Loonieviews: 24Mar17


FX volatility due for a spike

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net

Canada

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· USD shrugs off strong Durable Goods report

· Wait for US healthcare vote hamstrings FX traders.

· Loonie treading in vast pool of oil

By Michael O’Neill

The US dollar shrugged off a strong Durable Goods report and ignored a dip in the Markit Manufacturing PMI as traders wait for the results of today’s US healthcare vote. The Trump presidency is not even 100 days old and yet this vote is already being seen as a benchmark indicator for the administration’s ability to pass other key initiatives.

Loonie pros and cons

USDCAD sentiment is almost universally bullish with most analysts and economists looking for a rally above 1.3600 in the coming months. The view is based on:

· Bullish USDCAD technicals: The long-term USDCAD uptrend line from May 2016 is intact while prices are above 1.3060, supported by the break of the double top at 1.3210 on the daily chart.

· Weak oil prices: WTI has declined over 14% from its February peak level of $54.90/barrel. Rising US Crude inventories and forecasts for increased production have offset benefits from Opec production cuts. A move below the $47.60-70/b area would snap the long-term uptrend line from May 2016. A decisive break below $44.10/b, the 38.2% Fibonacci retracement level of the May 2016-January 2017 range would hang a target on $37.20/b, the 61.8% retracement level.

· Dovish Bank of Canada: BoC Governor Stephen Poloz has verbally intervened to devalue the Canadian dollar a couple of times this year. He said that “rate cuts remain on the table” at his January press conference following the BoC policy meeting. The March policy statement took pains to highlight downside risks. Deputy governor Lawrence Schembri also made a point of warning about economy slack and risks in a speech on March 21.

· Reopening of NAFTA: president Trump has promised to renegotiate this free trade agreement and it is hard to see how any changes will benefit Canada. That possibility has undermined CAD.

However, it is not all doom and gloom for the Canadian dollar. USDCAD bears will take solace from:

· Domestic economic data: Canadian data seem to have contradicted the bearish domestic outlook offered by the BoC. The March 24 CPI release was almost as expected and neither bullish or bearish; the employment picture is robust.

· Rangebound loonie: USDCAD has been trapped in a 1.30-36 range for all of 2017 and it needs to break either side to establish a new direction.

· Oil prices: the decline in oil prices has boosted USDCAD. However, if WTI support in the $44-47/b area contains downward moves, it should help to cap USDCAD gains.

· Although it is probably too early to take a contrarian view in USDCAD, it may be profitable to fade a rally if prices are in the 1.3530-70 range while protecting your position with a stop loss above 1.3620.

Can the Canadian economy and currency break out of its winter slump? Photo: Shutterstock

The week ahead

FX volatility should ratchet up a notch or three this week, which shouldn’t be a stretch when compared to the previous week. There are plenty of top-tier data and a flock of Federal Reserve speakers forthcoming. The usual entertainment from month-end portfolio rebalancing, however, could be disappointing.

Monday will open with Asia reacting to the results of the US healthcare vote. European and UK traders will be cranky due to the switch to Daylight Savings time and the loss of an hour’s sleep. German Ifo data and speeches from ECB chief economist Peter Praet and Chicago Fed president Charles Evans round out the day.

Tuesday, traders will be entertained by speeches from Reserve Bank of Australia assistant governor Guy Debelle, as well as BoC governor Stephen Poloz, Kansas Fed president Esther George, and Dallas Fed president Robert Kaplan. If that doesn’t do it for them, there are plenty of US data releases on tap including Case-Shiller home prices and consumer confidence.

Wednesday, USDJPY traders will deal with Japan Retail Sales reports. Sterling may be extra volatile as well as the UK government is expected to trigger Article 50.

Thursday is a big day for data around the globe, highlighted by US GDP and rounded out by more Fed speak.

Friday should be the busiest day of the week beginning with Japan CPI and then China Non-Manufacturing PMI. UK GDP and current account data will keep sterling traders busy while Eurozone CPI data will do the same for EURUSD traders.

US data includes PCE and Michigan consumer sentiment while Canada releases the GDP report. The month-end portfolio rebalancing flows may be a non-factor due to the sluggish performance of equity indices in March.

