Article / 04 August 2017 at 15:52 GMT

USDCAD rally a correction not a trend change

FX Trade Strategist /
  • US dollar rallies in a nonfarm payrolls corrective move
  • NFP rebounded to growth of  209,000 jobs in July, beating estimates
  • Canada employment report adds to "robust" Canadian economic recovery story
  • US inflation data will be the highlight next week
US and Canadian dollars
 The market's attitude now is that all the good news for the loonie 
 is priced in. Image: Shutterstock

By Michael O'Neill

The week ended with a bang when the recently battered US dollar rallied against major currencies after a stronger-than-expected US jobs report. 

USDCAD has found a floor. The 1.2410-15 area stopped a free-falling dollar in its tracks, last week, and it spent this week with an underlying bid tone. Prevailing sentiment is that all the good news for the Canadian dollar is reflected in the price.

That may be true, but there isn’t a whole lot of bad news to support a large top-side rally.
Canada posted strong GDP growth numbers on July 28, far stronger than expected, yet that news was forgotten by the end of the day.

The August 4 employment report showed Canada added 10,800 new jobs in July, the eighth consecutive month of gains. The unemployment rate at 6.3% is the lowest it’s been since October 2008. 

Canada’s merchandise trade deficit widened in June due to a decline in exports. The export decline comes after three months of record highs, so some payback was warranted.

Canada trade data
 Sources: Statistics Canada

Oil prices rallied to $50.40/barrel on August 1 from $42.08/b in June. US crude inventories have been declining. Opec is talking about extending production cuts beyond March 2018 and may have talked Nigeria into agreeing to production caps.

After all that, USDCAD is bid. That has a lot to do with FX traders' mindsets. At the beginning of June, speculators were holding short Canadian dollar positions that were at or near record levels. They started to bail when the Bank of Canada shifted to a tightening policy. That US dollar selling coincided with an oil price rally.

At the same time, markets were re-evaluating their outlook for the Fed. Expectations for a third-rate increase, initially in September then pushed back to December, have diminished even further. That led to broad USD selling that is continuing.

The USD rallied after July US nonfarm payrolls beat expectations on Friday with a 209,000-job increase, but the dollar rally looks an like an overdue correction in a typically thin summer market. Two inflation reports and another nonfarm payrolls report  are due before the next Federal Open Market Committee meeting.

The current USDCAD rally is only a correction, unless there is a decisive break above the 1.2750 area

USDCAD daily
Source: Saxo Bank 

The week ahead

The week ahead could explain why the term “summer doldrums” is used in reference to FX markets. There is a lot of data, most of it second-tier, except for US CPI on Friday. The Reserve Bank of New Zealand policy meeting may be the highlight of the week.

On Monday, Australian construction data will be the highlight in the Asia-Pacific. Swiss CPI is the major European data release, while the US offers the labor market conditions index.

Tuesday, China trade data could set the tone for Asia. Germany’s trade data won’t have much impact, and the US brings weekly American Petroleum Institute crude oil inventories.

On Wednesday, Australian consumer confidence and home loans as well as China inflation data will entertain traders in Asia. Europe and the US will be bored to tears, unless US weekly EIA crude oil stocks generate any interest at the end of the day.

Thursday, the RBNZ will provide the excitement in the Asia-Pacific region, and, if that’s not enough, New Zealand electronic card retail sales will be on tap. Australian inflation expectations are also due. Sterling traders may come to life when UK industrial production and trade data are released. The US data is not exciting.

On Friday, US CPI is the marquee event. Traders will be looking for evidence to support views of whether the Fed will leave rates where they are or hike them again.

The week that was

This week, a blast of data, two central bank meetings and the US July employment data pointed to FX volatility. For the most part, it didn’t happen.

Monday was the end of July. The usual disruption from portfolio rebalancing flows was missing in action. China's official manufacturing PMI missed forecasts and non-manufacturing PMI was as expected. That data and a soft New Zealand confidence indicator pressured NZDUSD until New York opened. AUDUSD was more resilient, dropping to 0.7958 from 0.7989 before reversing on rising copper prices.

USDJPY was rangebound in a 110.32-75 band, with traders skittish after another North Korean missile test. EURUSD and GBPUSD chopped about in tight ranges while ignoring Eurozone and UK PMI data.

Oil prices climbed. WTI touched $50.40/barrel in Europe on expected inventory drawdowns and the soft dollar.

US PMI data did not have much impact on markets. Washington sure did. President Donald Trump fired his recently hired communications director. Traders saw White House dysfunction as a reason to sell USD, although not aggressively. The day ended with minor USD losses against the majors, except for the antipodeans, which were flat.

On Tuesday, the Caixin China PMI beat the market expectation, which underpinned both AUDUSD and NZDUSD. The Reserve Bank of Australia held rates steady and after a bit of noise, AUDUSD was unchanged as well. USDJPY dropped to 110.01 on White House dysfunction concerns.

EURUSD drifted down from its peak of 1.1843 to 1.1808, thanks to soft PMI data. Across the channel, UK PMI data was better than expected. GBPUSD popped to 1.3250.

In New York, USDJPY hit 109.92 when ISM manufacturing and construction spending disappointed. The rest of the majors weren’t bothered by the data. WTI dropped 2% on news that Opec’s July production increased. The USD rallied during the New York session and closed with gains across the board.

On Wednesday, weak New Zealand data (Q2 actual 0.2% vs. forecast 0.7%) sent NZDUSD down to 0.7418.from 0.7472. USDJPY rallied  to 110.91 from 110.31, supported by rising Treasury yields and an uptick in the Nikkei. In Europe. EURUSD climbed to 1.1867 from 1.1790, bolstered by the belief that the Fed is on hold and that the European Central Bank is getting set to taper its quantitative easing. GBPUSD hovered around 1.3250, ignoring data.

The New York session tried to get going when ADP employment data missed the forecast. It didn’t. The miss was tiny. Oil prices drifted higher after the EIA reported a smaller than expected draw-down in crude inventories. USDCAD stayed bid despite the oil price rally.

Thursday, the antipodean currencies were pressured by weak economic data. EURUSD and USDJPY were rangebound inside tiny bands until the Bank of England took the stage. The BoE left rates unchanged, but downgraded inflation and growth forecasts in its quarterly inflation report. Traders got spooked. GBPUSD tanked, dropping from an overnight peak of 1.3267 to 1.3114 in New York trading. By day’s end, sterling was the only currency to lose ground against the USD.

On Friday, Asian and European FX markets were quiet, while traders awaited US July employment data. A nonfarm payrolls increase of 209,000 in July beat forecasts, leading to US dollar buying across the board.

— Edited by John Acher

Michael O'Neill is an FX consultant and currency strategist at

John Shaw John  Shaw
Another excellent article today Mike. Thanks for sharing. Have a great weekend.
Market Predator Market Predator
Agree john. I appreciate these reports because there are regular, day by day with no interuption! Fridays conclusion and outlook is excellent.
Michael O'Neill Michael O'Neill
Thanks Gents. I'm glad you appreciate the effort.
John Shaw John  Shaw
Mike a smart man. A veteran. We are fortunate to have him share his wisdom with us.
Alex Gavin Alex Gavin
This comment has been redacted
m7010306 m7010306
Top Man Mike. Thank you.
David12 David12
Thank you Michael !
seas seas
Could be a safe-haven week.
seas seas
Hate to say it, so I wont.
Michael O'Neill Michael O'Neill
:) nice call


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