Article / 10 February 2017 at 16:15 GMT

Loonie aiming for new heights, maybe

FX Trade Strategist / www.Loonieviews.net
Canada
  • The "Trump effect" will loom over markets in days ahead
  • Strong Canadian employment data lifts loonie
  • Fed chief Yellen may provide some US dollar direction next week

Loon
 Pretty bird. The loon gives the nickname "loonie" to the 
Canadian dollar. Image: Shutterstock

By Michael O'Neill

Look, up in the sky. It’s a bird, it’s a plane. Nope, it’s a bird, a loonie to be precise. And that loonie is climbing high.

Friday’s Canadian employment data showed a gain of 48,300 jobs in January. Five of the previous six reports have surprised to the upside.

rates
 

















The news was icing on the cake for USDCAD bears. USDCAD dropped from 1.3135 to 1.3072 on the news, extending this week's downtrend.

There may be further USDCAD downside ahead due to seasonal factors, US administration teething problems and position adjustments.

For nine of the past 10 years, USDCAD has tended to weaken in the first four months of the year. There isn’t one specific factor for the move, though a lack of corporate repatriation flows may be a contributing factor. Canada is home to subsidiaries of many US multinationals. When year-end approaches, USDCAD is in demand as multinationals repatriate profits back to the parent company. By the time January rolls around, these flows have dried up.

Comments about unfair currency practices from China, Japan and Germany have undermined the US dollar in the past week, and the loonie was a beneficiary.

The 2017 forecasts for USDCAD were bullish, with targets in the 1.3700-1.4000 area. The forecasts attracted a lot of buyers who may be suffering from “buyer’s remorse” at the moment.

Nevertheless, it won’t be all sunshine and unicorns for USDCAD bears.

President Donald Trump plans to reveal details of his tax plan in the next "couple of weeks". His tax plan sparked the so-called "Trumpflation trade”, which boosted the greenback on prospects of an increase in inflation leading to interest rate hikes. The controversy over his immigration ban distracted traders and led to USD selling. If the Trumpflation trade gets legs, USDCAD will quickly find a floor.

Trump is meeting with Japanese prime minister Shinzo Abe on Friday and at the weekend. If Trump plays nice, the risk of a US-Japan trade spat will dissipate and US dollar buyers will emerge, which would also be bullish for USDCAD.

Unless, USDCAD decisively breaks below support in the 1.2970-90 area, the downside will be contained and USDCAD will continue to see-saw within the 1.2990-1.3380 range.

USDCAD 4-hour chart
usdcad
Source: Saxo Bank



The week that will be

There is a lot of data scheduled for the week. All regions will release economic reports that normally would give some sort of market direction. That may still be the case, but the data’s effect on local currencies may have a short shelf-life. That is the Trump effect.

Trump’s February 8 statement to the effect that he would unveil his "phenomenal" tax plan in the next couple of weeks will dominate FX markets until then, at the expense of economic data.

On Monday, Japan's GDP data will be overshadowed by reports from Abe's meeting with Trump.
On Tuesday, China's PPI and CPI data are expected to show increases partly due to the rise in commodity prices. German economic data may be under closer scrutiny after US National Trade Council head Peter Navarro’s comments that Germany is using a weak euro to benefit itself. Eurozone GDP and European Commission economic forecasts are also due.

Also on Tuesday, UK data will be examined to see if it supports Bank of England monetary policy committee member Kirstin Forbes’s call for a rate hike. US data will take a back seat to speculation around Trump’s fiscal plans. However, Federal Reserve chief Janet Yellen’s testimony to Congress won’t. Markets believe that there is only a 4.4% chance for a Fed rate increase in March. Will Yellen hint at something different?

Wednesday is another heavy day for data in the Eurozone, UK and the US. US CPI may be the most closely watched of the data series as will the second day of Yellen’s testimony.

On Thursday, Australia releases its volatile employment report. Thursday's US data which may be lost in the fog of Yellen's earlier testimony or speculation around Trump's tax plan.

Friday may be a day of rest but not sleep. New Zealand releases retail sales data, and then things will get quiet until the European morning when the UK retail sales data is due. There is no US data of note suggesting it will be a quiet Friday in New York.

White House in snow
 President Trump told a gathering of airline executives that he would present 
a "phenomenal" tax plan in a few weeks. Image: Shutterstock

The week that was

There was a risk that President Trump would something that disrupted markets. He did.

