It’s not easy being Loonie
FX Trade Strategist / http://www.Loonieviews.net
· Weak data lifts USDCAD
· US dollar catches a bid from renewed tax cut hopes
· ECB policy meeting on Thursday may dampen trading until then
Trump’s tax plan might get through and the dollar is up. Pic: studioflara / Shutterstock.com
By Michael O’Neill
USDCAD is struggling for direction. At times, it is looking extremely bullish and other times, extremely bearish resulting in a lot of sliced and diced traders. The NAFTA negotiations which appeared to be on life support Tuesday morning, got a reprieve Tuesday afternoon when talks were extended into Q1 2018.
Today’s disappointing 0.3% decline in August retail sales launched USDCAD from 1.2478 to 1.2590 (so far) as rate hike risks fade. Traders ignored the increase in inflation. September CPI rose 1.6%, year over year after rising 1.4% in August. As far as the Bank of Canada is concerned, the trend is in the right direction.
The Bank of Canada Monetary Policy Report and policy statement are due October 25. Today’s USDCAD rally indicates traders are looking for a dovish statement and no rate increase.
In September, Bank of Canada Governor Stephen Poloz rained on the “October rate hike” parade in part, to inject two-way risk in USDCAD trading. He succeeded. USDCAD found a floor at 1.2060 and has a ceiling in the 1.2650-1.2735 area from both downtrend lines and Fibonacci retracement levels. With USDCAD trading above 1.2500, Poloz may not be as dovish as expected.
USDCAD positives include:
a) Outlook for higher US interest rates
b) Fiscal stimulus if Trump’s tax plan gets approved
c) Fair to robust US economic data
d) Risks from demise of NAFTA talks
e) Risk of dovish bias to BoC MPR and policy statement
USDCAD negatives include:
a) Risk of hawkish bias from BoC MPR and policy statement
b) Steady to firm oil prices above $50.00/barrel
c) Mixed to positive Canadian economic data
d) Bearish USDCAD technicals while prices are below 1.2650-1.2735 area.
Chart: USDCAD daily with Fibonacci retracement and downtrend lines highlighted.
Source: Saxo Bank
Separating the wheat from the chaff
The Cambridge dictionary defines the meaning of “separate the wheat from the chaff” as: to separate things or people that are of high quality or ability from those that are not.”
It is also a good exercise for FX traders any time, but more so these days. FX markets have been choppy and whip-sawing with traders reacting to rumours, speculation and wishful thinking.
The backlash to news President Trump is interviewing candidates for chair of the Federal Reserve, is a prime example. The US dollar rallied when reports surfaced that former Fed governor Kevin Warsh was the leading candidate. It rallied again when John Taylor was the rumoured front-runner. It sank when Politico, quoting unnamed administration officials, said that current Fed Governor Jerome Powell was the favourite. Incumbent chair Janet Yellen is mostly forgotten. That could be a mistake.
President Trump is prone to say outrageous things at any time on any given day. During the election campaign, he said he would “most likely” replace Janet Yellen. That was May 4, 2016. He hasn’t said anything like that about her, since.
Meanwhile, the US economy is growing, unemployment is at record lows, and the Fed has begun balance sheet normalisation.
Trump’s interviews of Fed Chair candidates may just be an exercise in due diligence.
For FX traders, speculation about Yellen’s job is chaff. The wheat is the US dollar index.
USDX bounced in a broad 91.20-94.10 range since July 20, while the downtrend from March 2017 stays intact. The Fed rumours haven’t done anything to change the dominant downtrend. They are merely distractions.
Chart: USDX daily noting downtrend and consolidation zone
Source: Saxo Bank
The week ahead
The European Central Bank policy meeting/press conference is centre stage in a week that could have an explosive beginning.
Monday, trading will start a little later than usual because New Zealand is closed for Labour Day. (Not because of Labour’s election win) The Japanese elections should be a non-event. Prime Minister Abe and his Liberal Democrat Party are expected to win by a wide margin.
