Christmas comes early for loonie bulls 1Dec17

Christmas comes early for loonie bulls

Michael O’Neill

FX Trade Strategist /



· White House is "Dysfunction Junction" as Mike Flynn charged with lying to FBI

· Blow-out Canadian economic data sends loonie soaring

· A US government shutdown is looming (again)

Canada has had an unexpectedly strong rise in jobs. Pic: Shutterstock

By Michael O’Neill

If you were a Canadian dollar bull, Christmas wasn’t just early it was today. FX markets were looking for Canada to add 10,000 new jobs in November. Instead, Statistics Canada reported 79,500 new jobs, which included 40,600 full-time jobs. The unemployment rate dropped to 5.9%, a nine-year low.

The icing on the cake came when September GDP rose 0.2%, beating the 0.1% forecast.

Today’s data reopened the door to the prospect of a Bank of Canada rate hike next week or in January.

The steep plunge in USDCAD, from 1.2885 to 1.2743, was exacerbated by stop-loss selling following the break of support at 1.2860 and 1.2810.

Canadian dollar pros

1) Steady to firming oil prices supported by Opec’s production cut extension, which now includes Libya and Nigeria.

2) Improving economic data and more resilient than expected economic growth.

3) Risk of BoC rate hike in January.

Canadian dollar cons

1) Canadian inflation remains below the BoC’s targeted level, diminishing the argument for a rate increase.

2) On-going concerns about high mortgage and household debt vulnerabilities

3) Possible shock to the economy with Ontario’s minimum wage hike to $14.00 beginning January 1, 2018, and $15.00 on January 1, 2019.

4) The risk that the NAFTA negotiations implode and President Trump tears up the agreement.

Bank of Canada Governor Stephen Poloz recently reminded markets about “uncertainties” and the need to be cautious. Arguably, the BoC will be slow to pull the trigger on a rate hike, until he has a better handle on how the NAFTA negotiations will pan out.

The intraday and short-term USDCAD technicals are bearish following the break of support at 1.2610 and are looking for a move below 1.2740 for a test of 1.2710 However, the uptrend line from September 7 is intact while prices are above 1.2720. Unless it breaks, decisively, USDCAD will bounce in a 1.2710-1.2910 range.

Chart: USDCAD daily

Source: Saxo Bank

The week ahead

In addition to the scheduled events, and data releases, markets may get distracted by the Trump Administration’s game of musical chairs. This week, will Secretary of State Rex Tillerson find a seat when the music stops? The New York Times says “no,” predicting CIA Director Mike Pompeo gets the chair.

Major Events

Tuesday, the Reserve Bank of Australia interest rate decision and policy statement is due, and rates will be left unchanged. A dovish statement would knock AUDUSD off its perch and concerns about weak wage growth would do the trick.

Wednesday, the Bank of Canada meeting is in focus. Rates are expected to be unchanged. The policy statement will be on the dovish side, in part because of NAFTA concerns.

Friday, the US government can be “shutdown” if Congress doesn’t pass a funding bill.

Major Data

Monday: UK PMI-construction. (Forecast 51.0 vs previous 50.8) Firm data will keep the “soft” Brexit rally going. Eurozone Services PMI and Retail Sales may not be enough to push EURUSD above 1.1965 resistance.

Tuesday, UK Services PMI data will compete with Eurozone Retail Sales, and PMI reports for attention. None of the reports are game changers.

Wednesday, Australia GDP is expected to rise 0.7%, q/q vs 0.6% previously.

Thursday, Eurozone GDP is forecast to show a 0.6% rise, q/q

Friday, The US nonfarm payrolls report is expected to post a gain of 185,000 jobs and an unemployment rate of 4.2%. Elsewhere, China trade data will be the key focus in Asia. GBPUSD traders will be busy with Trade, Manufacturing, and Industrial Production reports.

The week that was

Monday, Asia FX markets were nervous ahead of events later in the week which included; the US Republican tax reform debate, confirmation hearings for Fed Chair nominee Jerome Powell, Janet Yellen’s speech to the Joint Economic Committee and German politics. Traders bought dollars. New York finished the day with gains all around except for USDJPY and NZDUSD. Wall Street closed flat and oil prices fell 1%.

Tuesday, Asia was quiet. NZDUSD gained ahead of Wednesday’s RBNZ Financial Stability Review. USDJPY firmed while EURUSD and GBPUSD drifted lower in Europe. The US dollar was mildly bid at the New York open. US Consumer Confidence gave the greenback a boost. Fed Chair nominee Jerome Powell’s confirmation hearings didn’t have much impact. USDJPY was extra choppy thanks to a North Korea missile test. Sterling reversed morning losses and rallied from 1.3222 to 1.3386. The Daily Telegraph reported that Britain was willing to pay €50 billion to the EU, for Brexit. Oil prices were supported by talk that Opec would announce a production cut extension for all of 2018.

Wednesday, Asia markets quickly dismissed concerns after the North Korea missile test. USDJPY traded in a narrow 111.38-111.65 range, and the antipodean currencies were mixed. AUDUSD ticked lower while NZDUSD inched higher. Sterling extended the New York rally, and prices hit 1.3429 before consolidating. EURUSD was rangebound but with a modest bid tone because of a high Economic Sentiment Index reading. US GDP beat forecasts and gave the greenback a boost. Fed Chair Yellen delivered an upbeat economic assessment. Gold prices were hammered, falling from $1,294.73 at the open to $1,285.35 at the close. The day and month ended with EURUSD being the best performing currency in November. NZDUSD was the worst.

Chart: Currency gain or loss vs the US dollar in November

Source: IFXA/Saxo Bank

Thursday, the US dollar was in demand in Asia, underpinned by rising expectations of a tax reform deal and by Fed Chair Yellen’s testimony. Better than expected domestic and China PMI data lifted AUDUSD, while NZDUSD remained under pressure. USDJPY rallied from 111.90 to 112.46 as Treasury yields climbed. Eurozone inflation data disappointed and EURUSD slipped. Sterling consolidated earlier gains. In New York, portfolio rebalancing flows overwhelmed positive sentiment from robust US economic reports and tax-reform. Good sized month-end US dollar selling boosted the major currencies except for the Japanese yen. The Canadian and New Zealand dollar’s finished unchanged on the day. Wall Street soared. The Dow rose 1.3% to close at 24,272.35.

Friday, was the Lonnie’s day to shine. It did. Trading in the rest of the majors was subdued.

– Edited by Clare MacCarthy

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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