Negative sentiment undermining Loonie
- US consumers are confident
- USDCAD rally stalls again
- Don't bet on a BoC rate cut
By Michael O'Neill
The Loonie got kicked in the teeth on Friday and it is still spitting out pieces today. It started with the release of the inflation data. CPI rose 1.1%, y/y in August, a tad lower than July’s print of 1.3%. Adding insult to injury was a weaker than expected retail sales report. Instead of a modest 0.1% increase in July, retail sales were -0.1%.
USDCAD soared. The reaction was on renewed fears that the Bank of Canada would trim interest rates at its October 19 or December 7 meeting.
There is a good chance that the inflation and retail sales data don’t tell the whole story.
The newly elected Liberal government announced a fiscal stimulus program in March. A cornerstone of the plan was a change to child benefits which added another $300/month to the child benefit cheques issued to many families, beginning July 20. The impact of this initiative will be noticed in the September data.
Economists at Bank of Montreal point out that the CPI data is not a total surprise to the BoC as they previously stated that readings above the core 2% level were temporary.
BoC governor Stephen Poloz delivered a speech last week where he discussed the perils of low interest rates on savings and the negative impact that they have on retirement savings. He went on to say that the low interest rates are impacting companies decisions to invest and if they do not invest “we will not see the growth, productivity and job creation that we are looking for”.
Poloz doesn’t appear to be too eager to lower domestic rates and if retail sales and CPI rebound next month, he won’t have to.
Loonie tracking oil
West Texas Intermediate (WTI) is in the driver’s seat when it comes to steering Canadian dollar direction and that relationship has been readily apparent for the past week. The September version of the Howie Mandel’s game show ‘Deal or No Deal’ is being played out in media reports from Algiers.
Traders expecting a production cap agreement were disheartened to learn that Saudi Arabia and Iran were not championing an agreement. Oil ministers from both countries reminded markets that the meetings were for consulting and not for decision making but left the door open for an agreement in November.
WTI has been trading erratically within a $42.50-$46.50 since September 20 and that has caused USDCAD to bounce around in similar fashion, trading in a 1.2998-1.3278 during the same time frame. Oil in the barrel is worth two loonies in the bush.
Chart: USDCAD and WTI 30 minute
USDX points to higher dollar
The US dollar index has been rather choppy in September. After peaking at 96.32 on September 20, it embarked on a 6-day downtrend which ended yesterday with the break above 95.20. The subsequent bounce stalled at 95.55 which if broken will extend gains back to the peak. A decisive move below 95.00 would negate the topside pressure and target a retest of 94.50
Chart USDX hourly
USDCAD keeps hitting a wall
There is no shortage of USDCAD bulls. Domestic data releases have been disappointing, oil prices are unable to sustain any sort of rally and lately, rate cut fears have permeated the landscape. Despite this sentiment, all attempts to crack resistance in the 1.3250-90 area have been thwarted since mid-March. That same area capped the latest rally. However, as long as the September uptrend line remains intact, the topside will remain vulnerable.
Chart: USDCAD daily
– Edited by Clare MacCarthy
Michael O’Neill is an FX consultant at IFXA Ltd