Article / 29 September 2017 at 15:24 GMT

Q4 kickoff: The loonie is vulnerable

FX Trade Strategist /
  • Canada GDP data misses forecasts and lifts USDCAD
  • US NFP report  data may be suspect due to hurricanes
  • China Golden Week holidays will drain liquidity in Asia

By Michael O'Neill

The US dollar had a mid-morning surge following a jump in Chicago PMI data to 65.2 from 58.9 in August. The tick lower in the Michigan consumer sentiment index was ignored as it is coming off a high reading.

Despite the noise, nothing changed.

If you bought or sold USDCAD at 2000 GMT on August 31 and closed the position on September 29 at 15:00 GMT, you didn’t make or lose any money. It was a waste of time. September is closing, and USDCAD is unchanged. It wasn’t for lack of effort.

The Bank of Canada surprised markets with a 0.25 bp rate hike on September 6. The tone of the policy statement was considered hawkish. Economists and strategists pencilled another rate hike for October.

USDCAD plummeted from 1.2412 to 1.2060 that day, then spent the rest of the month recouping those losses. It took USDCAD two weeks to climb 0.200 points and this week, just four days to add another 0.0220 points.

The catalysts for the rally were Fed chair Janet Yellen and Bank of Canada governor Stephen Poloz. One was hawkish and the other dovish.

The US dollar rallied when Yellen warned of risks from leaving interest rates too low for too long, advocating a gradual approach to tightening. She said waiting for inflation to hit 2% before raising rates would be "imprudent". Her message wasn’t very different from previous speeches and FOMC statements, but FX traders reacted like it was and bought US dollars.

The anticipation of President Trump’s tax plan announcement also underpinned USDCAD during the week.

But it was BoC Governor Poloz who gave USDCAD the biggest boost. In a speech on September 27, the Governor stomped all over October rate hike thoughts. He emphasised that monetary policy wasn’t on a predetermined path, rate hikes would be data dependent (as opposed to flipping a coin?) and said that the BoC would proceed cautiously.

USDCAD spiked to 1.2517 on September 27.

Where to from here?

USDCAD is trading indecisively around the 1.2500 area (80.00 cents). The intraday and short-term technicals are bullish. USDCAD has climbed steadily from 1.2060 and if prices are above 1.2240, supported by the break of 1.2435, (38.2% Fibonacci of the June-September range) the target is the 61.8% level of 1.2667.

However, the downtrend from the end of June is still intact if prices are below 1.2500-20. The level is under stress, but has held.

The fundamental outlook contrasts with the technical picture. The Canadian economy is booming. Although July GDP was flat and a tick below, forecasts, it is coming off a torrid first half. WTI oil prices appear to have stabilised above $50.00/barrel. Opec is forecasting rising demand as crude inventories fall. 

But every silver cloud has a dark lining. The Nafta renegotiation is a wild card and if the US employs aggressive strategies like 219% countervailing duties on aircraft, USDCAD will behave support. Historically, USDCAD tends to firm in the last quarter of the year.

All the above implies a 1.2200-1.2700 USDCAD range for the balance of 2017.

USDCAD 4-hour with Q$ trading band forecast
 Source: Saxo Bank

The week ahead

Australia starts the week an hour earlier thanks to daylight savings time. China doesn’t start at all. It’s closed Monday and Tuesday for National Day as part of the Golden Week holidays.
Monday, the results of the Catalonia Referendum in Spain (if it happens) could have repercussions to EURUSD. The Spanish government says even holding a vote is illegal and can’t happen.Catalonian leaders disagree.

The Tankan report will be the highlight for USDJPY traders. Eurozone employment, PMI and US Manufacturing PMI data are the key economic reports. USDCAD traders will study the Bank of Canada Outlook Survey.

Tuesday, the Reserve Bank of Australia interest rate decision is due. They are expected to leave rates unchanged, again UK PMI construction data and Eurozone PPI reports will compete for attention. Germany is closed. The US calendar is very light.

