Red Dollar bulls give Loonie wings 6Jan17


Red dollar bulls give loonie wings

Michael O’Neill

·

· USDCAD may be approaching a bottom

· Next week could end on a high depending on Yellen’s speech

· Rise in average hourly earnings takes the sting out of soft NFP

Could things be looking up for Canada’s loonie? Photo: iStock

By Michael O’Neill

The year is just six days old and already USDCAD traders are starting to question their beliefs, or more accurately their 2017 USDCAD outlook.

It is fair to say that that the consensus was for a rising US dollar supported by president-elect Donald Trump’s fiscal stimulative initiatives and the prospect that the Federal Reserve would raise interest rates three times over the course of the year.

In that environment, the Canadian dollar would come under increasing pressure due to the dovish stance of the Bank of Canada, the risk of protectionist trade strategies being implemented by Donald Trump, and continued underperformance by the Canadian economy.

The rally in crude prices helped to limit Canadian dollar losses in the thin post-holiday markets. However, there is still a lot of scepticism about WTI’s ability to sustain price gains above $55/barrel while crude inventories remain at elevated levels, especially if the price point attracts new US production.

The Canadian dollar got an added boost on Friday when StatsCanada reported that employment rose by 54,000 (0.3%) in December, alongside a modestly improved Canadian trade report.

The impact from the domestic jobs report will soon be forgotten, however, in part because it is subject to large revisions.

Canada employment:

Source: StatsCanada/IFXA

For what its worth, the short-term USDCAD technicals argue that the current price action is merely a correction while prices remain above the 1.3150-90 support area. That area represents the uptrend line from May 2016 and prior intraday tops and bottoms.

A decisive move below 1.3150 could extend losses to 1.2747, the 61.8% Fibonacci retracement level of the 2012-2016 range.

In my opinion, the current USDCAD move is merely a correction and a buying opportunity as long as prices remain above 1.3150.

USDCAD daily with Fibonacci and moving averages:

Source: Saxo Bank

The week ahead

FX markets may be a tad less erratic this week as there is a dearth of top-tier data releases incoming. Still, the year is young and just like last year, developments in China have unsettled global markets – although not even close to the extent of the turmoil that occurred in 2016.

Monday should be more subdued than usual as Japan is closed for a holiday. European traders may be busy with German trade data, the Eurozone unemployment rate, and UK house price numbers.

Tuesday could be interesting if Chinese data, including CPI and PPI, cause a stir. Australian retail sales will be the focus for AUDUSD traders.

Wednesday doesn’t have a whole lot going on. UK data will continue to take a back seat to Brexit concerns, unless it is really negative.

Thursday doesn’t look to be much more interesting but that could change depending upon the tone of speeches from Chicago Fed president Charles Evans and Philadelphia Fed president Patrick Harker.

Friday, Asia could have a lively session as Fed chair Janet Yellen is delivering a Thursday night speech to teachers in Washington which will be webcast.

If that turns out to be a snooze-fest, traders will have Chinese trade data, US retail sales data and Michigan consumer confidence data to contend with.

It just keeps coming… Photo: iStock

The week that was

It was a short week for many and an even shorter week for Australia and New Zealand traders. For others, mostly in Asia, it was just another work week.

Monday started very quietly due to the Antipodean holidays. A few European markets were open and a slew of Markit Manufacturing PMI data were released but for the most part it was overlooked due to the New Years holiday. Still EURUSD edged lower, dropping from 1.0506 to 1.0448 and people starting talking about Bitcoin again as the cryptocurrency cracked the $1,000 level.

On Tuesday, a large part of the world dragged themselves to work for the first time in 2017. Better-than-expected China Manufacturing PMI data led to a mini bout of risk-on sentiment in Asia. Aussie and kiwi rallied and EURUSD drifted higher. GBPUSD popped on upbeat PMI data, rising from 1.2245 to 1.2300. USDJPY climbed from 117.23 to 118.00 because of a bullish US interest rate bias.

And then New York came in, a little cranky and with an urge to buy dollars. By mid-morning EURUSD had traded at 1.0338, a 14-year low. USDJPY dropped from 118.60 to 117.20 and Sterling plunged from 1.2297 to 1.2199. Oil prices tanked. WTI dropped from $55.14 to $52.08. Part of that move was due to the rising dollar and part from news that Libya was increasing crude production.

Donald Trump was threatening a special tax on GM cars that would be built in Mexico. Despite the earlier noise, by the time the New York session ended, the US dollar was only modestly lower versus the majors, except for sterling.

Wednesday was a rather messy day. In Asia, USDJPY extended gains from New York, moving to 118.18 from 117.53, on the back of a rising. Nikkei and supported by an increase in US 10-year treasury yields. However, those gains were not sustained. USDJPY dipped to 117.35 by the time New York opened.

Aussie and Kiwi drifted higher in Asia and then accelerated in Europe following stronger-than-expected Eurozone data including CPI. The Peoples Bank of China started buying yuan as fears of capital controls had pushed USDCNY close to 7.00.

The Eurozone and UK data releases were on the strong side, which undermined the US dollar, and PMI data in both areas were stronger than expected and the jump in Eurozone CPI was viewed positively, at least for that day. EURUSD climbed from 1.0388 to 1.0445 before sliding to 1.0428 as New York opened. Sterling traded in a similar fashion, rising from 1.2222 to 1.2288 and then slipping to 1.2260.

Dollar on the ropes

The dollar was on the defensive throughout the New York session and finished the day down across the board. The Federal Open Market Committee minutes were released and were both hawkish or dovish, depending upon the pundit.

Thursday’s Asia session was a continuation of the New York moves. USDJPY dropped to 115.56. The PBoC was back in buying CNY and CNH. The antipodeans and the Loonie traded higher. EURUSD rose from 1.0478 to 1.0575. However, Europe didn’t appear to see things the same way Asia did.

EURUSD got smacked down to 1.0480 by the time New York traders got started. GBPUSD, which had peaked at 1.2363, bottomed out at 1.2275 by mid-morning in the Big Apple.

And then it got worse. The US dollar melted down. It might have been disappointment in the ADP employment report. It could have been increased nervousness from the PBoC intervention in CNY for the second time in the week or just a squeeze of long dollar positions in relatively thin markets.

More than likely, all the above played a role in the dollar’s demise.

Has Icarus landed for good? Photo: iStock

The selling was broad-based. EURUSD rallied from 1.0483 to 1.0616, GBPUSD climbed from 1.2275 to 1.2432 and USDJPY dropped to 115.05 from 116.80. The commodity currency bloc performed in a similar fashion.

Friday, Asia and European sessions were quiet compared to the moves in the previous two days while traders awaited the US employment data. A big jump in average hourly earnings took the sting out of a disappointing headline nonfarm payrolls report.

— 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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