Loonieviews weekly 16NMar18


Loonie leads commodity currencies lower

Michael O’Neill

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

Canada

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· FOMC meeting headlines a trio of central bank meetings.

· Washington politics and risks of new tariffs will keep risk aversion trades on agenda

· Canadian dollar the worst-performing currency this week

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Hewers of wood, drawers of water: Canada’s vast landscapes may be picturesque, but the country’s consequent resource economy isn’t doing CAD any favours. Photo: Shutterstock

By Michael O’Neill

It’s not easy being a commodity currency at the moment, and the Aussie, kiwi, and loonie have strikingly similar tales of woe.

The trio has been mugged by President Trump’s tariff actions and threats and by their central bank’s decisions to leave monetary policy on hold even as the Federal Reserve gets set to ramp up the tightening pace.

The Bank of Canada cited “trade policy developments as an "important and growing source of uncertainty” when it left rates unchanged on March 7. Governor Poloz repeated the statement on March 12 to explain why the BoC will remain cautious.

On March 15, President Trump tweeted that Canada has a trade surplus with the US. Later, Mexico Secretary of the Economy Ildefonso Villarreal spoke of the possibility of Mexico/Canada bilateral talks.

USDCAD traders took the Trump and Villarreal comments as signs the Nafta talks were not going very well and bought USDCAD.

As all that was going on, rumours were circulating that the US administration was preparing a new round of tariffs on China technology and consumer goods. Commodity-exporting nations are viewed as “extra-vulnerable” if a trade war flares up.

Those currencies also tend to get hurt during periods of risk aversion. Political uncertainty is a regular risk aversion trigger, of course, and Washington has a great supply of it at the moment. Trump has fired his National Economic Adviser and Secretary of State; the Washington Post claims his National Security Adviser will be the next victim.

The commodity bloc currencies lost further ground on the news.

USDCAD appears the most vulnerable of the trio. AUDUSD and NZDUSD are well within the FX ranges in place since July 2017. USDCAD is not. It broke key resistance at 1.3000-15, a level that hadn’t been seen since the BoC announced a hawkish shift to monetary policy on June 27, 2017.

A widening of CAD/US interest rate differentials, mild risk aversion and the prospect of Nafta failing will continue to undermine the currency

The short-term technicals are bullish while prices are above 1.3015. There is not a lot of resistance between 1.3015 and 1.3200, either.

USDCAD daily:

Source: Saxo Bank

The week ahead

It is going to be busy and that’s before any inflammatory Trump tweets or new US trade barriers. There is plenty of top-tier data and three major central bank policy meetings scheduled. Also, the G20 meet in Buenos Aires, Argentina could generate market-moving headlines.

Central bank meetings: The Federal Open Market Committee meeting on Wednesday is the headliner while the Reserve Bank of New Zealand and Bank of England close the show on Thursday.

The Fed is expected to raise rates, upwardly tweaking forecasts with the possibility the dot-plot outlook could reflect four hikes in 2018.

The Bank of England is not expected to raise rates until May. Traders will be looking for the statement to confirm that outlook.

The Reserve Bank of New Zealand meeting will be a non-event. Rates are expected to be unchanged while the statement is not expected to offer anything new.

Major data

Tuesday: UK inflation is expected to dip from 3.0% In January to 2.8% in February, which shouldn’t come as much of a surprise.

Wednesday: The UK employment report will be the focus, but price action may be muted ahead of the FOMC meeting later in the day.

Thursday: The RBA minutes and Australian employment will be key for AUDUSD traders. The forecast is for a gain of 20,000 jobs while the unemployment rate stays unchanged at 5.5%.

Eurozone flash PMIs and the German Ifo survey are the main events for EURUSD traders. Softer

than expected data will support Draghi’s dovish monetary policy stance.

Friday: US Durable Goods Orders and Canadian Inflation data round out the week

The week that was

This week had bouts of drama and volatility between periods of boredom with an undercurrent of trade war angst.

