It's BBQ season and the loonie's on the spit
- Weak NFP sinks US dollar
- June rate hike hopes out the window
- Poloz and Yellen speeches pose risk for Monday
We thought they were going back to work, but perhaps it was a stroll on New Jersey's
Wildwood boardwalk that pulled the US labour force from their homes. Photo: iStock
By Michael O'Neill
Just when people got comfortable being long US dollars, it wasn't. In fact for many, it was downright painful. The surprisingly weak NFP report (Headline 38,000) crushed the US dollar. EURUSD roared to 1.1317 from 1.1155 and USDJPY dropped to 107.45 from 108.85.
The data also dashed hopes for a June rate hike and makes a July move unlikely as well. However, that view could change rapidly, depending on the tone of Janet Yellen's speech on Monday.
It’s summer and for many that means BBQ season. For FX traders, it’s the loonie that will be on the spit. Basted by specially trained cooks and slow roasted over an open fire, roasting in its own juice... sorry that’s a take-out chicken chain’s recipe. Nevertheless, the reality is that the loonie may be a tasty treat for USDCAD bulls in the coming month.
The Canadian economy is sputtering. The total impact from the Fort MacMurray wildfires on the economy is still an unknown. The much vaunted fiscal stimulus programmes announced in the March budget are a long way from providing quantifiable economic benefits. GDP growth ended Q1 on a down note and in negative territory.
The Bank of Canada predicted that the wildfires will shave of 1 ¼% in Q2 GDP which it had previously downgraded. FX traders may get more clarity on this issue and the overall BoC view of the economy on Saturday when governor Stephen Poloz delivers a lecture, Monetary/Fiscal Policy Mix and Financial Stability: The Medium Term is Still the Message. There is also a press conference.
The May 25 Bank of Canada statement was neutral and many economists believe Canadian interest rates hikes won’t happen until the second half of 2017. That contrasts sharply with the US where the Federal Reserve may deliver the first of possibly two interest rate hikes next week, notwithstanding that NFP shocker this afternoon.
This morning's NFP report and subsequent decline in USDCAD means that the loonie will spend a little more time on the spit and consolidate within a 1.2700-1.3000 band for the next week or so depending on what Poloz and Yellen have to say between Saturday and Monday.
Has oil rally been capped?
Rising oil prices have supported the Canadian dollar throughout May but that uptrend ended on Tuesday with the move below the $49.60-75/barrel area. Although oil prices may not go into freefall, it would seems that the $50.00/51.00/b level may cap upside in the near term.
Thursday’s Opec meeting ended without any agreement to cap or freeze production and the on-going Saudi Arabia/Iran feud argues that market share battles will continue to be waged.
The EIA Crude Oil Stocks Change data on Thursday reported another drawdown in US inventories. At 1.4 million barrels, it was less than the forecast and well below the previous week's draw.
In addition, the drawdown may be more due to a decline in shipments from the Canadian oilsands that were interrupted by the forest fires, than an increase in demand. If so, that should start to change as Canadian oilsands production has resumed.
Hot housing market scares Canadian banks
The Canadian housing market is on fire. Well, not really, but Vancouver and Toronto real estate prices are soaring. Big deal, you say? It is only two cities in the entire country. True, but those two cities represent 23.5% of the Canadian population and if that housing bubble bursts, the impact will be felt across the land.
Economists at the major Canadian banks have been warning of the dangers of the high prices and now the bank CEOs are getting in on the act.The CEOs want the government to rein in housing prices in a self-serving action to have the government save the banks from themselves. Apparently they can’t stop making housing loans in these risky markets because their competitors may continue. On Wednesday, the OECD jumped into the story, again pointed out that house prices and household debt in Vancouver and Toronto are high.
At the same time, the “real estate bubble” story in Canada has been around for years and as a factor for USDCAD trading, it is a non-event, so far.
Canada Household credit/disposable income
USDCAD technical outlook
The USDCAD technical outlook is bearish following the post NFP break of the 1.3050-60 uptrend line and the break below support at 1.2960 has hung a target on 1.2840. 1.2910 may slow the decline or even halt it as it represents the 38.2% retracement of the May-June 3 range.
USDCAD support is at 1.2910, 1.2870 and 1.2810. Resistance is at 1.2980, 1.3040
The week ahead
Janet Yellen may set the tone for the entire week with her speech to the World Affairs Council of Philadelphia on Monday at 1730 GMT. The title, “Economic Outlook and Monetary Policy” suggests that she may provide additional clarity to the June/July rate hike debate. If she doesn’t the lack of US data and the following week's FOMC meeting may make for a dull trading environment.
On Tuesday, The Reserve Bank of Australia announces its interest-rate decision which is expected to be unchanged. Eurozone GDP data will be the highlight in Europe.
Wednesday, China trade data will be in focus and carry additional weight due to rising US/China trade tensions. UK data will continue to overshadowed by Brexit polls and there isn’t any US data of note.
Thursday (late Wednesday in the US) the Reserve Bank of New Zealand rate decision is due and it could cut rates by 0.25 basis points although at this juncture, its still a coin toss. The rest of the day looks rather dull.
Friday may be quiet due to a lack of US data and the pending FOMC meeting June 15. Canadian employment data will provide the entertainment for USDCAD traders.
The week that was
Any week that begins with market closures in the UK and the US and finishes with a nonfarm payrolls report is likely to have a lot of downtime in between. This week was no exception.
Monday was quiet although Asia traders had a little fun dissecting Yellen’s speech from the previous Friday. She seemed to endorse the hawkish view of the prior Fed speakers.
Tuesday’s FX action was quite a bit livelier than Monday. It helped that it was month end. US dollar selling was evident. Asia equities liked the strong Australian and Japanese data. USDJPY flatlined but AUDUSD moved higher with NZDUSD following. GBPUSD got cracked on a Brexit poll showing the Stay side lead shrinking. Month-end US dollar selling made for a choppy morning session but the day ended with the US dollar firmly bid on rising Fed rate hike concerns, thanks to decent US data releases.
This was the week when the sterlings bull jumped on the bus, forgot about us, and put the blame on a nasty poll in favour or Britain leaving the European Union on June 23. Photo: iStock
Wednesday started a new month and traders sold US dollars. China data reflected lacklustre manufacturing while Australia GDP growth beat forecasts, giving AUDUSD a boost. USDJPY got spanked in Europe when the government announced a delay in the VAT tax hike which gutted expectations of the Bank of Japan easing in July. US dollar bulls liked the jump in ISM Manufacturing data and the Beige book indicating a tightening in the labour market. Oil prices snapped a decline on rumours that Opec would discuss production caps at Thursday’s meeting.
Thursday’s Asia session saw USDJPY probing support at 109.00 after starting the week at 111.43 while the rest of the currencies awaited the European Central Bank meeting and press conference. The wait was for naught. The ECB didn’t provide any fresh trading incentives. Neither did the Opec meeting which ended without any production cap deals. WTI prices declined.The US dollar got a bit of a bid on the jobless claims data and stayed that way into the close with nonfarm payrolls due on Friday.
— Edited by Martin O'Rourke
Michael O'Neill is an FX consultant at IFXA Ltd.