- US dollar down-move lacks conviction as USDX remains rangebound
- US tax reform chatter will continue to be the story next week
- Regional data will pack a bigger wallop then US data releases next week
Higher oil prices added a little gloss to the Canadian dollar. Pic: Shutterstock
By Michael O'Neill
Crude prices are gushing higher and it makes the Canadian dollar more attractive in a lipstick-on-a-pig, sort of way. Brent and WTI rallied 14.2% since October 20, but the Loonie did not get much, if any, benefit from that move. The past ten days have changed that.
USDCAD is playing catch-up, and there is a lot of ground to make up. USDCAD declined seven out of the past eight days, falling from 1.2915 to 1.2670. There is a lot more room on the downside.
The short-term downtrend line is intact below 1.2750, looking for a decisive break of 1.2660-70 support. The support stems from the September uptrend line and the 50% Fibonacci retracement level of the October November range. A decisive break will trigger fresh selling, targeting the October 20 low of 1.2430.
WTI oil is aiming at $62.00/barrel after resistance at $55.00 gave way. The uptrend is in place while prices are above $52.80/b. There is not a lot in the way between $58.00 and $62.00.
The USDCAD decline is not etched in stone. A large part of the selling pressure is because of broad US dollar weakness on tax reform disappointment. US dollar bulls are cutting positions as the highly-touted US tax cut plans are on shaky ground. If a deal gets done, it may put a floor under USDCAD.
Upcoming changes at the Fed may shift the focus to the risk of a hawkish US interest rate outlook which supports the greenback.
The NAFTA negotiations are another flash-point and they don't appear to be going all that well for Canada or Mexico.
USDCAD may not collapse but instead grind lower, interspersed with bouts of volatility..
Chart: USDCAD and WTI oil
Source: Saxo Bank
The week ahead
The US tax policy debate will keep traders on their toes and leave the US dollar exposed to headline risk. There isn’t a specific end date, which will keep markets vulnerable until a tax policy gets passed or the politicians go home for the holidays; Christmas, not Thanksgiving.
There could be fallout from the Asia-Pacific Economic Cooperation forum. President Trump is there along with three US Navy carrier groups. Philippine President Rodrigo Duterte plans to talk about China’s plans for the South China Sea.
Tuesday: China retail sales and industrial production reports will set the tone for the antipodean currencies. Germany unloads a host of economic reports including inflation and GDP. Eurozone GDP is also on the slate. However, the UK data may pack the bigger wallop. Retail sales, producer prices and CPI are on tap. CPI is forecast to rise 3.1% y/y
Wednesday, NZDUSD traders will deal with retail sales while AUDUSD traders key in on Westpac consumer confidence data. The UK employment report will keep GBPUSD in the spotlight, especially if it follows a high inflation print. The US retail sales report is expected to be soft due to low gas prices and sluggish new vehicle sales. October CPI is forecast at 0.1% vs 0.5% in September.
Thursday, the Australia employment change report may have a difficult time beating the September 19,800 gain. CPI is also due. Eurozone CPI and UK retail sales will be centre stage in Europe. US data includes Philadelphia Fed manufacturing PMI, import/export prices, capacity utilisation, industrial production, and NAHB housing market index.
Friday, the data calendar is very light in Asia and Europe. US housing starts and building permits are on tap. Canada data includes October CPI (forecast 1.3% vs previous 1.6%, y/y)) and retail sales.
The week that was
It was a typical week for the “Dog Days of Summer,” dull, boring with random volatility patches. For the first full week in November, it is a tad abnormal.
Monday was quiet. Not “hear a pin drop” quiet but certainly subdued. Oil was the story in New York. News that Crown Prince Mohammed bin Salam orchestrated moves to secure his power and position as heir to the throne. WTI rose over 4%. USD dollar gains in Asia on the US interest rate outlook were unwound in New York due to US tax cut uncertainties. Sterling consolidated losses from the previous week's soft data reports.
Tuesday was as quiet as Monday which is not surprising as the economic data calendar was empty. The US dollar drifted higher in Asia and Europe. The greenback finished in New York with losses against euro, yen and sterling while hanging on to earlier gains against the commodity bloc.
Wednesday was like Tuesday and Monday. It wasn’t quite like a snooze-fest, but it was close. China’s Trade surplus shrank which led to a very brief bout of AUDUSD and NZDUSD selling. President Trump was in Korea and heading to China. Sterling was under pressure all day after a barrage of negative Brexit stories. Also, another a minister was forced to resign from Theresa May’s cabinet, the second in two weeks. Wall Street closed with gains. Oil prices slipped after EIA reported an increase in crude inventories. Chatter about a one year delay for US corporate tax cuts to take effect led to broad, but minor US dollar selling against the majors (except GBPUSD).
Thursday started with NZDUSD in demand thanks to the Reserve Bank of New Zealand. They left interest rates at 1.75% but delivered a statement that wasn’t dovish. A USDJPY rally stalled. EURUSD flat lined but was shocked back to life when US data shifted the focus to the Fed’s interest rate outlook. That view was forgotten when Senate Republican tax plans leaked and included a one-year deferral for corporate tax cuts. Wall Street and FX traders were not impressed. EURUSD recouped all this week’s losses and touched 1.1655. GBPUSD bounced off support in the 1.3090 area and rebounded to 1.3162 on broad US dollar weakness. The day finished with the US dollar down across the board, except against NZDUSD which was flat.
Friday, the week is closing out with a whimper. There isn't much US data and the impact from European and UK data faded quickly.
– Edited by Clare MacCarthy
Michael O’Neill is an FX consultant at IFXA Ltd