Monday: The entire FX world appeared to celebrate Australian Labour Day. Trading was light and currencies stayed in narrow ranges. USDJPY bounced erratically, in part due to a political scandal that touched the Japanese PM and finance minister. The ECB’s Benoit Coeure’s dovish inflation comments led to EURUSD opening near the day’s low in New York. The greenback retreated slowly for the rest of the day and finished a tad worse than it did on Friday, except against the Canadian dollar.

Tuesday: Aussie FX traders returned to work and bought AUDUSD, supported by an improvement in the NAB Business Confidence Index. Kiwi tracked AUDUSD higher and they opened in New York with tiny gains. USDJPY traders forgot about political scandals and bought dollars ahead of the US inflation report. GBPUSD got an added lift from Chancellor of the Exchequer Hammond’s upgraded growth forecast. CPI was a disappointment. The US dollar got spanked and so did the commodity currency bloc. Then along came Trump… the president fired his Secretary of State, igniting a wave of risk aversion trades. USDCAD demand accelerated after a dovish speech by BoC governor Poloz downgraded the interest rate outlook. Wall Street finished the day in the red. The dollar closed the day with gains against euro, sterling, Swissie, and kiwi. The Canadian dollar was the biggest loser followed by AUDUSD and the Japanese yen

Wednesday: The day was a lot like Monday, except Australia was open. AUDUSD rallied in Asia and Europe supported by Westpac Consumer Confidence data but gave back all of the gains and then some by the end of trading in New York. USDJPY traded sideways. EURUSD drifted lower after a series of ECB officials delivered dovish remarks. GBPUSD traders were content to see how US Retail sales data shook out. Retail Sales were a bit of a disappointment but a modest PPI gain offset the results. Rumours of new trade sanctions against China dampened trading enthusiasm in New York. Wall Street finished in the red. WTI oil prices traded erratically in a $60.12-$61.28/barrel range. Traders were torn between rising US inventories and the prospect of increased global demand. The greenback ended the day with tiny losses against the FX majors, except for a tiny gain against the Australian dollar.

Thursday: FX markets stayed close to home in Asia and Europe. Traders were cautious due to the possibility of a trade war, wobbly equity markets, a lack of actionable economic data, and next week’s Federal Open Market Committee. NZDUSD dropped when Q4 GDP missed forecasts. The Swiss National Bank left rates unchanged, as expected. The UK expelled 23 Russian diplomats in a “cold war” tiff. The FX majors traded in narrow ranges and the US dollar opened in New York with small gains, except against the Japanese yen. New York traders bought dollars, aggressively in some cases. The Australian and Canadian dollars were crushed. Divergent RBA/Fed interest policies and falling commodity prices hurt AUDUSD. Heightened NAFTA risks undermined the loonie. Oil prices bounced between $60.00-$61.29/barrel. The US dollar finished the day with gains across the board.

Friday: FX trading was subdued but picked up the pace in New York. Better than expected US PPI data, political uncertainty in Washington and trade war fears lifted the US dollar. The Canadian dollar was the biggest loser this week shedding 2.03% from last Friday’s close.

– Edited by Michael McKenna

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President Trump has a “tariff-ic” week 9Mar18


President Trump has a ‘tariff-ic’ week

Michael O’Neill

· Nonfarm payrolls surprises with robust 313,000 new jobs

· US dollar gains from data starting to fade

· Tariff exemptions give loonie and Mexican peso a reprieve

"National security" is America’s reason for the metals tariffs, the Iraq war and the embargo against impoverished Cuba. Pic: Shutterstock

By Michael O’Neill

The American government uses the term “national security” to justify any number of events or actions that suits its agenda. The US invaded Iraq on the pretext that Saddam Hussein had “weapons of mass destruction” that threatened US national security. Russia is considered a national security threat. So is Cuba, a country so impoverished it is trapped in the 1950s. Venezuela is a national security threat because the US does not like that government.

On Thursday, President Trump announced that the importation of steel and aluminium was “in such quantities and under such circumstances as to threaten to impair the national security of the United States.” Miraculously, the threat vanishes when 25% and 10% tariffs are applied.

The Canadian dollar (and Mexican peso) were victims of the trade action. Canada is America’s number one steel supplier with 16.7% of the market and is also America’s number one source for aluminium.

