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

icon-envelope-tick-round-orange-animated-no-repeat-v1.gif Virus-free. www.avast.com
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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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