Currency
The best comment between the statuses of either the US or the Canadian economy comes from a Bank of Montreal Economist, Jenifer Lee. In referring to US economic growth in the first quarter she writes “the good news is its history.” The statement is as much applicable to Canada as well, as Stephen Poloz’s crystal ball should receive some credit for its foresight of an “atrocious first quarter” for growth. The US economy for the last 18 months has been the bellwether for global GDP growth, and since the energy sector began to tank in Canada around Q4 2014, The US relation to Canada has become even more important.
The numbers were a struggle as Canadian and US GDP growth in Q1 contracted at 6/10th and 7/10th of a per cent
respectively, and although forecasted to be bad, the actual reported GDP arrived well below expectations. For Canada, it was the overbearing 30 per cent decline of the mining, oil and gas sectors. And although this blow comes very much as anticipated, awaiting the revival of the manufacturing sector is something that will not be realized in the short term. For Canadian growth to pick up absent of a revival in the energy sector, the health of the United States economy will ultimately be the be the decider for the overall economic health of this country.
US economic growth arguably sites more reason for caution. The two important factors of port strikes in Los Angeles and cold weather in the east were no doubt factors that weighed heavily on economic activity in January through March. And even though recent indicators have signalled a bit of a tide change for the better, devastating news this week of flood disasters in the US’s fourth largest city, Houston, will surely be yet another curve ball for the economy this year. It repeats the question, and whether it is inspired or not by an over focus from financial media, of when the US Fed will be able to raise interest rates.
Sound analysis on this topic suggests that the Fed raising rates is somewhat of a misnomer. The Fed does not want to jeopardize economic activity because of a restrictive rate environment. Instead a rise in rates will simply be an adjustment to current economic conditions. As good and likely as that sounds though, a very interesting interview from St. Louis Fed President James Bullard this week offered a contrary point of view. An insider to the Federal Open Market Committee, Bullard’s take was that the Fed must remain reactive and very sensitive to adjustments in the economy. According to Bullard, (and I summarize) the beauty of being data dependant is the Fed can literally take in all up to date information and decide on a moment’s notice when to raise rates. There is no telltale sign that says they should do it in June, July, or even September.
And this is where the market forces decide. We have the US dollar resuming yet another bull run. As we close the week, even with oil finishing up nearly 5 per cent, currencies and precious metals sit quietly against a market convinced action from the Federal Reserve is the most important aspect of financial markets entering the summer. This is in tune with a forecast that both the US and for that reason the Canadian economy will pick up too. Entering the summer months, this will advance the talk of a Fed rate hike; and as result, the rest of the dependent globe can follow.
One of the most persistent story lines among gold bugs and market participants who foresee the collapse of the dollar goes something like this:
….read it all HERE
USDCAD Overnight Range 1.2415-1.2520
USDCAD soared following a much worse than expected Canadian GDP report, jumping to 1.2525 from 1.2430 in a flash. GDP printed -0.2% instead of the expected gain of 0.2%, m/m. The move occurred despite a less-than-stellar US GDP result which was mixed at best. The US headline number was slightly better than forecast while PCE and Core PCE both missed. The Canadian dollar got a minor reprieve from the Chicago PMI index which came in at 46.2 vs forecast of 53.0.
Overnight, FX trading was mostly uneventful. Kiwi and Aussie are moving in opposite directions together. Kiwi is down on a soft Consumer Confidence index while AUDNZD demand underpinned AUDUSD. USDJPY is still digesting contrasting remarks from the Finance Minister and the Economics Minister. In Europe, EURUSD drifted higher, a pattern which continued in New York.
USDCAD may come under renewed selling pressure on rebalancing flows due to the monthly Reuters/WM fix which occurs at 16:00GMT, which if it occurs, may provide an opportunity to buy dollars at the proverbial “better levels”.
USDCAD technical outlook
The intraday USDCAD technicals are bullish above 1.2420 hoping to extend gains through resistance in the 1.2550-70 area to extend gains to 1.2820. This morning’s post GDP rally above 1.2450 snapped a minor intraday downtrend which should now revert to support. For today, USD support is at 1.2450 and 1.2410. Resistance is at 1.2530, and 1.2570.