USDCAD was probing key resistance in the 1.3000 area when President Trump gave Canada and Mexico an “eleventh-hour” reprieve. Both countries were exempted but with a caveat. The exemption is only good as long as the Nafta negotiations are happening. If the deal is scrapped, then the tariffs would apply.

It is a reprieve, not a pardon. Nafta is far from being successfully renegotiated. When round 7 ended on March 5, US trade representative Robert Lighthizer said: “Our time is running very short. The longer we proceed, the more political headwinds we will feel.” Then he talked about the possibility of bilateral agreements.

The Bank of Canada must have taken note of his remarks because they underscored trade concerns in their policy statement on March 7, which read “trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks.”

US interest rate increases are very likely to outpace those in Canada, partially due to Canadian economic underperformance compared to that of the US. Nafta negotiations are the wild card which should limit USDCAD losses.

However, in the short term, the break below 1.2860 opens the door to further losses to 1.2750. USDCAD needs to trade above 1.2915 to target 1.3000.

Chart: USDCAD daily

Source: Saxo Bank

The week ahead

The week ahead could be a memorable one, depending on how Europe, China and Japan respond to President Trump’s tariffs.

Monday. FX activity will be driven by the response to the nonfarm payrolls report or any tit-for-tat trade tariffs levied against the US. Data wise, there isn’t anything of note.

Tuesday: The UK budget will be of interest to Brits but not so much for anyone else unless economic forecasts change materially. US inflation data will be closely watched to see if last month’s gains are equalled, leading to predictions of higher rates, sooner.

Wednesday. The Bank of Japan monetary policy meeting minutes from the March 9 meeting are released. AUDUSD traders will be looking for a rebound in consumer sentiment from the earlier result of 102. They will also be leery of China retail sales and industrial production data. Eurozone industrial production data could support European Central Bank president Mario Draghi’s dovish outlook. US retail sales, PPI and business inventories data may give the greenback a boost.

Thursday: The Swiss National Bank policy decision is on tap. Then, second-tier US data, including the Philadelphia Fed manufacturing survey and NAHB housing market index.

Friday: Eurozone inflation data, US housing starts, building permits, industrial production and Michigan consumer sentiment will close out the week.

The week that was

It was expected to be a busy, volatile week., dominated by trade war fears. It was.

Monday: FX markets were closed in Australia. German politics and US tariff threats dominated trading. EURUSD drifted higher all day, helped when Germany’s Angela Merkel finally formed a coalition government. The Italian election results were inconclusive. UK Services PMI data underpinned sterling. USDCAD soared when Trump tweeted that Canada may not be exempt from new tariffs. Wall Street rallied, in the belief that the tariff talk was all bluster.

Tuesday: Asia and European FX markets were uneventful. Trade war fears eased on talk that even Republicans, including White House economic advisor Gary Cohn, did not support the tariffs. The Reserve Bank of Australia left rates unchanged and issued a neutral statement which was expected.

Things got exciting at the New York open. A Bloomberg headline said North Korea was will to scrap its nuclear programme. Financial market channelled former UK Prime Minister Neville Chamberlain, saying “peace in our time” and scrambled to buy risk assets. Oil prices rallied, but the move did not survive the day. Wall Street rallied sank and rallied again, closing with small gains. By the end of the day, North Korea was forgotten because of fresh turmoil in the White House. Economic adviser Gary Cohn quit in protest of the tariffs.

Wednesday: Asia FX markets were thrown into turmoil when they opened, because of Cohn’s resignation. USDJPY plunged, falling from 106.17 to 105.46 on fresh risk aversion selling. AUDUSD dropped to 0.7773 from 0.7827 with softer Aussie Q4 GDP data adding to the pressure. EURUSD drifted higher in Europe ahead of Thursday’s ECB meeting. Brexit concerns undermined GBPUSD. Reports that Trump would announce the tariffs on Thursday. And a cautious Bank of Canada statement lifted USDCAD. Wall Street finished on a mixed note. Oil prices closed with losses due to concerns about rising US inventories.