The week that was

This week was expected to be on the “tame” side of the equation. Boy, was it ever.

Monday, the greenback started the week under pressure and still reeling from the “dovish” Fed rate hike. Japan was closed for Vernal Equinox Day and liquidity was poor. The G20 didn’t provide much trading fodder but managed to create some chatter when they dropped the usual reference about “we will resist all forms of protectionism” about trade.

EURUSD recouped Asia losses in the European session and USDJPY bounced around in a 112.50-90 range for the entire day, while GBPUSD found the low for the week of 1.2334 at lunchtime in New York. News that official Brexit talks would start at the end of March probably hurt sterling. New York was very quiet and the majors held to narrow ranges

Tuesday, AUDUSD was sold after the RBA minutes were released but the move was quickly reversed. USDJPY traded in a similar fashion but its rally was due to improved risk sentiment. EURUSD started the session soft but French election poll news lifted the single currency to 1.0817 and it traded in a 1.0792-1.0818 until the New York close.

USDJPY hit 112.85 in early European trading and never saw that level again for the rest of the week. Sterling broke out of a narrow Asia/European range when UK inflation beat expectations. GBPUSD soared, rising from 1.2380 to 1.2471. EURUSD inched higher on less-than-dovish comments by ECB’s Weidmann. Risk-off sentiment wafted through the New York session and the greenback finished the day on a down note.

On Wednesday, Asia saw more US dollar selling on questions as to whether or not president Trump could get his health bill passed. A failure would raise questions about his ability to deliver on promised tax cuts and infrastructure spending. The risk-off sentiment lasted the whole day. USDJPY continued the slide it began on Monday and hit 110.72 before Europe opened, aided by a better-than-expected Japanese trade report. EURUSD tried to extend gains in early Asia trading but couldn’t get above 1.0824 in New York. ECB board member and Bank of France President Francois Villeroy put a damper on speculation that the ECB may be shifting its policy stance when he denied that ECB policy had changed.

Sterling had a peak above 1.2500 but didn’t like the view and dropped back to 1.2424 before rallying into the close. A terrorist attack near the UK parliament had traders watching TV and sitting on their hands during the New York afternoon. Oil prices rode a roller coaster. They dropped on the EIA report of a rise in inventories and then rallied on talk that Opec could extend production cuts.

Expect more on this from the weekend’s oil summit in Kuwait. Photo: Shutterstock

Thursday had all the ingredients for an explosive day but the fuse was never lit. The Reserve Bank of New Zealand left rates unchanged with a dovishly-neutral bias. NZDUSD declined on the news but recovered the pre-announcement losses by mid-morning in New York. There was no reaction to the Canadian Federal budget which released after the close of business on Wednesday.

Fed chair Janet Yellen’s speech at breakfast in New York was a big “nothing” because she did not address monetary policy. President Trump’s health bill was expected to be voted on and traders were on hold until the results were known. They were still on hold at the end of the day as the vote had been delayed

Friday, the week’s FX ranges stayed intact. The impact of US data was muted as the US Healthcare vote was the focus.

— Edited by Michael McKenna

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Oil and Loonie together 10Mar17


Oil and loonie together again

Michael O’Neill

FX Trade Strategist / www.Loonieviews.net

Canada

·

· US dollar retreats in pre-FOMC correction

· Nonfarm payrolls report is a "non-event" for FOMC meeting

· USDCAD bulls knocked for a loop

The Federal Reserve is to decide upon rates on march 15. Photo: Shutterstock

By Michael O’Neill

USDCAD and WTI appear to have resumed their relationship. Oil price declines usually led to USDCAD gains and vice-versa but that hasn’t been the case since the middle of February. WTI prices fluctuated within a $52.55-$54.95/barrel band during that period while USDCAD steadily climbed higher. Oil traders appeared to be oblivious to a dovish Bank of Canada statement, hawkish Fed rhetoric and even repeated increases in US crude inventories.

That changed on Tuesday. Rumours that the American Petroleum Institute would report a large increase in US inventories knocked WTI from $53.75/b to $53.03/b. Confirmation of the rumour pushed WTI to $52.68/b. When the Energy Information Administration (EIA) reported a large build in crude inventories, it was the proverbial “straw that broke the camel’s back.”

