Loonieiviews Weekly 19Jan18

The dumbing down of Davos

Michael O’Neill

FX Trade Strategist / www.Loonieviews.net



· Davos summit unlikely to spur major FX moves

· BoC hike sees massive two-way move, continued CAD uncertainty

· USD meltdown continues on gov’t shutdown fears

The gilded peaks of Davos will host the US’ brassy new president next week, but don’t expect more than a fleeting impact on FX. Photo: Leon Gutierrez / Shutterstock.com

By Michael O’Neill

The mission statement of the World Economic, colloquially known as “Davos”, says it is “committed to improving the state of the world.”

You have to wonder how that goal gets achieved when you glance at the guest list.

President Trump’s idea of improving the world appears to involve nuclear missiles, trade wars, and self-promotion. Canadian prime minister Justin Trudeau, meanwhile, is there to be the designated apologist, ready with a tearful apology for heart-wrenching injustices yet to be named.

French president Emmanuel Macron is the straight man of the trio, and the Eurozone’s default champion now that Angela Merkel’s political issues have marginalised her impact.

The Davos forum attracts a lot of attention from the media and generates a lot of headlines. These tend, however, to have the approximate shelf-life of a cold beer on a hot day, and FX markets will be wise to ignore them.

In Canada everything is coming up roses, but…

With the Bank of Canada’s Stephen Poloz, there is always a “but.” On Wednesday, the loonie went into convulsions upon the release of the monetary policy statement.

The first sentence in the statement read “the Bank of Canada today increased its target for the overnight rate to 1.25%,"; this sent USDCAD tumbling from 1.2410 to 1.2367.

The third sentence – "however, uncertainty surrounding the future of the North American Free Trade Agreement is clouding the economic outlook” – then launched USDCAD to 1.2532.

Economists and analysts are undecided as to whether the combined policy statement, monetary policy report, and press conference were dovish or hawkish.

Those believing it was a dovish rate hike pointed to the BoC’s claim that it would be “cautious” with additional rate increases because of the uncertainty surrounding the NAFTA negotiations.

The hawkish camp focused on the BoC modestly increasing growth forecasts, as well as the inclusion of “higher interest rates will likely be required over time” – a phrase lifted from the December statement.

Poloz said that future rate moves are “data-dependent, not NAFTA-dependent". Broad scepticism among market participants, however, has limited USDCAD downside.

The week ahead

Looking at next week’s major events, we of course have the World Economic Forum all week,. President Trump’s attendance ups the entertainment quotient exponentially with Trudeau set to be the “Beavis” to his “Butthead.”

On Tuesday we have a Bank of Japan policy meeting statement, Q4 outlook, and press conference. USDJPY started to slide last week after the BoJ “tweaked” its long-term and super-long-term bond buying. That led to assumptions of a soon-to-be-announced policy shift.

On Thursday, we will see the European Central Bank policy meeting statement and press conference. FX traders have lifted EURUSD in anticipation that the ECB will announce a shift in bond-buying policy. Many economists think not, but the ECB may sound more upbeat on the economy.

The week that was

Monday: The Martin Luther King holiday in the US didn’t deter US dollar sellers in Asia or Europe.

An upbeat-sounding BoJ governor Kuroda fuelled USDJPY selling while EURUSD was buoyed by fresh, hawkish ECB expectations. Sterling shone on the back of new “soft-Brexit” hopes following chatter that the Netherlands and Spain wanted a close relationship with the UK. The antipodeans rallied on broad US dollar weakness; USDCAD was rangebound ahead of the BoC Wednesday.

Tuesday: In Asia and Europe, Monday’s US dollar sellers were Tuesday’s dollar buyers. Renewed concerns about Merkel’s ability to form a government, and Japan’s finance minister expressing concern about sharp currency moves supported the greenback. Sentiment shifted in the US session, and the dollar sellers were back in the driver’s seat. Talk that the ECB would maintain its current dovish policy stance underpinned EURUSD. GBPUSD rallied on US dollar weakness and solid economic data; the US dollar finished with losses across the board.

Wednesday: The US dollar opened in New York with minor gains. USDJPY retreated after Kuroda repeated that policy would continue to be crafted to achieve inflation of 2.0%. AUDUSD declined despite strong domestic data. EURUSD was erratic. It jumped to 1.2322 in Asia and then dropped to 1.2209 in early Europe trading. Eurozone inflation data were ignored, but an ECB official wasn’t. He expressed some concern about the high level of the currency.


