Yields on core European bonds went for a slide yesterday as prices rose in response to the ECB's decision to leave its QE programme unchanged – for now at least. Elsewhere, the USD continues to make gains on its peers.
Article / 10 June 2016 at 14:38 GMT

Loonie tunes – dodgy data makes dollar dirt cheap

FX Consultant / IFXA Ltd
  • USDCAD recouping losses from employment report
  • Wait for FOMC meeting will keep traders sidelined
  • Sabre-rattling by US doesn't rattle FX
 Golden days for Canadian jobs or just dodgy statistics? Photo: iStock

By Michael O'Neill

USDCAD is recouping its post Canadian employment losses on the back of soft oil prices and position adjusting ahead of next Wednesday's Federal Open Market Committee meeting.

Canada Employment data defies belief

Statistics Canada reported that Canada added 13,800 jobs in May and that the unemployment rate declined to 6.9%. They also offered up a bridge in Brooklyn. There weren’t any takers for the bridge deal but FX traders sure bought into the employment report.

Statistics Canada specifically addressed the Alberta wildfires issue and that the impact from not collecting the labour force data in the Fort MacMurray area was minimal.

In my opinion, this is a bogus report and will be forgotten by Monday. The USDCAD decline immediately following the report was likely more a factor of traders being long dollars going into the data and bailing out on the news.

USDCAD outlook

Yesterday, the Bank of Canada released the semi annual “Financial Stability Review”.  Even with nothing going on, it failed to attract much attention. The BoC did note that the pace of housing prices gains in Vancouver and Toronto were “unlikely to be sustained” which Globe and Mail reporter, David Parkinson suggests is bank-speak for “bubble”. They did point out the “fragility of fixed-income market liquidity” suggesting that they have become less liquid due to regulatory reforms. That may be an issue worth watching.

The intraday WTI/USDCAD correlation deteriorated on Friday with USDCAD declining even as WTI prices slid. That appears to have been an anomaly due to the employment report which is beginning to correct.

Various Canadian economic data releases have managed to spark brief flurries of activity in USDCAD but those moves are short lived. Oil price movement and Fed rate hike sentiment continue to be the main drivers of the currency.

Chart: 30 minute WTI oil and USDCAD
 Source: Saxo Bank

USDCAD technical outlook

The USDCAD downtrend from the January peak remains intact while prices are below 1.3000 which coincides with the break of the intraday May uptrend also at 1.3000.

The intraday technicals are bearish while trading below the 1.2750-60 area, supported by the post-employment report move below 1.2690.  A break below 1.2630 will lead back to the May low at 1.2462.  A decisive break above 1.2770 will extend gains to 1.2900
Chart USDCAD daily
 Source: Bank

Dogs of war have no bite

Russia is miffed at the US, again. (What else is new?) This time it is because the US Navy is cruising the Black Sea in a guided missile destroyer. Russia is about as happy as America would be if a Russian destroyer was sailing around the Florida Keys and have reportedly said it will respond, although not how.

The American’s aren’t just butting heads with Russia. They are irked at China for having the audacity to intercept an American reconnaissance plane in the East China Sea.  The Americans say the intercept was unsafe but fail to explain why they felt the need to “seriously harm China’s maritime security”, which is how China’s Foreign Ministry sees it, according to CNN.

Obviously FX traders are bored or likely just don’t believe that the sabre-rattling between the three super-powers is anything to fear. Years ago, fighter jet interceptions of other fighter jets or warships sailing close to another nations territorial waters would have led to heightened safe haven demand.  Today, after 16 years of constant war/terror attacks, its just another day at the office.

The week ahead

Wednesday’s FOMC meeting is the “elephant in the room” and no, the reference is not a shot at Janet Yellen. Much earlier expectations for a June rate hike have been diluted to such an extent, that even one hike by the end of the year is questionable. That will be enough reason for traders to stay on the sidelines until the afternoon in New York on Wednesday. 

The FOMC meeting isn’t the only game in town. The Bank of England rate decision is on Thursday but the following week’s Brexit vote has stolen their thunder. The BoE result will be an understated affair and likely a non-event for Sterling.

Although the Central Bank meetings are the major events, there are enough regional data releases to keep traders entertained, beginning with China on Monday. Tuesday’s US Retail Sales data would need to be extraordinary strong to shift the rate hike dialogue to June or July.

The week that was

The week started with a bit of a hang-over with traders still feeling the ill-effects of the previous Friday’s nonfarm payrolls report. But that was ok as it was anticipated that “Nurse Janet” would provide the cure. If they had only known.

Monday, the FX majors opened in Asia trading near to where they closed on Friday. The US dollar managed to eke out some gains against GBP, JPY, AUD and NZD but Yellen’s speech during the New York lunch hour, was on everyone’s radar. US dollar strength continued during the European session. GBPUSD got smoked on Brexit polls showing the “Leave” side leading. The Yellen speech leaned toward “dovish” and the dollar erased its earlier gains,.

Tuesday, the Reserve Bank of Australia didn’t surprise many when it left rates unchanged but the lack of an easing bias in the statement clearly did. AUDUSD rallied.  Meanwhile GBPUSD popped higher prior to the RBA announcement and traders were at a loss to explain “why”, eventually blaming the move on a “fat-finger” incident.  Rising oil prices garnered a lot of attention which kept the commodity bloc currencies in demand and lifted equity markets.

The dollar wasn’t very popular on Wednesday. Traders seemed convinced that a June rate hike was just a pipe dream.  China export data showed a pick-up in crude imports and oil rose, lifting the Loonie in the process. Japanese Q1 GDP was revised upwards and USDJPY headed lower. The European session was rather dull. Sterling moves continued to be driven by polls rather than data and was sold throughout the New York session.

Thursday started out with the Reserve Bank of New Zealand’s interest rate decision and statement. They left rates unchanged which surprised about 30% of the market and NZDUSD soared. USDJPY sank in line with a declining Nikkei which dropped nearly 1 percent. That move didn’t last. By mid-morning in Europe, USDJPY caught a bid and it never looked back, rising from 106.25 to 107.15 heading into the New York close. EURUSD followed suit but its rally was shallower and shorter lived. It gave back all of its gains by the hand-off to Asia. The major global equity markets were all lower on the day.

Friday saw a drift into risk aversion in Europe and Asia with the US dollar posting gains against the majors except for Swiss and yen.

– Edited by Clare MacCarthy


Michael O’Neill is an FX consultant at IFXA Ltd

10 June
John Shaw John  Shaw
Thanks for sharing Mike. A lot of truth in today's article. Well done.
Have a great weekend.


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