WTI blasted below support at $52.20/b and the first wave of stop-loss sellers emerged. The break below $50.00/b triggered more stops and the rout paused at $48.56/b. The post payrolls US dollar retreat helped boost WTI to $50.09/b.

As oil prices were plummeting, USDCAD took off and appeared poised to press above the 2017 peak of 1.3596. That view changed on Friday.

Better-than-expected Canadian employment data combined with the broad US dollar retreat caught USDCAD traders “long and wrong” and USDCAD plunged to 1.3423.

Now what?

The Canadian dollar may not get much support from oil prices. It seems that $55.00/b will cap WTI. There isn’t any guarantee that the Opec production cuts will be extended past the six-month deadline. According toReuters, Saudi Arabia Energy Minister Khalid al-Fahid, speaking in Houston, said that there would be “no free rides” for US shale producers. He said that US producers should not automatically assume that Opec will extend the cuts. If true, a steeper decline in WTI will certainly put a floor under USDCAD.

USDCAD plunged following the strong domestic employment report (Actual 15,300 vs. forecast 2,500) in a move fueled by broad US dollar selling vs. the majors.

A tiny miss in the average hourly wage component of the US nonfarm payrolls report gave traders all the excuse they needed to trim long dollar positions ahead of Wednesday’s FOMC meeting. That selling exaggerated the USDCAD decline.

The reality is that for the Canadian dollar nothing has changed. There is still a lot of slack in the domestic economy. Canadian interest rates are staying where they are and the outlook is dovish thanks to the BoC repeatedly warning that rate cuts are being discussed. US interest rates are going higher and the pace of increases could be faster than what the markets have priced in. The details of President Trump’s infrastructure spending and tax cut plans are still unknown.

The short term USDCAD technicals are bullish while prices are above 1.3420 with more support in the 1.3380 area. A break below 1.3380 would negate the topside pressure and suggest USDCAD consolidation within a 1.3250-1.3520 band.

USDCAD hourly chart

Source: Saxo Bank

The week ahead

The week will begin with FX traders in Canada and the US feeling sleep deprived due to the switch to daylight savings time. It will end with traders dressed in green, acting silly and toasting St. Patrick. In between, traders will be waiting for and then dealing with the fall-out from the Federal Open Market Committee meeting on Wednesday and a mess of central bank policy meetings on Thursday.

Monday is likely to be a quiet day due to a lack of top tier data and the countdown to the FOMC meeting. Markets will be looking to see if Mario Draghi gives any insight to the subtle shift in his monetary policy outlook.

Tuesday, the ZEW data in Europe could cause EURUSD to wobble more than likely this day will be a sleeper as well.

Wednesday, March 15, things should heat up and the Dutch election is just one of the things on the burner. US Retail Sales and CPI data could lead to some FX volatility, pre-FOMC. The afternoon will be choppy. Traders are expecting a hawkish statement following news of a ¼ point rate increase. Disappointment may lead to long US dollar positions being unwound.

Thursday, should be very busy. Traders will react to the FOMC news, Australia’s employment report and interest rate decisions from the Bank of Japan, the Swiss National Bank, and the Bank of England.

Friday, the week may end with a whimper. St Patrick’s Day will give traders all the excuse they need to wind down from will likely have been a frantic two days of action.

The week that was

The FX price action was expected to be disappointing and it lived up to that expectation, until Friday.

Monday, Asia opened with a mildly risk averse session. Traders had some event risk to worry about but that wasn’t until the end of the week. North Korea sent missiles splashing into the Sea of Japan which annoyed Japan and sent USDDJPY to session lows. AUDUSD and NZDUSD moved lower as well, encouraged by China’s lower 2017 GDP forecast. Risk aversion sentiment dissipated in Europe. French political polls showed the leading right wing candidate losing ground which helped EURUSD rally. GBPUSD was smacked on weak services PMI data. In New York, more French political headlines and strong US data knocked EURUSD back to the day’s low. US rate hike concerns undermined the commodity currency bloc.

