Article / 28 February 2014 at 16:37 GMT

China stirs the wok as Ukraine provides food for thought

Michael O'Neill Michael O'Neill
FX Consultant / IFXA Ltd
Canada

• A tale of two GDPs — Canada and US diverge
• Ukraine not the only nation facing turbulence
• USCAD technicals looking for move lower

The highly-anticipated US GDP data (2.4 percent) was slightly lower than the already reduced forecasts of 2.5 percent, which, combined with the higher eurozone inflation data (Feb. 0.8 percent vs. 0.7 percent forecast y/y), put downward pressure on the US dollar. The EU inflation report had the larger impact as it appears to have diminished concern that the European Central Bank (ECB) would ease rates next Thursday. The above mentioned data gave the loonie a bit of a boost but the release of the Canadian GDP really oiled the wheels, putting USDCAD on the defensive and making the USDCAD bulls nervous.

Canadian GDP surged to 2.9 percent in the fourth quarter, handily beating forecasts of 2.5 percent. It also provided a much- needed lift to the domestic economic outlook and damaged any lingering thoughts of a more dovish central bank statement on Wednesday.

Chart: Canada GDP

Canada data

Risk aversion threats read like a Tom Clancy novel

 Command Authority is the title of the late Tom Clancy's latest novel; a tale that depicts events not unlike what is unfolding in the Crimea/Ukraine. Unfortunately, Barack Obama is no Jack Ryan and there aren't any virtuous American special operatives to come in and save the day. There are reports that Russian marines have seized the airport and government buildings in Crimea, which is a plausible story due to the high concentration of Russians living there. The Russian Federation also considers the Black Sea ports vital to their national interest.


argentina
Argentina's leader, Cristina Fernandez de Kirchner, is believed to have fled the presidential
palace in the face of civil unrest. Photo: Jeff Zelevansky / Getty


There are other tinderboxes around the globe just waiting for a match, including China and the nations that surround the South China Sea. Also, China has not backed away from the inflammatory rhetoric and military posturing with Japan over the Diaoyu/Senkaku islands which both claim. Still in Asia, the Thailand government and protestors are exchanging gunfire. In South America, Argentina's president, Cristina Fernandez de Kirchner, has reportedly fled the presidential palace in a helicopter in the face of Ukrainian style civil unrest. Venezuela is smouldering following recent elections that have left the country divided and the Middle East is still a mess. The Ukraine/Crimea events, due to the freshness of the actions and Russia's role, may provide an element of uncertainty to markets but for the most part, all of the above are merely distractions ahead of next week's central bank meetings and major data releases.

PBOC squeeze pokes holes in long CNY positions

The Peoples Bank of China (PBOC) appears to be fans of Iron Maiden, not the British heavy-metal band but rather the medieval torture device, as evidenced by the nasty squeeze that it orchestrated on long CNY positions. The re-introduction of two-way risk into CNY trading led to a spillover effect in other markets over fears that the moves may induce a further economic slowdown in China. Just when financial markets are starting to normalise (or what passes as normal, these days), China stirs the wok.

The week that was

This week started with numerous comments from officials attending the G20 summit. Mario Draghi, the ECB president, was quoted as saying that “policy makers were ready to add stimulus if outlook for prices deteriorate, though there are currently no signs of deflation in the Euro area”. Traders focused on the first part of the sentence and EURUSD came under pressure. China's CNY devaluation and Ukraine developments had traders eyeing risk aversion moves. On Thursday, Janet Yellen's highly anticipated speech proved to be an echo of her previous testimony while US durable goods surprised to the upside. The US Federal Reserve chairman blamed the weather for the US slowdown, which is consistent with most analysts' conclusions.

The week that will be

Next week is gearing up to be rather entertaining, at least in FX trading opportunity terms, with a full slate of major global data releases on tap and interest rate decisions expected from the Reserve Bank of Australia (RBA), the Bank of Canada (BoC), the Bank of England (BoE) and the ECB. The HSBC China Manufacturing purchasing managers' index (PMI) ahead of a slew of Eurozone PMIs, will set the tone early. Traders will be looking for evidence of strengthening in global economic growth. The week should end with a bang, with the release of the US nonfarm payrolls report and the Canadian employment report. Both releases are noted for the inaccuracy of the consensus forecasts.

 USDCAD technical outlook

The short-term USDCAD technicals are bearish while trading below 1.1140, which represents the third in a series of lower highs, the previous two being 1.1224 and 1.1158. The break of the uptrend line (4-hr chart) at 1.1120 points to a deeper correction to 1.1050. A break of this support level could see a retest of the 1.0910 low, last seen two weeks ago. A failure to move below 1.1050 will keep the existing 1.1050-1.1190 consolidation range intact.

Chart: USDCAD 4-hour

usdcad

Source: Saxo Bank

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