Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 30 July 2013 at 5:35 GMT

The payrolls Hokey Pokey and the WTI anomaly

FX Trade Strategist /

"You pay the offer
You hit the bid
You eat the spread
And you're in the Red
You  do the Hokey Pokey
And you churn your account around
That's what it's all about!"  (with apologies to Larry LaPrise)

Throughout this week, traders will be dancing to the FX version of the Hokey Pokey under an onslaught of major data releases, central bank interest rate decisions including the Fed and all capped off by US non-farm payrolls on Friday. As usual, USDCAD traders will be at the mercy of US dollar moves against the majors.

Currently, the USDCAD is flirting with key support in the 1.0240-60 area as soft US data releases encourage the belief that a September start to tapering will be deferred.  Monday's release of US Pending Home sales, a disappointing minus 0.4 percent (the forecast was minus 0.1 percent)  is evidence of this effect.  The ever shifting outlook for the tapering timing elevates the importance of US data over most domestic releases with the US non- farm payrolls being the most important driver this week.

Wednesday's Canadian May GDP report has forecasts all over the map due to the uncertainty of the impact of the floods in Alberta and a construction strike in Quebec. The consensus forecast is for a gain of 0.3 percent month-on-month and a large surprise to the upside would be Canadian dollar positive. Unfortunately this is the Federal Open Market Committee (FOMC) day as well which suggests that domestic Canadian data will be overshadowed.

Of course, the FOMC and the data are important drivers for USDCAD, but another important item is the price of WTI crude oil.  Canada is usually lumped in with the "commodity currency " basket as the country is a resource based economy and USDCAD usually tracks WTI price movements. When WTI rises, USDCAD sinks and vice versa. Since the FOMC meeting in June, this relationship appears to have broken with USDCAD rising and falling in tandem with WTI.

USDCAD with OILUScont, daily

daily oil usdcad
Source: Saxo Bank

The simple explanation is that WTI is a global commodity priced in US dollars. Theoretically, a rising US dollar price will reduce demand for the product and thus lower the price. Since the dollar's rise was due to expectations of the removal of stimulus, predicated on a strengthening US economy, the symbiotic US and Canada trade relationship, means that the Canadian dollar should gain as well.

Perhaps, but I think that this price correlation is an anomaly and that the historical relationship will soon revert.  The question is "which one and when?

The price action following the June FOMC can't be ignored and until the markets get some clarity, conviction and confirmation of when and how tapering will work, the WTI/USDCAD anomaly will remain intact. The result may be that the USDCAD trading band, currently 1.0240-1.0440 widens to 1.0080-1.0440.

USDCAD daily with forecast range

daily usdcad

Source: Saxo Bank


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