Today’s Range 1.2430-1.2530
Chart: USDCAD Daily with Fibonacci retracement levels
USD TO CAD Overnight Range 1.2442-1.2530
New York traders wanted dollars and for some reason, they wanted them as soon as they sat down. The USD has gained across the board despite a modest miss in Jobless Claims. Perhaps, traders are following the lead of USDJPY moves which continues to defy gravity despite some claims that it is overvalued.
USDCAD had stalled just below 1.2500 in overnight action until a renewed plunge in Kiwi and Aussie contributed to the spike to 1.2530, currently.
Part of today’s USDCAD strength may be a result of yesterday’s BoC statement. Some analysts believe that the statement was doveish due to a reference to the currency (The Canadian dollar has strengthened in recent weeks in the context of higher oil prices and a softer U.S. dollar. If these developments are sustained, their net effect will need to be assessed as more data become available in the months ahead.) Extrapolating these words to mean “currency intervention” is a risk is a tad delusional as the BOC has not intervened in FX for over 15 years and has probably forgotten how.
Kiwi and Aussie were also active overnight. NZDUSD got hammered on lower prices for milk solids. AUDUSD dropped on a weak Capex number and USDJPY rallied when BoJ Kuroda failed to mention the currency in a speech. In Europe, Sterling dropped after a miss on Q1 data while EURUSD consolidated within yesterday’s range.
EURUSD appeared to consolidate yesterday’s losses in the European session but bounced higher in New York on the back of a news report suggesting that Greece and its creditors were making progress on an accord. EURUSD jumped to 1.0915 from 1.0830 on the news.
Looking ahead, tomorrow’s Canadian GDP data and month end portfolio rebalancing flows will ensure a volatile session. There are rumours that the 11:00 am fixing will result in USDCAD selling. WTI oil is softer, in part due to a report that OPEC won’t cut output. Oil is trading below support at $57.50/bbl which may be a direct result of the intraday US dollar strength.
USDCAD technical outlook
The intraday USDCAD technicals are bullish and looking for a move to the 1.2570-90 area which if broken should lead to 1.2820, the 2015 high. A move below 1.2480 would see losses extended to 1.2380 and still leave the uptrend intact.
For today, USD Support is at 1.2480 and 1.2440. Resistance is at 1.2530 and 1.2570.
Today’s Range 1.2480-1.2530
Chart: USDCAD 1 hour with uptrends shown Larger Chart
USDCAD Overnight Range 1.2398-1.2480
The Bank of Canada left interest rates unchanged while the statement reflected the modestly rosier outlook painted by Stephen Poloz in his speech last week. Unfortunately for USDCAD bears, it wasn’t rosy enough to offset the tide of global dollar demand sparked by renewed optimism that the long waited US economic recovery is starting to take hold.
The US dollar rally paused in Asia, except for USDJPY which returned to June 2007 levels on the back of bullish technicals and stop loss buying.
EURUSD appeared to consolidate yesterday’s losses in the European session but bounced higher in New York on the back of a news report suggesting that Greece and its creditors were making progress on an accord. EURUSD jumped to 1.0915 from 1.0830 on the news.
USDCAD technical outlook
The intraday USDCAD technicals are bullish and looking for a move to 1.2560. The break of resistance in the 1.2390-1.2400 area will act as support on a correction as will the uptrend line down at 1.2340. For today, USDCAD support is at 1.2410, 1.2390 and 1.2360. Resistance is at 1.2470, 1.2505 and 1.2560.
Today’s Range 1.2430-1.2520
Chart: USDCAD Daily with target shown
-
I know Mike is a very solid investor and respect his opinions very much. So if he says pay attention to this or that - I will.
~ Dale G.
-
I've started managing my own investments so view Michael's site as a one-stop shop from which to get information and perspectives.
~ Dave E.
-
Michael offers easy reading, honest, common sense information that anyone can use in a practical manner.
~ der_al.
-
A sane voice in a scrambled investment world.
~ Ed R.
Inside Edge Pro Contributors
Greg Weldon
Josef Schachter
Tyler Bollhorn
Ryan Irvine
Paul Beattie
Martin Straith
Patrick Ceresna
Mark Leibovit
James Thorne
Victor Adair