Loonie offered as oil consolidates recent gains
- US dollar cautiously bid ahead of Yellen speech
- Oil prices approaching stiff resistance
- BoC statement may keep USDCAD rangebound
The US dollar is ending the week with a bit of a bid ahead of Federal Reserve chair Janet Yellen's afternoon speech which is hoped to validate the hawkish rhetoric seen from a number of Fed speakers of late.
How neutral was the Bank of Canada?
By most accounts, the Bank of Canada statement on Wednesday was neutral. The Canadian dollar squeaked out some gains as there was a faction who were disappointed that the statement wasn’t on the dovish side.
In fact, an argument can be made that the BoC was indeed “dovish”.
In the April Monetary Policy Report, the BoC downgraded Q2 economic growth to a mere 1%. In Wednesday’s statement the Bank said that the impact from the Alberta wildfires would cut 1¼ points off of Q2 GDP, which puts it into negative territory.
The BoC statement was vague and appeared to be a deliberate attempt to skirt the negative issues overhanging the domestic economy, perhaps hoping that the fiscal initiatives announced in the March budget will lead to economic improvements by the next meeting on July 13. The statement may have read “neutral” but gear-shift is heading toward “reverse”
Canadian trade balance and exports:
Source: Statistics Canada
Oil rally may pause
USDCAD plunged from 1.3188 to 1.2912 when WTI spiked to $50.21/barrel from $48.62/b and then collapsed just as quickly as WTI retreated. Oil prices found support from the May 15 Goldman Sachs report that said the market has shifted from ““nearing storage saturation to being in deficit much earlier than we expected”.
The WTI technicals are showing signs of fatigue with RSI indicators showing overbought despite the short-term uptrend remaining intact and prices well above the uptrend line which comes into play at $45.10/b.
USOil daily with RSI:
USDCAD consolidation ahead
This week’s USDCAD decline from the 1.3187 peak appears to have come to an end with this morning’s break of 1.3050 which will be confirmed on a move above 1.3090. The Canadian dollar negatives are starting to stack up, beginning with a coyly neutral Bank of Canada statement, the prospect of an oil price decline (or at least the rally stalling out), and steadily improving US economic data.
The latter is behind the slew of hawkish Fed speakers suggesting a rate hike is possible in June or July. That view may be set in stone if Yellen’s Friday speech echoes the hawkish sentiment. At the same time, USDCAD is unlikely to shoot for the moon due to strong resistance in the 1.32-1.3300 area.
The week ahead
The past couple of weeks have been close to a "famine” in the context of major, market-moving data releases. For the coming week, welcome to the feast.
(Unfortunately, the feast won’t begin on Monday due to holidays in the UK and America).
Tuesday is a different story as Australia and New Zealand lead off with some second-tier data ahead of the main event, Eurozone CPI and a host of secondary regional data. The US weighs in with PCE data for April and the Chicago PMI. The icing on the cake is the month-end portfolio rebalancing flows which point to US dollar selling.
Wednesday, China releases Caixin PMI data. while Australian GDP information is also due. There are a lot of UK data which may get more attention as long as the Brexit polls continue to show the Remain side with a convincing lead. The key US data release of the day will be ISM Manufacturing PMI
Thursday begins with Australia Trade data which will be overshadowed by the looming European Central Bank interest rate decision and press conference.
On Friday, US nonfarm payrolls will be the star of the show and as usual, FX trading will be muted ahead of the release.
The week that was
The bar was set pretty low in terms of FX trading expectations for this week and for the most part, those expectations were met.
Monday started with the US dollar offered against Aussie and kiwi, a theme that didn’t last past early morning in Europe. USDJPY sank on news that Japan posted the largest trade surplus in six years and it continued to be sold during the New York session.
On Tuesday, Asia markets fixated on the Japanese finance minister’s apparent definition of a “one-way move in USDJPY; five big figures in two days.
Wednesday saw the commodity currencies find a bid in Asia due to higher oil prices and rising equity markets. A better-than-expected New Zealand trade report provided additional support for the kiwi.
Thursday’s Asia session started where the New York session ended; the US dollar was offered, except against NZDUSD. Bearish news on milk prices from Fonterra put kiwi under pressure. Commodity currencies were in demand in Europe with Brent oil making a new six-month high.
In Europe, EURUSD drifted in a narrow range as traders awaited Fed chair Janet Yellen’s speech on Friday. In New York, WTI broke through $50/barrel to reach $50.21, but retreated almost immediately. US Durable Goods looked good but it was mostly due to aircraft orders while the other components were weak. That news took the wind out of the dollar’s sails.
Friday's FX trading was on the subdued side of the equation due to looming long weekends in the UK and the US and Janet Yellen's afternoon speech.