US dollar rallies but bearish sentiment prevails
FX Trade Strategist / http://www.Loonieviews.net
· US dollar rallies as nonfarm payrolls beat forecasts
· Three central bank meetings next week, no rate hikes expected
· USDCAD may have found a floor at 1.2250
Has the latest dollar rally put a floor under CAD? Photo: Shutterstock
By Michael O’Neill
What is there to like about the Canadian dollar when USDCAD trades in the 1.2250-70 area? Not much.
For starters, the Federal Open Market Committee Policy statement on January 31 was more hawkish than dovish, as per many economists and analysts. Afterwards, the CME FedWatch tool pegged the odds for a rate increase in March at 83.1% compared to 70.9%, on January 26.
The Bank of Canada statement two weeks ago was more dovish than hawkish because of the admission that NAFTA negotiations were clouding their economic outlook.
The Atlanta Federal GDPNow projects Q1 2018 GDP growing at a 5.4% clip, a jump from the 4.2% forecast on January 29. It is a very volatile metric, but the core takeaway is that US economic growth continues to climb.
Canada GDP growth is expected to slow from 3.0% in 2017 to 2.2% in 2018 and 1.6% in 2019.
Oil prices gains are delivering less Canadian dollar support due to the widening spread between Canada’s main crude export, Western Canada Select, and the North American benchmark WTI. The discount was CAD 35.60 on January 31, 2018, compared with a CAD 17.27 discount on that date last year
The fundamentals suggest that USDCAD should be higher. That means the Canadian dollar rally since mid-January isn’t about domestic issues at all, but a function of widespread US dollar weakness. The weakness stems from the perception that global central banks are shifting away from easy monetary policies toward a neutral-to-tightening bias at a time when the pace of US rate hikes may be slowing.
That perception is starting to change. US Treasury yields have risen sharply over the past few days with the 10-year note cracking resistance at 2.75% and headed toward 3.0%. President Trump’s tax cuts could add fuel to rising US economic growth. Many US employers handed out bonus cheques to their employees. Those cheques, helped by a jump in average hourly earnings to 2.9% from to 2.6%, reported February 2, may lift consumer spending.
Nonfarm payrolls increased by 200,000 leading to broad US dollar buying. However, today’s rally is rather pathetic compared to the magnitude of the dollar losses since the first week of January. Even still , until the US dollar index (USDX) can climb above 90.60, the greenback will remain under pressure.
USDCAD technical outlook
The short-term USDCAD technicals are bullish following the break above resistance in the 1.2305 and 1.2350 area. However, unless prices can move above 1.2420, representing the downtrend line from December 26, the rally will only be a correction, suggesting an additional 1.2250-1.2420 consolidation.
Source: Saxo Bank
The week ahead
US economic data take a back seat to international data and central bank policy statements.
Major events: Tuesday sees a Reserve Bank of Australia interest rate decision. The RBA is almost universally expected to leave rates unchanged. The statement is expected to be mildly upbeat.
On Thursday we have a Reserve Bank of New Zealand Interest rate decision. No change in rates is expected. On the same day we have a Bank of England policy decision and Quarterly Inflation Report. The BoE is expected to leave rates unchanged, while Governor Carney’s inflation letter may make for entertaining reading.
The week is full of important economic reports from every region.
Monday, Services PMI data is due in every region including the US.
Tuesday, Australia releases a slew of reports including New Home Sales, TD Inflation, Retail Sales and Trade
Thursday, China trade data will be key in Asia.
Friday, UK Industrial Production, Trade, Manufacturing Production data and the NIESR GDP Estimate will be key for GBPUSD traders. USDCAD traders will look to Canadian employment data for guidance.
The week that was
Monday: It was a quiet start. Traders were understandably reluctant to commit to a course of action ahead of major risks running the gamut of political, monetary policy, month-end, and major data events. The US dollar opened in New York with modest gains and finished the day the same way. In between, FX currencies were choppy but rangebound.
Tuesday: FX volatility returned. The FX majors were whippy but remained in the well-established short-term ranges. There wasn’t any shortage of economic data reports from Australia, New Zealand, or the Eurozone. However, the impact of the data was short-lived. Rising Treasury yields under-pinned USDJPY. GBPUSD traders seemed oblivious to dire Brexit warnings and keyed in rallied because of mildly hawkish comments by the BOE’s Carney. Oil prices dropped due to fears of rising US crude inventories. The greenback was a tad firmer against the majors by the end of the day due to pre-Trump speech position adjusting. GBPUSD was the exception.
Wednesday: President Trump’s State of the Union hogged the spotlight in Asia but was quickly dismissed. The focus shifted to economic data. Soft inflation data sent AUDUSD lower but not for long. Broad US dollar weakness, in part due to month end flows, pressured the greenback. EURUSD gains were capped at 1.2450. Sterling traded with a bid despite a negative government Brexit report that was leaked. The New York session was whippy. Better than expected Chicago PMI data and Pending Home Sales didn’t give the greenback any lasting benefit. Dollar selling was evident into and around the 1600 GMT fix. The FOMC statement was thought to have had a mildly hawkish tone, and the dollar closed the day with small gains versus the majors except for the Swiss franc and British pound.
Thursday: The hawkish FOMC statement didn’t stand the test of time, at least as far as EURUSD and GBPUSD were concerned. Sterling even shrugged off the impact of a worse-than-expected Manufacturing PMI report. They climbed steadily while the fear of higher US rates lifted the US dollar against the commodity currency bloc, Swiss franc and Japanese yen.
The bullish dollar sentiment did not survive the morning in the US. A host of strong economic reports, rising Treasury yields and the prospect of a faster pace of Fed rate increases did not deter US dollar bears. EURUSD rallied to 1.2522, GBPUSD climbed to 1.4275, and the dollar finished with losses across the spectrum Oil prices were at three-year highs, with traders deciding that rising global growth and Opec production compliance offset the risk of higher US Shale production.
Friday: A better than expected US employment report gave the dollar a boost in New York in a move supported by rising US Treasury yields and the risk of a faster pace of Fed rate increases.
Friday’s strong January jobs report, however, did little for US equities. Photo: Shutterstock
— Edited by Michael McKenna