Potential big bangs to finish shortest month
FX Trade Strategist / www.Loonieviews.net
· Canada inflation data surprises to the topside
· President Trump and treasury secretary Mnuchin delivering mixed messages
· Busy week ahead with major president Trump speech and month end on tap
The loonie has been steadily strengthening this week, which be cause
for concern to Bank of Canada governor Stephen Poloz, who knows the benefits a weak currency can have on trade. Photo: Shutterstock
By Michael O’Neill
The loonie and the BoC
Canadian economic data releases since the last Bank of Canada (BoC) policy meeting on January 19 have been robust. Sure, there were a couple of hiccups, including a decline in retail sales reported earlier this week. But by and large, the domestic economy looks pretty good.
Employment gains continue to surprise to the upside, the trade surplus widened, manufacturing shipments increased and inflation jumped. CPI in January rose 2.1% – versus the forecast of 1.6% – year-over-year and is within the BoC’s target zone.
Chart: Canada CPI
Source: Statistics Canada
That’s the kind of news that warms the cockles of a central banker’s heart. Unless, you are Stephen Poloz, governor of the Bank of Canada.
Poloz will be unhappy. He knows the benefits of a weak currency on trade. The steadily improving Canadian dollar – supported by firm and rising oil prices – jeopardises future growth prospects. Friday’s inflation-inspired USDCAD selloff that threatens to test support in the 1.2990-1.3000 area may have set off some warning bells at BoC headquarters
On Wednesday, the BoC is widely expected to leave rates unchanged.
It won’t be much of a stretch to expect the statement to downplay the recent economic performance while stressing the downside risks to economic growth. President Trump and his yet-to-be-disclosed trade tweaks is a ready-made excuse for caution. There won’t be anything about “rate hikes being discussed” because there isn’t a press conference. Just a statement.
Traders may write off the BoC meeting as a non-event leaving USDCAD direction to be decided by technicals and the US dollar. Trump’s currency manipulation talk and rumours that the highly-touted tax reform plan will be delayed, have undermined the US dollar against the majors.
The Canadian dollar is a beneficiary.
The prospect of month-end demand for Canadian dollars from portfolio rebalancing flows adds another element of support to the loonie. The risk is if oil prices correct. The sharp rise in WTI – despite a lack of evidence that global inventories have diminished in a meaningful way – suggests that a downside move is possible.
USDCAD technicals are bearish in the context of a 1.2970-1.3220 trading band. The intraday downtrend from Wednesday’s peak of 1.3207 (which is also the downtrend line from the end of December) is intact while prices are below 1.3110. A decisive break of support below 1.3060 will target 1.2960-1.3000. Nevertheless, the 1.2960-1.3220 band has contained price movements all of February and will likely do so again next week.
Chart: USDCAD (4-hour)
Source: Saxo Bank
The week ahead
The coming week’s FX action will be far removed from the prior week’s random walkabouts. The Trump circus will be under the big top (well, actually the Capital Dome) when the president addresses a joint session of Congress on Tuesday.
Monday, the enthusiasm for Eurozone and US data releases that include Durable Goods data releases could be overshadowed by angst ahead of president Trump’ speech on Tuesday.
Tuesday will be busy. It kicks off with the New Zealand trade report, a slew of data from Japan and Australia home sales and trade. There is a lot of Eurozone data, a US GDP report accompanied by a slew of other data. Tuesday is also month end. The outperformance of US equity indices against Canada and Europe implies US dollar selling at the fix. The day will finish with president Trump.
Wednesday, fall-out from whatever Trump says, Australia GDP data, and China PMIs should ensure a lively Asia session. It is PMI day in the Eurozone and the UK. The Bank of Canada interest rate decision will be big news for Loonie traders.
Thursday’s Asia session only has to deal with Australia trade data. Europe will contending with key Eurozone data, including inflation. It is a fairly quiet data day in the US, but Canada releases GDP data.
Friday will kick off with Japanese inflation data and then a slew of services PMI reports in Europe. Eurozone retail sales data are also on tap. There aren’t any US data of note which likely means a quiet end to the week.
US president Donald Trump is expected to elucidate his financial and economic policies during a speech before Congress on Tuesday. Photo: Shutterstock
The week that was
It was a short week for traders in the US and they were thanking their lucky stars because this
was another week of light data, and choppy, rangebound FX markets
Monday was expected to be quiet and it was. EURUSD opened at 1.0674, the high for this week, and slid steadily until finding a bottom on Wednesday. It was a similar story for USDJPY – it started the week at 112.64 (the bottom of the range) and it wasn’t seen again until Thursday. The antipodeans traded sideways. Sterling got a lift in Europe on better-than-expected data rising from 1.2408 to 1.2475.
Tuesday, kiwi traders soured on the outlook for NZDUSD and sold it from 0.7188 to 0.7108 by the New York open. The aussie tracked the kiwi lower within the same time frame, suffering from modest disappoint with the Reserve Bank of Australia minutes. USDJPY drifted from 113.05 to 113.78 on rising Treasury yields but that move peaked at 113.76 in early New York trading. French election concerns weighed on EURUSD. In Europe, GBPUSD got beat up following the Bank of England’s inflation report and gave back all of Monday’s gains. EURUSD slumped on hawkish interest rate chatter by Philadelphia Fed president Harker, falling from a European peak of 1.0585 to 1.0524 by the New York close. USDJPY peaked at 113.72, where it closed. US Markit PMI data missed the forecasts.
Wednesday, Cleveland Fed president Lorretta Mester’s mixed message on interest rates undermined USDJPY, which fell from 113.68 to 112.97 by the New York open. Aussie and kiwi firmed in Asia but only kiwi held on to the gains in Europe. There was a downward revision in Q4 year-over-year GDP data to take the shine off sterling and it dropped from 1.2505-1. 2439. The US dollar gains evident at the open in New York were nowhere to be found by the end of the day. The market decided that the Federal Open Market Committee minutes were cautious and thus doveish, putting March rate hike expectations into the dustbin. US dollar buyers became US dollar sellers and the greenback finished the day with losses against the majors except for yen. Oil prices spiked from the lows on a smaller-than-expected build in US crude inventories.
Thursday, Asia traders extended the US dollar selling spree but with a lack of enthusiasm. AUDUSD declined from 0.7710 to 0.7663 in early Asia trading because of weak capex data but the soft tone to the US dollar against the majors gave it support. AUDUSD was flirting with 0.7700 at the New York open. EURUSD and GBPUSD managed to hang on to most of the previous day’s gains. The US dollar was flat to slightly higher at the New York open but ended the day down across the board. Sterling was the big mover, perhaps because Wednesday’s plunge following the GDP miss was overdone. Jobless claims missed forecasts but what really spooked traders were comments from US Treasury Secretary Mnuchin that Trump’s highly touted tax plan may be delayed.
Friday traders were wrapping up their week digesting President Trump’s China currency comments and what it really meant.
Between the president’s bellicose tweets and Mnuchin’s more amiable remarks, none of us are any the wiser as to the Trump administration’s true stance on China. Photo: Shutterstock
– Edited by Jack Davies