Article / 01 June 2016 at 4:58 GMT

Diverging US and Canadian data will keep USDCAD bid

FX Consultant / IFXA Ltd
  • Weak Canadian GDP data will undermine the Loonie
  • The impact of the Alberta wildfires on the Canadian economy is a key unknown
  • Upbeat US data is lending support to US rate hawks
  • If the strong trend in US data continues, a July Fed hike is almost a given
  • There's a lesson from the narrow win in the 1995 Quebec vote for UK politicians

By Michael O'Neill

Tuesday's US data fed the Fed rate hike hawks while month-end rebalancing flows distorted forex directions. EURUSD has climbed steadily while Sterling has been yoyo-ing.

USDCAD doesn't know what to do even with WTI punching above $50.00/barrel.  that will change by the end of the week with the release of nonfarm payrolls.

Trouble for the Loonie

There’s a bad moon rising and it spells trouble for the Loonie (apologies to Creedence Clearwater Revival). And Tuesday's bad moon was Canada's Q1 GDP data. It was weaker than expected, posting a gain of just 2.4% in quarterly terms versus a forecast of 2.9% gains, while the month over month data posted a decline of 0.2% versus a forecast for a 0.1% decline.

While the data was on the soft side, it wasn’t much of surprise. Consumer spending and exports led the gain, although business investment was weak.

As the close result in the 1995 Quebec referendum showed, it is risky for politicians to raise other serious political issues during campaigns about populist separatism. Photo: iStock

The weak data presages even more weak data ahead, with the impact of the Alberta wildfires on the economy a major unknown. And that’s just the half of it. Upcoming US data releases are expected to be strong enough to prompt the Federal Open Market committee to bump up interest rates in June or July.

Weak Canadian data, strong US data and a rate hike should keep the Canadian dollar on the defensive and USDCAD targeting 1.3500.

Canada's GDP looks weak
Source: Statistics Canada

USDCAD technical outlook

The USDCAD technicals are bullish and have been since breaking the 2017 downtrend on the move above 1.2770 at the beginning of May. The subsequent rally has tried and failed to move below the uptrend line, which now resides in the 1.2970-00 area.

However, USDCAD will meet stubborn resistance in the 1.3200 area and again at 1.3300.  A move below 1.2970 would extend losses to 1.2830 and lead to consolidation at 1.2800-1.3200.

USDCAD daily chart
 Source: Saxo Bank

USD index technicals and the Fed

The US dollar index has rallied throughout May and is ending the month probing the downtrend line from January, which resides in the 95.95-96.05 area. A break above this level would extend gains to resistance in the 98.50-60 zone, which is guarding the “triple-top” at the 100.60-70 level. On the downside, a move below the uptrend line at 95.30 would extend losses to 93.30 and lead to consolidation at 93.50-96.00.

Federal Open Market Committee chair Janet Yellen and the rest of the FOMC have stressed the point that US rate hikes are data dependent. Recent US data has been good, and if that trend continues this week, then a July rate increase would be almost a given. If so, the USDX should break above the middle resistance area and head back to the 2016 peak.

USDX chart
Source: Saxo Bank

UK hunger games

The Reuters headline reads “UK to boost border security to prevent migrants crossing English Channel”. It sounds ominous, evoking visions of Britain with a post apocalyptic, Hunger Games style government, with the elite versus the riff-raff.

Then reality intrudes. Apparently the UK Border Patrol fleet is made up of a mere three boats.  That’s three boats to patrol 18,820 kilometers of coastline or 6,273 kilometres per boat. Even if the government triples the fleet, the number of boats is a woefully inadequate deterrent.

The news is obviously a nod to the immigration concerns of the “Brexit” leave side, which may also be evidence that the government is running scared. The latest ORB poll commissioned by the Telegraph shows that support for Britain to remain in the EU is shrinking. Remain is at 51%, while leave is on 46%.

Brexit and the 1995 Quebec vote

The Quebec referendum held in October 1995 was a vote by residents in the province of Quebec on opting out of Canada. Daily polls from September 9, 1995 to October 4, 1995 showed the “no" opting out (the “stay”) side with a small lead every day, except on the very first day. 

Then in October, the poll results changed. The “yes”, or “leave” camp led for nine out of 12 days prior to the vote. On the very last day of polling (October 27), the leave side had a commanding 47% to 41% lead. They lost, but barely. The no side squeaked out a win, with just 50.5% of the vote.

There are 23 days to go until British voters decide whether to stay or go. That means there are 23 days more of GBPUSD turmoil. The UK government's tacit agreement with immigration concerns expressed by the “leave” side by announcing improvements in border security may serve to embolden the “leave” side, and lead to additional poll gains for those who want to quit the EU.

Whatever happens, UK politicians may have been better served if they had heeded the advice of former Canadian Prime Minister Kim Campbell. She famously said "an election is not time to discuss serious issues". Substitute "Brexit" for "election" and the Brexit issue would have been avoided.

Historical footnote: Kim Campbell's comment led to the Conservative government losing 154 seats, and finishing in fifth place on just two seats.

Michael O'Neill is an FX consultant at IFXA Ltd. Follow Mike or post your comment below to engage with Saxo Bank's social trading platform.

01 June
John Shaw John  Shaw
Thanks Mike and good morning.
01 June
Michael O'Neill Michael O'Neill
Hi John. It has been an interesting couple of days


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