Tuesday, the Reserve Bank of Australia left rates unchanged and delivered a reasonably positive economic outlook which helped AUDUSD eke out small gains in an otherwise dull session. In Europe, GBPUSD came under further selling pressure after weak housing price data and the Brexit vote in the House of Lords. The New York session ended with the US dollar posting modest gains against most of the G10 currencies. Sterling popped in the afternoon helped by news that the House of Lords voted against the government. Oil prices dropped because of a steep rise in US crude inventories

Wednesday, NZDUSD was smashed following the results of the global dairy trade auction that were released during the earlier New York session. Poor China trade data undermined the greenback during the Asia session but all was forgiven when Europe opened. US Treasury Yields rose which underpinned the US dollar. A ”super-strong” ADP employment report gave more fuel to US dollar bulls. Oil prices got whacked again when the EIA reported an 8.2-million-barrel increase in crude inventories which lifted USDCAD.

Thursday’s Asia and European sessions were mostly uneventful. Weaker than expected China CPI data undermined the antipodeans while USDJPY was bid. It got more exciting during the ECB press conference. The ECB left rates unchanged but a dovish Mario Draghi was missing in action. He wasn’t especially hawkish but he did suggest that the “cyclical recovery may be gaining momentum”. That lifted EURUSD off the overnight lows. New York closed with the US dollar a little worse for wear except against USDJPY.

Friday, US nonfarm payrolls beat expectations but the US dollar sank in a pre-weekend, pre-FOMC meeting, profit taking move.

— Edited by Clemens Bomsdorf

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Did BoC sign Loonie’s death certificate? 3Mar17


Did BoC sign the loonie’s death certificate?

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net

Canada

· Any fallout from Janet Yellen’s speech will dictate Monday’s Asia session action

· Non-farm payrolls data may be a non event

· Dovish Bank of Canada undermines Canadian dollar

· They jury’s out on the veracity of Thursday’s positive GDP data

· Yellen’s speech unlikely to produce much of a long-lasting stir

The Bank of Canada’s policy statement on Wednesday sounded a decidedly dovish tone. Photo: Wikimedia Commons

By Michael O’Neill

The Bank of Canada policy statement on March 1 was terse. Yet those few words read like an obituary for the loonie.

The Bank of Canada made a point of belittling recent, upbeat data. The 2.1% rise in inflation for January was dismissed as temporary, due to higher energy prices and carbon taxes.

They acknowledged that Q4 growth may have been stronger than forecast and then said exports were still facing challenges.

They noted gains in employment then emphasised that subdued wage growth meant persistent slack in the domestic economy, compared to the US.

They finished up by saying that significant uncertainties weighed on the outlook and that they were monitoring risks.

This statement put the boots to those thinking that a 2017 BoC rate hike was even a remote possibility.

Canada GDP – real or fake

Source: StatsCanada/IFXA

On Thursday, Canada posted strong GDP numbers. Q4 GDP rose 2.6% (forecast 2.0%), quarter over quarter. Depending upon the economist, the data was impressive or a sham.

Bank of Montreal economists were impressed. They pointed to solid gains in consumer spending and housing and concluded that “the growth landscape is shifting for the better”.

Not so fast. Scotiabank economists called the GDP results a “Fake Beat”. They insist that large swings in some import categories distorted the results.

USDCAD reacted liked they bought the Scotiabank story on GDP.

Even if the loonie isn’t dead and buried, relatives are gathering bedside. Bullish USDCAD technicals, dubious domestic data releases, oil price concerns due to record US supplies, the unwinding of speculative short USDCAD positions and the prospect that US rates increase faster than originally anticipated have combined to undermine the Canadian dollar and pin a target on the January peak of 1.3598.

The current 1.3000-1.3600 range has been intact since September 2016. Remember, just as it is always darkest before dawn, USDCAD tends to look bullish at the top and bearish at the bottom of any range. This time may be no different.

USDCAD daily with FX range highlighted

Source: Saxo Bank

The week ahead

There are scads of top tier data from China and around the globe with a sprinkle of central bank policy decisions and the US non-farm payrolls report to provide trading fodder, yet the action may be disappointing.

Monday, Asia markets will deal with the fallout from Janet Yellen’s speech on the previous Friday. It doesn’t make sense for her to tip her hand about the pace of future rate hikes which means that her speech shouldn’t create much of a long-lasting stir. China announces an interest rate decision and Australia releases Retail Sales data.

