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Article / 02 September 2016 at 14:04 GMT

NFP sends dollar bulls to slaughterhouse

FX Consultant / IFXA Ltd
  • Soft nonfarm payrolls report crushes US dollar
  • Canadian trade data fuels Loonie rally
  • Beware a doveish BoC statement
The brakes were slammed on hopes for a flying nonfarm payrolls
for August by a 151,000 disappointment. Photo: iStock
By Michael O'Neill

Friday's weaker than expected nonfarm payrolls report combined with Thursday's ugly-looking ISM manufacturing report has sent US dollar bulls to the slaughterhouse. The US dollar has been crushed. However, the bearish greenback bandwagon looks a little rickety. Today's selloff may be more a case of culling the herd rather than a sign of a weaker-dollar-for-longer scenario.

Bank of Canada preview

It has been 51 days since we last heard from the Bank of Canada. There has been something akin to ‘radio silence” after the July 13 monetary policy meeting. At that time, it predicted that second quarter GDP would decline by 1.0%. It actually declined by 1.6%.

Following the July BoC meeting, major domestic data releases have been less than stellar. The June unemployment data released on August 5 was downright ugly, posting a loss of 31,200 jobs. However, it should be noted that a large number of the job losses were in the public sector, (42,000) implying that the data is wonky if not faulty.

Canadian trade data set a new record, but not a good one. The June trade deficit was a record $3.6 billion. Fortunately, the July trade data improved dramatically to $2.49 billion.

Retail Sales posted a very weak month in June but many economists see it as just a blip. They expect that child benefit checks, which were issued in July, to boost sales in the coming months.

Inflation declined by 0.2% in July (forecast for -0.1%), core inflation dipped to -0.2% but the year over year measure remained at 2.1%.

The Reserve Bank of New Zealand acknowledged weak global conditions, below target inflation and cut the overnight cash rate 25 basis points on August 11. A little more than a week earlier, the Reserve Bank of Australia also cut rates by 25 bps. The RBA said that the global economy was growing at a lower than average pace and low commodity prices.

It is not too much of a stretch to see that the Canadian economy has issues and that the Boc may need to temper its optimistic outlook for Q3 economic growth. The BoC is unlikely to cut interest rates but a doveish interest rate statement is a strong possibility.

Positive loonie outlook is just a mirage

What a difference a day makes. Yesterday, USDCAD was bid. The outlook was fairly negative with the currency undermined by US rate-hike expectations, falling oil prices and soft domestic data.

That changed in a hurry beginning with the disappointing US ISM Manufacturing PMI on September 1. Suddenly, US rate hawks started getting nervous. Friday’s weaker-than-expected nonfarm payrolls report and a better-than-expected Canadian trade report put the squeeze on short Canadian dollar positions, and there were plenty of them.

The Friday drop in USDCAD is all about normalising outstanding positions and less about a dramatic shift in the outlook for the Canadian dollar or the Canadian economy.

USDCAD technical outlook

The 1.2650-1.3250 USDCAD trading band that has contained price action since May remains intact. The bottom of the band is guarded by a rising uptrend line that comes into play in the 1.2790-1.2830 area. In the short term. Support in the 1.2990-1.3000 area guards additional support in the 1.2940-60 zone. Intraday resistance is at 1.3080 and 1.3110.

USDCAD daily
 Source: Saxo Bank

The week ahead

The week will get off to a slower start than usual due to Labour Day holidays in the US and Canada. Still, it will be a busy week. Monday will begin with markets dealing with the fallout from Friday’s NFP and any surprises arising from the weekend G20 meeting in Hangzhou, China.

FX volatility may arise from any or all of the three central bank meetings. The RBA decision is Tuesday, the BoC is on Wednesday and the European Central Bank is on Thursday. The RBA will likely be a non-factor. The BoC statement may be doveish. The ECB could have the biggest impact if it announces additional stimulus.

In addition to the central bank meetings, the week is full of top-tier and second-tier data which will keep regional markets on their toes. Markit Services PMI will be the focus in Europe on Monday while Eurozone GDP data is centre stage on Tuesday.

UK house prices, manufacturing and industrial production data on Wednesday will determine if the GBP rally continues or starts to fade.

Thursday, China trade data will the focus in Asia while the ECB meeting gets the attention in Europe and New York.

Friday will see UK inflation and trade data.

The week that was

Monday, Asia traders were on the buy US-dollar bandwagon following Fed Chair, Janet Yellen’s seemingly hawkish remarks, the previous Friday. Not do be outdone, the Bank of Japan Governor, Haruhiko Kuroda, reminded markets that there would be more easing as needed. USDJPY rallied.

A holiday in the UK sucked the trading enthusiasm out of European markets. The New York session saw a small retracement in EURUSD gains although USDJPY stayed bid. Oil prices dropped on rising Opec production.

Tuesday, FX markets were fairly quiet in Asia. That wasn’t the case in Europe as UK traders returned from holiday. The US dollar caught a bid, in part due to rather pessimistic Eurozone Confidence surveys. That tone carried into New York. US dollar buying accelerated after strong Consumer Confidence data. In a Bloomberg interview, Fed Vice Chair, Stanley Fisher reiterated the Fed mantra that rate increases are data dependent. Gold and oil prices declined which lifted USDCAD.

Wednesday was a chippy, choppy day. It was also month end. Kiwi and Aussie both made gains in part due to positive domestic data and in part because of what seemed to be rebalancing flows. USDJPY rallied on increased US rate hike speculation. In Europe, soft Eurozone data including weaker than forecast CPI sent EURUSD lower. GBPUSD got a boost from better-than-expected consumer confidence. In New York, initial dollar buying due to a healthy ADP report faded on a soft Chicago PMI report. Weak Canadian GDP data and plunging oil prices launched USDCAD into orbit.

Thursday was the start of the new month. The Asia session saw AUDUSD and NZDUSD rally and then give back those gains in Europe. USDJPY climbed steadily. GBPUSD soared on a surprisingly strong Markit Manufacturing PMI report. EURUSD was offered initially supported by minor but rate hike friendly US data.

That changed when the US ISM Manufacturing PMI report was released. In dropped into contraction territory (49.4) and US dollar bulls headed for the exits. The US dollar ended down across the board against the G10 currencies. Oil prices fell for the fourth consecutive day.

Friday’s NFP report lived up to its reputation. Another large deviation from consensus forecast led to a big drop in the US dollar against all but USDJPY.

 A rare week when sterling could do some chest puffing. Photo: iStock

— Edited by Martin O'Rourke

Michael O'Neill is an FX consultant at IFXA Ltd
02 September
John Shaw John  Shaw
Thanks for sharing Mike. Have a great long weekend bud.
02 September
Michael O'Neill Michael O'Neill
Thanks John. You too.
04 September
fxtime fxtime
Have a great long weekend Mike :-)


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