The great white short squeeze
FX Trade Strategist / http://www.Loonieviews.net
· Bank of Canada changes its tune, turns hawkish
· FOMC leaves door wide open for another rate increase
· Lack of tier-one US data next week lifts importance of regional reports
Investors are flocking back to CAD. Photo: Shutterstock
By Michael O’Neill
A month ago, a Reuters article resurrected the term “Great White Short” to describe the bearish outlook for the Canadian dollar.
On May 11, CAD was the worst-performing G10 currency in 2017. The combination of falling oil prices, monetary policy divergence between Canada and the US, increased trade friction led by president Trump, and housing bubble concerns had some forecasters predicting
USDCAD would touch 1.4084.
As a result, long USD/short CAD speculative positions were at very elevated levels.
To use Mark Twain’s formulation, however, reports of the loonie’s death were greatly exaggerated.
First, a series of reports showed that the economy is rebounding. That culminated in an ever-so-modest upbeat tone to the Bank of Canada policy statement on May 24. BoC governor Stephen Poloz appeared to acknowledge the positive aspects of the domestic economy rather than emphasising the downside. The statement was followed by a 0.5% rise in March GDP and another stellar employment report.
Still, it wasn’t enough to take USDCAD out of its comfortable 1.3400-1.3600 range, something that was largely due to the sharp decline in oil prices; WTI had dropped from $51.90 to $45.20/barrel between May 11 and June 9.
Then came senior deputy governor Carolyn Wilkins’ speech on Monday. In it, she trumpeted broad economic growth from 70% of domestic industries, rising employment, and an end to the economic adjustment from the oil price plunge.
Source: Bank of Canada
She also said that “to ensure that inflation gets back to target on a sustainable basis, we must consider not only current economic conditions but also how they will evolve. If you saw a stop light ahead, you would begin letting up on the gas to slow down smoothly. You do not want to have to slam on the brakes at the last second. Monetary policy must also anticipate the road ahead."
Then and there, the "Great White Short Squeeze" began.
FX traders concluded that the Bank of Canada was in rate hike mode. JPMorgan economists pulled their Canadian rate hike forecast forward from Q2 2018 to October 2017.
USDCAD plunged, falling from 1.3465 to 1.3165 and instead of 1.4084, traders are looking at a potential drop to 1.2771 and even as far down as 1.2450, the May 2016 low .
Sceptics point to low oil prices as a major reason why USDCAD losses will be limited, noting that WTI short-term technicals are bearish and looking for further weakness to $42.40/b. They may have a point, but it should be noted that USDCAD traded within a 1.2490-1.3290 range when
WTI traded between $30-$40/b in Q1’16.
The BoC believes that the country has weathered the storm from the oil price shock. which implies that WTI at $$40-$45/ barrel is less important that the prospect of a rate hike.
The short-term USDCAD technicals support that view and are targeting a drop to 1.2770 on a break of support in the 1.3160-80 area.
Source: Saxo Bank
The week ahead
It’s Brexit time. Britain begins negotiations with the EU to exit from the European Union. The UK government is a bit of a mess and even though the negotiations will last nearly two years, inflammatory rhetoric could make GBPUSD volatile. Elsewhere, a lack of actionable economic data argues for a very quiet trading week.
Monday, Japan will get things going with the release of the trade balance. After that, the global data cupboard is bare which should make for a quiet day.
Tuesday, AUDUSD traders will be entertained with the Reserve Bank of Australia minutes and house price data. The European and US sessions do not have much to get excited about, either.
Wednesday looks like another dull session right across the globe.
Thursday, New Zealand will liven things up a bit with the Reserve Bank of New Zealand’s interest rate decision and policy statement. There isn’t much else until Canada releases retail sales
Friday, those traders still awake must deal with a slew of preliminary Markit PMI reports, which are second-tier and not likely to cause a stir.
The week that was
The week was expected to be quiet until Wednesday’s Federal Open Market Committee policy meeting and statement… and it was.
Monday got off to a slow start in Asia; Australia was closed for a holiday. FX ranges were very tight and that continued throughout the European session as well. EURUSD ticked higher on French election results giving Emmanuel Macron’s party a solid majority. UK election results and Brexit concerns took GBPUSD from 1.2768 in Europe to 1.2642 by mid-morning in New York. The US session was deathly dull due in part due to a lack of top-tier economic data. USDCAD plunged when the BoC’s Wilkins announced her somewhat hawkish shift.
Tuesday was as quiet as Monday for the antipodean currencies. USDJPY flatlined in a 109.80-110.26 range. Sterling started to rally in Asia and had recouped almost all its previous day’s losses by lunch time in New York thanks to better-than-expected CPI data. EURUSD stayed inside a 1.1185-1.1220 range. USDCAD declined further after BoC governor Poloz said rate cuts “have largely done their work”.
Oil prices rose on Saudi production cut plans but erased those gains at the end of the day on an increase in US crude inventories.
Wednesday, Aussie and kiwi rallied following better-than-expected China retail sales data but those gains were erased after the FOMC statement. EURUSD was steady within Tuesday’s range while sterling was choppy. GBPUSD rose from 1.2742 to 1.2792 in Europe on a solid UK employment report but retraced the move as New York opened.
Stateside, a mess of weak US data including weaker than expected CPI and retail sales lead to broad US dollar selling. EURUSD rose from 1.1198 to 1.1294. GBPUSD soared to 1.2816 from 1.2740. USDJPY plunged from 110.30 to 108.95. The antipodeans spiked back to their overnight peaks.
The greenback looked like it was on its last legs. Then the FOMC came to the rescue. The Committee raised US interest rates by 0.25%, for the second time in 2017, and tweaked inflation and growth forecasts. That was expected. However, the tweaks were minimal, another rate hike was still on the table, and balance sheet reduction would begin sometime in 2017. It wasn’t the dovish hike expected and the US dollar rallied.
USD index (hourly):
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Source: Saxo Bank
Thursday, AUDUSD had a short-lived rally on a better-than-expected employment report. After touching 0.7629. AUDUSD slid steadily and closed in New York at 0.7581. A weak GDP report sent NZDUSD tumbling from 0.7266 to 0.7184 by mid-morning in New York but it bounced back to 0.7210 by the close. GBPUSD traded lower in Europe, weighed down by UK politics and a weak May retail sales report.
EURUSD traded sideways in Asia but sank to 1.1153 in Europe. USDJPY opened in New York, unchanged from the previous close. A slew of robust US economic reports not only validated the FOMC rate hike Wednesday, but left a third hike on the table for 2017. The day ended with gains across the board for the US dollar, except for sterling. USDJPY closed near the day’s peak of 110.97 while sterling held on to its post-BoE move.
Friday, the Bank of Japan did what was expected, leaving interest rates and policy unchanged and USDJPY rallied. Elsewhere, the US dollar pared gains against the majors in what was likely a profit-taking move ahead of the weekend.