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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·

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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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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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