Loonie flexing its feathers 5Jan18


Loonie flexing its feathers

Michael O’Neill

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

Canada

·

· 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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Author: Loonieviews

In the past 30+ years, I have been an FX interbank market making trader, a high performing FX and Derivatives Sales person, creator of simple and complex risk mitigation strategies and a manager of high performance FX teams. The Trade of the Day is a culmination of that experience. Retail FX traders have access to a well-crafted and carefully researched FX trade strategy designed to generate FX profits while mitigating losses.

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