Wednesday, there isn’t much in the way of data in Asia. Eurozone Services PMI and the UK Inflation report are the main events in Europe. The US calendar is uninspiring.

Thursday, Australia Retail Sales and trade reports are due. There isn’t any key data from Europe or the US to pull traders from the sidelines as they wait for Friday’s nonfarm payrolls report.

Friday, Asia and Europe will be quiet. The action will heat up (briefly when the US nonfarm payrolls report is released. The forecast is for a gain of 130,000 jobs and a rise to 2.6% in average hourly earnings. The data is likely useless due to distortion from all the hurricanes.

The week that was

US dollar change vs. currencies in September
 Source: Saxo Bank/IFXA Ltd

Monday was a busy day. Asia opened with Kiwi traders trying to make sense out of an election result. There wasn’t a clear winner. The unsettled state of affairs undercut NZDUSD. Japan traders heard a rumour that prime minister Shinzo Abe would call an October 22 election. (He did, but not until Wednesday) GBPUSD recovered from Friday’s Moody’s downgrade low. It couldn’t hold the gains and retreated in Europe and New York on Brexit issues.

In Europe, EURUSD was soft, hurt by German election results. Angela Merkel kept her job as Chancellor, but her party lost seats. Gold and oil prices firmed before New York opened.
Risk aversion trades were all the range by mid-morning in New York. North Korea said that the US had declared war on them and threatened to shoot down US bombers, even if they weren’t in N.K. airspace. Gold soared as did yen and the Swiss franc. Oil prices gushed 3.12% higher. Expectations of tighter supply and increased global growth underpinned the market.

Tuesday, Asia FX markets traded with a risk-averse bias. The Bank of Japan minutes didn’t offer any fresh insight. Kiwi was under pressure from soft trade data and the election hangover. The US dollar started the New York session with a bid and climbed steadily. Fed Chair Yellen’s speech didn't change anyone's minds about at December rate hike. The dollar rose but pared back some of the gains in the afternoon. Wall Street was flat, and oil prices ended a choppy day at $51.92/b, virtually unchanged.

Wednesday, Asia and European traders bought US dollars, convinced that Yellen’s speech was hawkish. Both sessions were a tad subdued ahead of President Trump’s tax announcement in the afternoon. The greenback opened in New York with a bid. Oil prices rose on falling US inventories. Gold prices slid on the US rate outlook.

US Durable Goods data beat forecasts and crushed USDJPY. The Canadian dollar got thrashed when the Bank of Canada delivered dovish remarks, and the US imposed countervailing duties on Canadian aircraft. Trump’s tax plan left the greenback modestly firmer by the end of the day.

Thursday, the Reserve Bank of New Zealand policy meeting was a non-event. It was expected to be. Asia sold US dollars on the US fiscal stimulus news. In Europe, Sterling came under pressure when Mark Carney warned that monetary policy could not nullify the impact of Brexit. EURUSD recovered on improved Eurozone data. US GDP data was a tad better than expected. Fed speakers, vice chair Fischer and Kansas City Fed president George, were hawkish. Trump announced a new fiscal stimulus plan. And the US dollar couldn’t rally, By the end of the day, the greenback was down across the board with positioning for month-end portfolio rebalancing, getting the blame.

Friday, US economic data provided support to the greenback, helping to offset some of the selling pressure from month-end flows.

 Edited by Clare MacCarthy

Michael O'Neill is an FX consultant, currency strategist and author of the Trade of the Day at Follow Mike or post your comment below to engage with Saxo Bank's social trading platform.

John Shaw John  Shaw
Thanks again for sharing with us here on Trading Floor Mike. I think Trump and NAFTA are going to have a very big impact on USDCAD for the next little while. Especially since oil doesn't seem to be really going anywhere.
Have a great weekend my friend.
Michael O'Neill Michael O'Neill
You too, John
torres089 torres089
The previous week the CAD futures showing a peak in the open interest in the las 4 years.


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