. The commodity currency bloc traded in similar fashion.

Suddenly, a Trump win wasn’t the end of the world. All the FX moves were reversed almost as quickly as they occurred. By the time New York traders got to work, European traders had started selling dollars again, perhaps on profit taking. The move was short lived and by the end of the day, EURUSD was down and USDJPY was flirting with 106.00. US equity markets soared, rising over 1.1% on the belief that Trump’s economic policies would be good for the US economy and inflation.

The Reserve Bank of New Zealand followed the road as expected. Photo: iStock

Thursday, much of the world was still stunned by the US election result. Kiwi traders may have been more stunned than most and the US election had nothing to do with it. The Reserve Bank of New Zealand chopped the OCR rate by a quarter of a percent in the very wee hours of the morning. It was expected, but a less dovish than expected statement propelled NZDUSD from 0.7260 to 0.7360. That move came to a screeching halt when traders realised that new US trade policies may have a negative impact in Asia. The gains were erased and NZDUSD dropped to 0.7175 before edging higher into the New York close.

AUDUSD suffered a similar fate. For the rest of the majors, Thursday was a day of consolidation. EURUSD hovered just above its recent lows while USDJPY closed just below 107.00

Friday,

The US dollar ended the week with large gains against the G10 currencies except for the British pound which is Brexit has put in a parallel universe.

— Edited by Clemens Bomsdorf

Advertisements

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.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s