Create your own charts with SaxoTraderGO click here to learn more

Source: Saxo Bank

Sterling dropped, in part, due to profit-taking. The NY session was frothy as EURUSD rallied to 1.2285 by mid-day and then sank to 1.2216 at the close. GBPUSD hit 1.3940 before retreating to 1.3954 at the end of the day. The Bank of Canada triggered a 1.2367-1.2532 range after a dovish rate hike because of Nafta concerns. Wall Street indices soared. The Dow Jones Industrial Average closed at 26,115. Apple announced plans that included the repatriation of $250 billion

Thursday: AUDUSD couldn’t hang on to gains after a better than expected employment report. However, the downside was limited, and it traded in a 0.7980-0.8000 range until the New York close. USDJPY bounced wildly inside a 110.60-111.40 band, closing in New York at 111.05. Prices were buffeted by US government shutdown fears, higher Treasury yields, and mixed US data. Broad US dollar weakness lifted the antipodean currencies to the highest levels of the week by the close in New York. EURUSD consolidated Asia gains during the US session while Sterling ticked steadily higher.

Friday: The US dollar traded on the defensive overnight and in New York on heightened concerns that the US government would shutdown on Saturday.

— Edited by Michael McKenna

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Loonieviews end of week 12Jan18

Stable genius downgrades Nafta risks for loonie

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net



· Next week’s focus is on regional economic reports; US data is second-tier

· Bank of Canada rate hike should limit USDCAD gains

· Rise in US core CPI fails to provide sustainable US dollar gains

Bank of Canada governor Stephen Poloz is widely expected to raise

rates next week. Photo: screengrab from BoC webcast

By Michael O’Neill

USDCAD traders are nervous. The Bank of Canada’s monetary policy report (MPR) statement and press conference is on January 17. Markets believe there is a 75-80% chance that the BoC will raise the overnight rate to 1.25% from 1.0%. That’s because BoC governor Stephen Poloz has repeatedly said that “higher rates will be required over time” and moves will be guided by “incoming data.”

The incoming data has been stellar. The unemployment rate dropped 1.2% in 2017, while the economy created 423,000 new jobs, most of them full-time. Inflation rose 2.1% year-on-year, and new home construction is at its second highest pace since 2008. Oil prices have risen over 30% since October.

The stars are aligned, fortune is smiling. If you take BoC comments and statements at face value, a rate hike next week is a given. Yet, the market is only pricing in about a 75-80% chance of a rate increase.

Caution is warranted. Poloz has a history of alluding to a course of action and then, when the time comes, taking a different tack. Before the September BoC meeting, most economists expected that Canadian rates would be unchanged. They were wrong. Rates increased to 1.0%, rationalised by stronger-than-expected economic data. The policy statement was hawkish, saying that future policy decisions would be determined with a focus on labour market conditions.

By December 1, Canada had racked up three more stellar employment reports for eleven consecutive gains in 2017. However, the BoC appeared to have lost its labour market focus. Once again, the overnight rate was left unchanged. The data-dependent, labour-focused, policymaker was nowhere to be found.

On January 10, a Reuters article, citing a couple of “unnamed sources”, injected a large dose of Nafta risk into next week’s BoC policy rate equation. The sources said that Canada believes the US will pull the plug on Nafta by the end of the month. The White House denied the story, saying that the president had not changed his mind on Nafta. On Thursday, President Donald Trump, the self-described "stable genius", appeared to give the negotiations a bit of a lifeline when he said he would be “leaving it a little bit flexible” until after the Mexican elections on July 1.

If accurate, the short-term erosion of Nafta concerns should give the BoC room to raise rates again, ensuring that USDCAD stays in a 1.2350-1.2750 range for the next month or so.

The week ahead

Major event: Wednesday’s Bank of Canada monetary policy report, policy meeting, statement, and press conference.

US markets are closed on Monday for Martin Luther King Day.

Major data:

Tuesday: UK inflation data is expected to tick down to 3.0%.

Wednesday: Eurozone December inflation data is expected to be 1.4% and Core CPI up 1.1%, y/y.

Thursday: Australia consumer confidence, new home sales and employment reports are released. Employment is expected to rise by 24,900, while the unemployment rate stays unchanged at 5.4%. China GDP, retail sales (forecast 10.1% y/y) and industrial production (forecast 6.0%, y/y) data are on tap.

Friday: UK retail sales and US Michigan consumer confidence are the only notable data events.