Tuesday, the Reserve Bank of Australia’s interest rate decision and policy statement will garner the bulk of the attention but only momentarily as it is expected to be rather benign. Eurozone GDP and US trade data round out the day’s major releases.

Wednesday, Asia markets will be concerned with China trade data which takes on a little more importance due to president Trump’s trade complaints. USDJPY traders will key on Japan trade and GDP data.

Thursday, China PPI and CPI data will keep Asia traders busy and then it will get quiet until the European Central Bank interest rate decision and press conference. This one could be interesting if the ECB forecasts get upgraded.

Friday, is US non-farm payrolls day. It may be a non event, especially if Yellen has given any indication that a March rate hike is a done deal.

The week that was

Forex traders played a trifecta this week: month-end, Trump and Yellen. It made for an entertaining week.

Monday started slow, as Monday’s often do. AUDUSD and NZDUSD rode mini roller coasters –rising in Asia, sinking in Europe and then repeating the process in New York. USDJPY was range bound within a 111.90-112.50. EURUSD inched higher in Asia on pre-Trump speech jitters. A weaker than expected durable goods report and a -2.9% dip in pending home sales encouraged additional US dollar selling. USDJPY dropped back to 111.93, EURUSD climbed to 1.0629 and GBPUSD rallied from 1.2399 to 1.2477. Those moves were reversed in the afternoon following remarks by Dallas Fed president Kaplan recommending immediate tightening.

Tuesday was rather uneventful in Asia and Europe. The US unloaded a mixed bag of key data including GDP, PCE and the Case-Shiller Home Price index but the data didn’t matter. US dollar sellers were everywhere thanks to month-end portfolio rebalancing flows. EURUSD rallied again but stalled at 1.0629 and USDDJPY bottomed out at 111.70. USDCAD rallied with demand from the closing of an M&A deal swamping month end dollar selling.

When the “fixing” was past, the US dollar recouped all its losses and then some ahead of president Trump’s speech.

Wednesday, Asia markets dealt with the fall-out from the president’s speech, which was easy because there wasn’t any. Trump dialed back his bombastic rhetoric. CNN described his delivery as a “statesman-like cadence” (Yes, fake news CNN). Asia traders shifted focus quickly. The re-looked at the earlier US data dump, heard more hawkish sound bites from Fed officials and bought US dollars. San Francisco Fed president John Williams suggested that he was on board for a March rate increase.

In Europe, EURUSD drifted lower undermined by a soft Eurozone Markit PMI print and US rate hike concerns. A weaker than expected UK PMI report drove GBPUSD, which was still under pressure from Scottish referendum stories, below support at 1.2350. It finished the New York session at 1.2257. Oil prices sank on news of record high US crude inventories. The Bank of Canada left interest rates unchanged, as expected, and delivered a dovish statement. USDCAD rallied. Wall Street liked Trump’s speech and drove the Dow Jones industrial average above 22,000.

Thursday, Asia traders were treated to another Fed dove joining the hawk camp, Fed governor Lael Brainard joined the chorus suggesting that “perhaps it was time to raise rates again.” USDJPY accelerated to the topside on her comments, rising from 113.68 and finally peaking at 114.58 by the New York afternoon. AUDUSD got whacked on worse than expected trade data and kiwi moved lower in concert. Both currency pairs continued to slide in New York. EURUSD was more subdued and traded in a 1.0495-1.0525, closing just above 1.0500.

Wall Street gave back some of Thursday’s gains with all traders waiting for Fed chair Janet Yellen’s speech Friday afternoon.

Friday, soft China Services PMI data helped the US dollar consolidate the week’s gains. EURUSD couldn’t extend gains below 1.0495 and a new poll out of France showing presidential candidate, Emmanuel Macron with a small lead over Marine Le Pan in the first round of the elections, added support. The afternoon speech by Fed chair Yellen was the key focus.

US Federal Reserve chair Janet Yellen speaks tonight following comments

from a growing chorus of Fed members seemingly preparing

expectations for a March rate hike. Photo: US Federal Reserve

– Edited by Jack Davies

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