Article / 23 September 2016 at 15:00 GMT

Oil outlook, economic data churn USDCAD

FX Consultant / IFXA Ltd
Canada
  • Canadian data knocks Loonie for a loop
  • Central bank speakers are plentiful next week
  • Opec meeting may be key event
h
 Movements in CAD are never too far away from what's happening in oil. Photo: iStock

By Michael O'Neill

Loonie sinks on soft data

The world was looking kind of bright for the Canadian dollar. An obviously befuddled Federal Reserve had tacitly endorsed risk assets, pushed USDCAD to 1.3060 from 1.3220. Then news that Saudi Arabia and Iran were talking production caps in Vienna fueled additional selling. On Friday, a headline that trumpeted Saudi Arabia’s willingness to cut oil output in return for an Iranian production freeze snapped an intraday USDCAD rally and once again the currency pair was threatening to test support at 1.2990.

Domestic data put an end to that thinking. Retail sales were down 0.1% in August compared to a forecast for a gain of 0.1%. Inflation data added to the misery. Core CPI, year over year, dipped to 1.8% from 2.1 % in July.

The USDCAD rally is indicative of a market that may be starting to believe that risk for a Canadian rate cut has risen. Don’t bet on it. It is too premature for that kind of thinking considering that oil prices are showing evidence of stabilizing and the full effects of the federal stimulus program spending has yet to be felt.

Is Canadian data dodgy?

The Canadian employment report is notorious for its volatile monthly swings that tend to make a mockery of forecasts. Two years ago, the July report (released in August) was retracted due to errors. More recently, Stats Canada was unable to effectively compile data from Northern Alberta due to the wild fires. The employment report inaccuracies led to questions about the veracity of other data.

Those concerns may have some basis in fact.

The head of Statistics Canada resigned on September 16. He was unhappy with the way his department was forced to collect data due to a government initiative to centralise and standardise information technology services under the new Shared Services Department. 

He said "Statistics Canada is increasingly hobbled in the delivery of its programmes through disruptive, ineffective, slow and unaffordable supply of physical informatics services by Shared Services Canada”.

For the most part, the turmoil at Statistics Canada is a non-event for USDCAD traders. However, it does suggest that large deviations from forecasts will be looked at more closely.

USDCAD outlook

There isn’t going to be much in the way of domestic direction for USDCAD next week. Economic data is scarce but Bank of Canada Governor Stephen Poloz’s speech on Monday could be interesting. It is titled Cross-Border Trade Integration and Monetary Policy and after this mornings soft retail sales and inflation data his remarks may be extra-doveish.

The USDCAD technical outlook is bullish while prices are above 1.3000 and looking for a break of resistance in the 1.3250-70 area to extend gains to 1.3450. A break below 1.3000 would suggest that a short-term top is in place and target a retest of the 1.2820-50 zone.

The prospect of some sort of oil price stability agreement by Opec next week may keep USDCAD trapped in the 1.3000-1.3250 range for the week ahead.

USDCAD four-hour with trading range highlighted
usdcad
Source: Saxo Bank 

The week ahead 

The first full week of autumn will be ushered in by a Khamsin (an Arabic term to describe a hot wind full of sand and dust) from no-less than 14 different central bankers. Janet Yellen, Mario Draghi and Haruhiko Kuroda are just three of those.  Kuroda will likely defend the BoJ’s recent actions which USDJPY traders appear to have deemed a failure, judging by the level of USDJPY. Yellen may just rehash her post-FOMC meeting press conference.

There is a mixed bag of top tier data available from various regions which could complement the central bankers' speeches.

Oil traders and the commodity currency bloc will be glued to developments from the “informal” Opec meeting in Algiers on Tuesday.

The week will end with a flurry of action stemming from Japan’s half-year end and the monthly and quarterly portfolio rebalancing flows.

The week that was

It was one of those weeks. It should have been a spectacle like a pyrotechnic, laser finale at a rock concert. Instead, it was Roseanne Barr singing the US national anthem at Super Bowl XXlV, in 1990. Central bankers will do that to you.

Monday, Asia markets were a tad quieter than usual due to a holiday in Japan. The antipodean’s recouped some of the previous Friday’s CPI losses helped by a bump in oil prices on reports of an Opec deal. The reports weren’t accurate. Oil continued to make gains in Europe and there was a whiff of “risk-on” when New York started. It didn’t last. Venezuela’s Oil Minister saw to that. He said that the world oil production was 10% over demand. Oil tanked and so did the commodity bloc currencies.

Tuesday, the Reserve Bank of Australia minutes gave AUDUSD a brief lift and an article in the Japanese Nikkei stoked BoJ policy stimulus hopes but not much action in USDJPY. Brexit chatter gutted sterling during the European session. The majors all finished the day in New York, lower than where they started. Traders were sidelined awaiting the Wednesday’s BoJ and FOMC statements.

Wednesday, the BoJ threw everything at the wall to see what would stick. It left the policy rate unchanged and introduced flash terms such as “yield curve control” and something described as flexibility in the monetary base. The initial reaction was to buy USDJPY which soared from 101.15 to 102.77. The initial reaction was wrong. USDJPY then dropped and threatened to break 100.00.

In Europe more chatter surrounding Brexit triggered renewed GBPUSD selling. EURUSD traded sideways. The New York morning was a write-off. 

In the afternoon, the 88% of the market that believed the FOMC would leave rates unchanged were validated. This meeting didn’t do anything to dispel the notion of a timid, overly cautious Fed. The Fed dropped a broad hint of policy action in December despite tweaking GDP forecasts lower. When the dust had settled, the US dollar had lost ground against all the G10 currencies.

Thursday, Asia opened with Japan on another holiday. The RBNZ left interest rates unchanged, complained about the strength of the currency and alluded to future rate cuts. Kiwi got spanked. In Europe, GBPUSD rallied on the back of profit taking due to less doveish remarks by Bank of England official, Kristin Forbes. EURUSD probed resistance in the 1.1250 area. Eurozone equity indices were all in the green. There was an air of risk-seeking sentiment when the New York Day started. 

It only lasted to mid-morning. EURUSD started to fade followed by GBPUSD. US data was mixed and a non-event. It seemed that US traders determined that the FOMC downgrade of GDP growth prospects was less of a factor than the hint of a December rate bump and decided to buy US dollars.

Friday, the US dollar started the New York session after a mixed overnight session. Oil prices were the big mover following a report Saudi Arabia would agree to oil cuts if Iran froze its production.

fed
 This Fed is as solid as a rock and not for moving. Photo: iStock

— Edited by Martin O'Rourke

Michael O'Neill is is an FX consultant at IFXA Ltd.
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