The week that was

The week started quietly. The antipodeans consolidated gains near the top of their recent ranges in Asia and then retreated during Monday’s European session. USDJPY was rangebound and opened in New York unchanged from Friday’s close. EURUSD was offered in Asia and traded lower until the end of the New York session, dropping to 1.1952 from 1.2045. In the UK, prime minister Theresa May announced a cabinet shuffle which had no impact on sterling.

On Tuesday, AUDUSD gains on housing data were short-lived, but the big story was the news that the Bank of Japan reduced purchases of long and super long government bonds. Tapering, maybe? USDJPY dropped to 112.48 from 113.18. Weak UK retail sales drove GBPUSD to 1.3506 by mid-morning in New York from 1.3570 at the European open. Prices rebounded to 1.3540 by the end of the day. EURUSD cracked support in the 1.1955-60 area because of bearish technicals and better-than-expected German trade and Eurozone unemployment data but found a bottom at 1.1915. Oil prices climbed in New York, in part because API was rumoured to be reported a large crude inventory draw-down at the end of the day. They did. Bond King, Bill Gross declared that markets had entered a new bond bear market. New York closed with the FX majors almost unchanged from the open.

On Wednesday, AUDUSD and NZDUSD got a lift following the release of China PP! and CPI data. USDJPY remained under pressure due to Tuesday’s BoJ action. In Europe, EURUSD soared, rising to 1.2016 from 1.1931 after a Bloomberg headline suggested China would buy fewer US Treasuries. Weaker-than-expected UK trade data drove GBPUSD to 1.3481 from 1.3525 but the losses were reversed on the Bloomberg story. A mid-afternoon Reuters headline that the US would leave Nafta (see above) crushed the Canadian dollar and the Mexican peso. Oil prices remained firm below the previous day’s peak.

On Thursday, USDJPY bounced in Asia, rising to 111.84 and erasing Wednesday’s losses. The gains were not sustained, and USDJPY closed in New York just above the session’s 111.04 low. AUDUSD rallied after an upside surprise to retail sales, while NZDUSD inched higher on broad US dollar weakness. China denied the Bloomberg treasuries story, and EURUSD consolidated in a 1.1930-68 range until just before the New York open. The ECB meeting accounts were thought to be hawkish as they indicated a change in forward guidance would be coming in January. EURUSD soared. The US dollar finished the day with losses across the board. Initial jobless claims and November PPI reports were weaker than expected.

On Friday, the USD traded quietly in Asia and Europe but came to life in New York trading. The catalyst was US core CPI rising to 0.3% in December, m/m, beating analysts’ 0.2% forecast and giving the US dollar a modest and short-lived bid.

Will the stable genius scatter these building blocks? Image: Shutterstock

– Edited by John Acher

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Loonie flexing its feathers 5Jan18

Loonie flexing its feathers

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net



· US data disappoint, Canadian data elate

· CAD finishes the week as the best-performing major currency

· Mostly second-tier data in store for next week

By Michael O’Neill

A peacock’s plumage pales in comparison to the loonie’s feather flexing today following news that Canada added 78,500 jobs in December; the forecast was for a gain of just 1,000 jobs.

Even better, Statistics Canada wrote “in the 12 months to December 2017, employment was up 423,000 (+2.3%), with nearly all the gains in full-time work (+394,000 or +2.7%). Over the same period, total hours worked grew 3.1%".

Source: Statistics Canada

That was good news for the loonie, but the icing on the CAD cake were the disappointing US nonfarm payrolls data. Thursday, the ADP employment report posted a gain of 250,000 jobs in December, priming the pump for a forecast-beating NFP release (forecasts called for 190,000)…

It didn’t happen. NFP added a paltry 148,000 jobs. The combination of the weak US numbers and the strong Canadian data crushed USDCAD, which plunged from 1.2510 to 1.2357 on the news.

Now what?

Spring hasn’t even sprung, yet lately everything is coming up roses for the Canadian dollar. Canada has enjoyed a string of upbeat economic reports for the past few months led by a bump in headline and core CPI inflation levels, year-on-year. Oil prices have been on a tear with WTI rising from $54.82/barrel in November to $62.10/b this week. A December 14 speech by Bank of Canada governor Stephen Poloz appeared to keep the door open to rate increases.

The speech was titled “Three Things Keeping Me Awake at Night”; NAFTA concerns were apparently not among them. Earlier, USDCAD strengthened as traders believed NAFTA concerns were a key reason why the BoC left rates unchanged on December 6. Today’s employment report will fuel talk that the Bank will raise rates on January 17.