Monday, there wasn’t a lot of follow-through in US dollar selling following the “soft-ish” US nonfarm payrolls report. (Big job gains offset by a rise in jobless rate and decline in wage growth). Chinese and European data didn’t provide any trading fodder. French political turmoil weighed on EURUSD, and a whiff of risk aversion led to selling.

Tuesday was busy. Asia traders bought US dollars, partly because of comments from Philadelphia Fed President Patrick Harker suggesting a rate hike in March would be appropriate. Those comments were enough to halt the USDJPY slide. USDJPY bounced between a 111.80-112.50 range in Europe and New York. Kiwi inflation data propelled NZDUSD higher while a modestly “less-doveish” Reserve Bank of Australia gave AUDUSD a bid. The antipodean gains were erased in Europe. The UK parliamentary debate on who can trigger Brexit drove GBPUSD to 1.2345. The sellers became buyers in the New York morning when Bank of England monetary policy committee member Kristen Forbes talked of a need for the UK to raise interest rates. GBPUSD rebounded to 1.2544 and closed just below that level. EURUSD gave back all its Asia gains in Europe and New York due to French political uncertainty and new Greece debt talks. Oil prices came under pressure after the American Petroleum Institute reported a 14.2 million barrel increase in US oil inventories.

Wednesday, USDJPY remained rangebound and choppy, but was confined to a 111.60-112.60 range the entire day. Asia traders bought EURUSD initially and then changed their minds and started selling. European traders followed suit, and by the time New York opened, EURUSD was probing support at 1.0638. A dip in Treasury yields and persistent uncertainty around Trump’s economic policies undermined the US dollar, and EURUSD rallied to 1.0713 before easing back into the close. Sterling traded sideways within a 1.2475-1.2550 band. Oil prices were still under pressure when the Energy Information Administration released its weekly crude stocks report. The data confirmed what the API data had shown on Tuesday, but this time traders bought oil. WTI rallied from a low of $51.48/barrel to $52.65/b and has been drifting higher ever since. A drop in gasoline inventories and expectations for rising future demand underpinned prices.

On Thursday, the New Zealand dollar was centre stage at the Asia open after the Reserve Bank of New Zealand left rates unchanged (as expected) but delivered a somewhat dovish statement. NZDUSD dropped from 0.7263 to 0.7192 before drifting back to 0.7229 in Europe. EURUSD was very choppy inside a narrow range. Traders are torn between rising Eurozone political woes, including more Greek debt trouble, and US political developments.

A bump in the UK housing price balance to 25% from December’s 23% reading gave GBPUSD a boost, taking it from 1.2499 to 1.2580.

US jobless claims were better than expected, but nothing for traders to get overly excited about. New Yorkers were more concerned about a storm that dumped nine inches of snow in Manhattan. And then along came Trump. Around mid-morning, Trump announced he would be releasing details of his tax plan in the next couple of weeks. Suddenly, everyone wanted dollars, and the greenback finished firmer against all the G10 currencies. US equity indices made new intraday highs.

On Friday , the US dollar was ending the week on a firm note, but well within recent ranges.


— Edited by John Acher

Michael O'Neill is an FX consultant and currency strategist at Loonieviews.net

2y
fxtime fxtime
Great overview.....have a good weekend Mike :-)
2y
yuiyui yuiyui
Hi Michael, thanks for the article as always. Do you have any thoughts on if there is a Trump border tax and if it should be applied on oil, it would only raise the price of US domestic oil and incentivize more shale but Is there any negative side for Canadian oil?
2y
Michael O'Neill Michael O'Neill
Hi yuiyui. Sorry for the late reply. The weekend got in the way..Everything that I have read says that the BAT (Bordered Added Tariff) would apply to energy. It would hurt exports and Canadian dollar . However, it wouldn't be immediate. US refineries that are geared for Alberta's heavy Crude would have to convert their refineries to handle the lighter crude which would be expensive and time consuming. BAT would also hurt auto and auto part exports.
2y
yuiyui yuiyui
Thanks, since x-oil, Canada has a trade deficit with the US and the oil from Canada is considered strategic. It doesn't make much sense to bring a BAT to the oil so that's why i was scratching my head. I can't really make sense of it. Have a nice day

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