The fireworks could come from Spain and Catalonia. If nothing, the rest of the day will be a snooze-fest.
Tuesday, it is Manufacturing PMI day in Japan, Germany, France, Eurozone, and the US. Any reactions to the data will be short-lived ahead of Thursday’s ECB meeting. It should be another quiet FX day.
Wednesday, the action heats up. Australian inflation data is due followed by the Germany IFO survey. UK GDP and inflation board hearings will keep GBPUSD traders entertained. Durable Goods and the House Price index is on tap in the US. It’s a big day for Canada. The Monetary Policy Report and Bank of Canada policy statement are released, followed by a press conference.
Thursday the antipodean economic data releases are minor. Traders will bide their time for the rest of the session and until the ECB policy statement and press conference. The results of that meeting will set the trading tone until at least the end of the week.
Friday, Japan CPI and Australia PPI will be the main events in Asia. There will be nothing until US Q3 GDP data is released.
The week that was
Monday, FX traders were cautious due to a lack of top-tier US economic data. USDJPY rallied briefly in Asia, retraced the move as Europe opened and rallied again in the New York session. China PPI and CPI were better than expected, helping to underpin NZDUSD. Spanish politics was at the forefront in Europe. EURUSD drifted lower but closed unchanged in New York. Sterling dropped on negative Brexit headlines. A dovish Business Outlook Survey and fears NAFTA could be terminated gave USDCAD a lift. Oil prices firmed on news that Iraqi and Kurdish forces were clashing around the Kirkuk oil field.
Tuesday, NZDUSD had a short-lived rally on better than expected inflation data and then spend the day in a 0.7149-0.7180 range. The RBA minutes were dovish, as expected and AUDUSD traded in a narrow 0.7820-0.7858 range. USDJPY moved sideways but with a bullish bias. Soft German ZEW and bearish technicals had EURUSD probing downside support. The move stalled in New York and the move was reversed.
GBPUSD drifted sideways in Asia and Europe. A Bank of England MPC member made dovish comments and combined with “hard” Brexit fears, drove GBPUSD from 1.3282 to 1.3158 by mid-morning in New York.
The Canadian dollar and Mexican peso were roiled by the US hardline stance on NAFTA. USDCAD gains in the morning were erased in the afternoon after a report negotiations would extend into 2018. Oil prices traded wildly in $51.20-$52.16 range on conflicting supply and demand stories.
Wednesday, traders were looking for direction and grasping at straws. USDJPY rallied the entire day, due to expectations of rising US rates and speculation of a new “hawkish” Fed Chair being appointed. NZDUSD recovered all its losses from Tuesday’s weak GlobalDairyTrade auction while AUDUSD climbed on USD dollar weakness.
EURUSD was rangebound, finishing in New York flirting with 1.1800. Sterling was a non-event Traders were torn between rate hike risks and bearish Brexit headlines. UK employment data was as expected. US economic reports were soft. Crude inventories declined more than expected but gasoline inventories rose leaving WTI oil rangebound around the $52.00/barrel level.
Thursday, the New Zealand dollar got crushed when NZ Labour leader Jacinda Ardern became Prime Minister. China Q3 GDP data was as expected at 6.8%. Industrial production rose 6.6% (forecast 6.2%) and Retail Sales climbed 10.3% (forecast 10.2%). USDJPY see-sawed in a 112.80-113.13 band.
GBPUSD was sold on weak, weak retail sales data and increasing fears of a hard Brexit. EURUSD had a bid but traded in a tight 1.1825-1.1858 band until the New York close. Another “Jerome Powel for Fed Chair” story was published by Politico at the end of the New York session, and the US dollar came under pressure.
Friday, the US dollar rallied after the Senate approved the 2018 budget bill. And opened in New York with gains across the board. USDCAD soared on weak Retail Sales data.
– Edited by Clare MacCarthy
Michael O’Neill is an FX consultant at IFXA Ltd