However, even if everything is coming up roses, there is plenty of manure fertilising the garden. For starters, buying USDCAD because of rising WTI prices may be a flawed strategy. The bulk of Canada’s crude exports are Western Canada Select, which is a heavy crude; it costs more to refine and trades at a discount to WTI. WCS traded at CAD 47.33/b on January 3 when WTI was trading at USD 61.63/b. The spread between WTI and WCS has widened to CAD 29.98 as of January 3, 2018. At the end of November, it was only CAD 14.20.

NAFTA negotiations restart on January 23. Canada is concerned about the outcome and has sent three senior cabinet ministers to the US in hopes of getting a favourable result. With USDCAD within spitting distance of 1.2000, it is hard to believe that Poloz would want to fuel a higher Canadian dollar by raising interest rates, especially if NAFTA becomes history.

The short-term USDCAD technicals are bearish. The break of uptrend support from September at 1.2720 followed by the move through the multi-bottom base at 1.2620 hung a target on support in the 1.2420-40 area. That level cratered on January 5, opening the door to further weakness to 1.2040.

USDCAD support is in the 1.2340-60 area which guards additional support at 1.2250. Resistance is at 1.2440 and 1.2510

USDCAD daily (five years):

Source: Saxo Bank

The week ahead

FX trading was subdued the previous week due to holidays on Monday (and Tuesday in some areas) and a lack of incentive ahead of today’s US employment report. The coming week doesn’t look to be a whole lot more exciting… there aren’t a lot of top-tier data from the US and what data there are, don’t get released until Friday.

Major data

Monday: There are plenty of second-tier Eurozone data which include the December Consumer

Confidence (forecasted at 0.5) and Economic Sentiment Indicator (forecasted at 115.0). The BoC Business Outlook survey is due with some analysts looking for it to provide interest rate hike clues.

Tuesday: The Eurozone employment report should support EURUSD if the unemployment rate is below the 8.7% forecast.

Wednesday: A lot of data from the UK, including Industrial Production, Manufacturing Production, and Trade. Weaker than expected results will support forecasts for UK growth slowing to 1.4% in 2018.

Thursday: Australia Retail Sales (forecast 0.4$) will underpin AUDUSD. Eurozone Industrial and Manufacturing data are on tap but likely to be a non-factor ahead of Friday’s US data.

Friday: The week ends with the release of US December CPI (forecasted at 2.2%, y/y vs previous 2.2%) and Core CPI (forecasted at 1.8% vs previous 1.7%). The data are unlikely to alter expectations for US rates to remain unchanged at the January 31 FOMC meeting.

The week that was

On Tuesday, FX markets were tentative due to extended year-end holidays and the release of major data later in the week. The US dollar retreated against the majors in Europe and Asia but clawed back some of those losses during a quiet New York session. Only the Canadian dollar and sterling closed the day with gains. Gold cracked above $1,300/oz, something it had been unable to do since September. Political unrest in Iran underpinned WTI oil above $60.00/b.

On Wednesday, Asian and European FX markets were subdued. The release of the Federal Open Market Committee minutes later in the day combined with a bank holiday in Japan and a lack of data sapped trading incentive. President Trump failed to stir risk aversion when he boasted that his “desktop nuclear button” was bigger than Kim Jong-un’s. The US dollar posted tiny gains versus the majors at the New York open. Forecast-beating ISM Manufacturing PMI and Construction data gave the greenback a bit of a bid which continued after the FOMC minutes were released. The minutes were thought, by some, to be mildly hawkish and the dollar inched higher into the close. Oil prices climbed steadily. Rumours that the end-of-day API data would report a large drawdown were confirmed.

Thursday, Asia opened, and the dollar had a bit of a bid thanks to the FOMC minutes and Tuesday’s US data. It was short-lived. EURUSD and GBPUSD rallied steadily in Europe. In New York, ADP employment posted a 250,000 gain, but the greenback could not get much traction. The US dollar dropped steadily throughout the day and finished with losses against all the majors except for the Japanese yen. Oil prices were supported by freezing weather in much of the US, on-going Iran concerns and the EIA report of a 7.4 million barrel draw-down in crude inventories.

Friday, quiet Asian and European sessions gave way to lively post-payrolls trading in New York. The dollar will finish the week with gains against euro, yen, and Swiss. It will be unchanged against sterling, and down against the commodity currency bloc.

CAD spent today’s session at the heights following an astounding jobs beat. Photo: Shutterstock

– Edited by Michael McKenna

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