Thursday: Asia markets and the European morning session were quiet ahead of the ECB meeting later in the day. AUDUSD could not hold gains made after a better than expected trade report. USDJPY drifted sideways and opened in New York unchanged from Wednesday’s close. GBPUSD peaked in Asia then drifted lower during the European morning. EURUSD inched higher on expectations of a mildly hawkish tweak to the ECB statement. The ECB dropped the warning that “less favourable conditions could lead to increased asset purchases regarding size and duration.” The FX market was somewhat satisfied until Mario Draghi’s press conference. He pointed out the statement still included the promise to run asset purchases until September 2018, or beyond”, emphasising “beyond.” Doves still reigned, EURUSD plunged and the greenback rallied across the board. The exception was the Loonie which popped after Trump exempted Canada from steel and aluminium tariffs.

Friday: FX markets were quiet until the US employment data became available. It was better than expected but a drop in average hourly earnings may have limited gains. Canadian employment data was weaker than forecast but USDCAD was undermined by relief from trade tariffs.

– Edited by Clare MacCarthy

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Loonieviews-Weekly wrap 2Mar18


Trump’s trade war: Bye, bye NAFTA as we knew it

Michael O’Neill

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

Canada

· ECB meeting headlines a huge amount of central bank meetings next week

· Data cupboard is jammed full of top-tier data including US nonfarm payrolls

· Trump’s trade tariffs roil markets

The ECB’s Mario Draghi will kick off a bumper week for central bankers. Pic: Shutterstock

By Michael O’Neill

President Trump promised to tear up the North America Free Trade Agreement (NAFTA) calling it the “worst deal ever.” He hasn’t ripped up the deal yet, but his actions of late suggest he has shortened the acronym. It may be fair to call it the North American Tariff Agreement (NATA).

On Thursday, the president said that he would impose a 25% tariff on steel imports and a 10% tariff on aluminium imports It may be a direct shot at Canada. Canadians want to believe that the penalties are aimed at China, but that country only accounts for 2% of US steel imports. CNN reports that Canada is America’s largest source of steel and steel products, accounting for 16% of imports. Why target one of your smallest suppliers?

Last April, Trump slapped a 20% tariff on Canadian soft-wood lumber saying the product was unfairly subsidised. That tax was levied despite the US never winning a challenge in front of NAFTA or World Trade Organisation panels. It is still in place.

That same month, the Americans imposed a 292% duty on Bombardier C-Series aircraft, claiming unfair subsidies. On January 26, 2018, the US International Trade Commission, ruled that those aircraft “did not injure US industry.”

These hostile trade practices are occurring even as Canada, the US and Mexico enter Round 7 of the NAFTA renegotiations. Is America bargaining in bad faith? Maybe so. On March 2, President Trump tweeted “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good and easy to win. Example, when we are down $100 billion with a certain country, and they get cute, don’t trade anymore – we win big. It’s easy!”

The Bank of Canada may cushion the blow. Wednesday, the BoC’s monetary policy decision is due. They are widely expected to leave rates unchanged. The January statement cited NAFTA concerns as a reason for caution and USDCAD rallied. Trump’s recent actions validate the BoC’s cautious stance. One way to cushion the economy against American tariffs is to devalue the currency. The BoC won’t do that or even say anything about the loonie. However, they could tweak the reference to “uncertainty surrounding the future of NAFTA” by replacing “uncertainty” with something like “scepticism” or even “doubtfulness.” The ensuing plunge in the Canadian dollar would more than recoup the losses from the tariffs. It is an unlikely scenario, but it cannot be ruled out.

USDCAD is bid. Canada Q4 GDP data didn’t help. The 1.7% rise in Q4, q/q was below the forecast for a gain of 2.0%, adding to the bullish sentiment. USDCAD has been in a steep uptrend since February 12, and it stays intact while prices are above 1.2770. Topside moves are supported by the break above the 200 day moving average. If strong resistance in the 1.2915-50 area is overcome, there isn’t much standing in the way until 1.3010 and then 1.31650

Chart: USDCAD daily

Source: Saxo Bank

The week ahead

The European Central Bank meeting on Thursday headlines a central bank show that includes the Reserve Bank of Australia on Tuesday, the Bank of Canada on Wednesday and the Bank of Japan on Friday

In between, US nonfarm payrolls lead a list of actionable economic data from around the globe. Possible fresh equity market turmoil and added fall-out from President Trump’s latest tariffs will make traders dance.

