Loonie looking for love and not finding it
FX Trade Strategist / http://www.Loonieviews.net
· USDCAD rally sparked by soft Canadian inflation and drop in oil prices
· French election worries end on Sunday and begin anew on Monday
· Month-end portfolio rebalancing flows may give a volatile end to the week and month
· FX may be more volatile in coming week thanks to central banks an top-tier data
Often called the "loonie", the Canadian dollar gets its nickname
from the common loon. Image: Shutterstock
By Michael O’Neill
The week is ending the way it started, quietly. French election jitters and other geopolitical worries have combined to keep FX traders sidelined.
Loonie not getting any love
USDCAD kicked off a steep rally on April 13 (Maundy Thursday to some), and it hasn’t looked back since. A confluence of events has erased the memory of the positive sentiment arising from the Bank of Canada’s perceived shift to a neutral policy stance.
To begin with, the market may believe that the BoC is neutral, but governor Stephen Poloz doesn’t appear to support that view. The BoC may have upgraded economic forecasts, but the tone of the statement was still very cautious, according to some economists.
The drop in oil prices played a large role in the USDCAD rally. WTI dropped to $50.07/barrel on April 20 from $53.70/b on April 12. Oil traders seem to have put more weight on near-term oversupply issues than on forecasts for increased demand in the second half of 2017.
Announcements from at least three major foreign investors of deals to sell Canadian oil sands assets provided additional (if unwarranted) support to USDCAD. Three of the deals were worth a total of CAD$27 billion.
The recent price action supports the view that those transactions could lead to Canadian dollar selling. USDCAD stayed bid all week, even during bouts of broad USD weakness.
Weaker-than-expected Canadian inflation data, released April 21, supports Poloz’s cautious monetary policy stance.
Canada CPI 12-month change CPI vs. CPI ex-food and energy
Source: Statistics Canada
Nevertheless, speculative traders are reportedly short Canadian dollars, and USDCAD is approaching significant resistance levels in the 1.3535-1.3600 area. The 1.2960-1.3600 range has held moves since January. It may be getting close to the time to fade this move.
USDCAD daily nearing significant resistance
Source: Saxo Bank
The week ahead
There are many reasons to suggest that the upcoming week will be entertaining. It will begin with the fall-out from the French presidential election on April 23 and then a fresh round of fretting about the second-round ballot on May 7. There’s no shortage of top-tier economic data slated, and two central bank meetings will also keep traders interested.
On Monday, the French election results will dominate FX discussions, while UK house price and German Ifo survey data will keep traders on their toes. There is no US data scheduled.
French voters cast first-round ballots on Sunday in a presidential election that’s too close to call. Image: Shutterstock
On Tuesday, Australia, and New Zealand are closed for Anzac Day, Italy shuts down for Liberation Day, and Portugal celebrates Freedom Day. There are no major Japanese or European data scheduled, but the US unloads a slew of housing data.
Wednesday, AUDUSD will be in focus thanks to a speech by the Reserve Bank of Australia governor and inflation data. Europe and the US are light on economic releases, while Canada retail sales are on tap.
On Thursday, the Bank of Japan interest rate decision, policy statement, outlook and press conference will dominate Asian FX trading. The European Central Bank policy decision and press conference will be the main event in Europe. The press conference will be closely watched to see if ECB president Mario Draghi has changed his tune from the previous press conference. US durable goods, trade, and more housing data will round out the day.
Friday will be a busy day all over. In the Asia-Pacific region, New Zealand trade and building permits kick it off, followed by Japanese inflation, retail trade, and employment data. Several regional European economic releases as well as Eurozone inflation data are also slated. Sterling will be centre stage with the release of first-quarter GDP. GDP reports are also due from Canada and the US. And if that’s not enough, there will be the usual month-end portfolio rebalancing flows.
The week that was
This week was short due to the long Easter weekend, and a dearth of data suggested that trading activity would be lacking. But it wasn’t.
Monday was quiet. That was to be expected because many countries had an Easter Monday holiday. China posted better-than-expected GDP, which gave the antipodeans a lift. USDJPY dropped as North Korea’s threats fueled safe-haven demand. The European session was a non-event due to holidays. New York was open for business, but its session was a non-event as well, although USDJPY rebounded from its Asia lows as US treasury yields inched higher.
On Tuesday, traders were unhappy with the tone of the RBA minutes, and AUDUSD began a slide that lasted until very early Thursday morning. USDJPY added to gains made in New York, but the rally died at 109.20, and the currency pair declined steadily until 108.44 at the New York close.
EURUSD gained on increased optimism that centrist presidential candidate Emmanuel Macron would win the upcoming French election. Sterling was the headliner in Europe and New York. The British prime minister surprised everyone by calling for an early election on June 8. Sterling soared, rising to 1.2905 from 1.2520, and it has hung on to most of those gains.
On Wednesday, NZDUSD added to gains made in New York after a 3.1% rise in the global dairy trade auction. Kiwi peaked at 0.7051 and declined to 0.6990 by the New York close. AUDUSD dropped to 0.7490 from 0.7526 on falling iron ore prices in the same period. USDJPY opened with a bid at 108.44 and rallied to 109.15 by mid-morning in New York, supported by profit-taking and higher equity prices. EURUSD traded sideways in a 1.0700-40 range, sidelined by French election worries. Sterling drifted down to 1.2770 from 1.2855, undermined by broad USD strength.
On Thursday, better-than-expected New Zealand inflation data (CPI actual +2.2% vs forecast 2.0%, y/y) powered NZDUSD from 0.6998 to a peak of 0.7050 by the time Europe opened. That move was completely reversed by the New York open and Kiwi traded sideways for the rest of the day. The Australian dollar pulled itself off lows, supported by broad dollar weakness and a forecast-beating NAB business confidence report (actual 6 vs. forecast 5). AUDUSD climbed from to 0.7545 from 0.7494 in New York.
USDJPY bopped and weaved inside a 108.70-109.06 range. Japan’s trade data was better than expected. EURUSD was bid in Europe on French election positioning, but that move was pared back in New York. GBPUSD was steady on expectations that prime minister Theresa May would get a strong majority.
The US dollar ended in New York with small gains after starting the day with small losses across the board. US economic data releases did not attract much attention. The only major developments were another terrorist attack in Paris on Thursday evening, in which one policeman was killed and two wounded, and comments from US treasury secretary Steven Mnuchin that tax reform plans would be coming “soon”.
On Friday, FX traders consolidated moves and were content to await the French election results.
US treasury secretary Steven Mnuchin this week reassured markets that the Trump administration would accomplish tax reform by year-end. Photo: Wikimedia Commons
— Edited by John Acher