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

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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