Tuesday: The Reserve Bank of Australia is expected to leave rates unchanged at 1.50% with a statement similar to the previous one.

Wednesday: Bank of Canada will leave rates unchanged. The statement will likely be cautious as the Trump steel tariff’s keep NAFTA uncertainty on the front burner.

Thursday: European Central Bank rates will be left unchanged. The statement is expected to be “tweaked” with a Reuters survey reporting that 1/3 of 56 economists surveyed believe the “easing bias” will be dropped

Friday: Bank of Japan will leave rates unchanged.

The actionable data starts on Monday with non-manufacturing PMI data released China, Europe, and the US.

On the economic data front, Australia GDP (released Wednesday) is expected to rise 0.5% supported by domestic demand. Eurozone Q4 GDP is due, forecast unchanged at 2.7%, y/y.

The week closes with the US nonfarm payrolls report. (Forecast 190,000) Average hourly earnings are expected unchanged at 0.3%, m/m. Canada employment data is due at the same time

The week that was

Monday: The US dollar lost ground in Asia and Europe, in part because of position adjusting ahead of Fed Chair Powell’s Congressional testimony. GBPUSD was lifted after Bank of England Deputy Governor Ramsden chirped hawkishly about interest rates. New York trading was on the choppy side, but by the end of the day, the US dollar had recovered all of the losses from Friday’s close. Mario Draghi was his dovish self in a speech to the European parliament. It didn’t have any impact on EURUSD, and neither did a soft German IFO survey. Wall Street rallied in the morning but gave back most of the move by the end of the day.

Tuesday: NZDUSD got spanked after posting a wider-than-forecast trade deficit. Eurozone data was mixed to positive, but EURUSD opened in New York near the bottom of the range. The rest of the majors were rangebound ahead of Jerome Powell’s speech and US economic data. Durable goods orders were weaker than forecast but didn’t really cause a ripple. Mr Powell did. Traders took his optimistic outlook to mean four rate hikes in 2018 (up from three) and the US dollar soared. The day finished with Wall Street and commodity prices a lot lower.

Wednesday: Asia FX did not appear to be all that impressed with the FX reaction to Powell’s comments. USDJPY was sold after the Bank of Japan reduced purchases of super-long bonds. AUDUSD and NZDUSD traded sideways. GBPUSD was under pressure from soft Gfk consumer confidence data. Brexit headlines undermined sterling as well. EURUSD was rangebound until New York opened and that session as busy, The US released a mixed bag of data led by Q4 GDP that was as expected. However, month-end demand for dollars fortified the greenback. Wall Street closed at a loss. Oil prices lost 2.4% on a combination of the strong dollar and rising US inventories.

Thursday: AUDUSD and NZDUSD drifted lower in Asia and Europe. USDJPY found a bottom early and drifted higher on firmer Treasury yields and ahead of more Jerome Powell testimony. The antipodeans didn’t get much help from better than expected China Caixin Manufacturing PMI data. EURUSD traded with a bearish bias, and GBPUSD stayed in a narrow range until New York opened. The US dollar was bid during the morning, bolstered by strong Initial Jobless Claims and ISM Manufacturing data. That lasted until just before lunch when President Trump announced tariffs on steel and aluminium imports. All hell broke loose. By the end of the day, EURUSD rose from a low of 1.2157 to 1.2272 and GBPUSD followed suit. USDJPY which had peaked earlier at 107.17 dropped to 106.16 Street crashed with the DJIA falling 1.68%.

Friday: Global equity indices were in the red as Trump’s trade tariff’s sparked a shift into risk aversion trades. USDJPY broke support and was probing support in the 105.40 area. EURUSD and GBPUSD held on to earlier gains and the commodity currency bloc was mixed.

– Edited by Clare MacCarthy

Michael O’Neill is an FX consultant at IFXA Ltd

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