VBCE Weekly Market FX Update - November 10-14 2014

November 10-14 2014

 

 

Cheap Oil Begets Cheap CAD

 

In last week’s Dispatch we warned that the USD could consolidate lower in the week ahead especially since the news flow for the U.S. was sparse and because the USD was unable to trade higher after last Friday’s stellar U.S. non-farm payroll report. With the technical condition of the USD stretched we did finally get a correction with only the British pound and the Japanese yen preforming worse than the USD. The GBP was weighed down as interest rate hike expectations were pushed out into late 2015 after the release of the Bank of England's Quarterly Inflation Report, which warned of the risk that UK inflation could fall below 1% in the next six months. Meanwhile, the yen languished as rumours persisted that Prime Minister Abe is expected to decide after Q3 GDP is reported at the start  of  next  week  that  the  economy  is  too  weak to  sustain the planned hike in the sales tax next year. If Abe decides to postpone the sales tax he would then call for snap elections that would more than likely bolster his support for more yen weakening policies.

 

 

The CAD was able to finish the week with a meager gain after data showed manufacturing shipments increased in September and after the price of oil was able to regain the $75 handle. The CAD also received a temporary boost after the Republican-dominated House of Representatives passed – by a 252-161 vote – a pro-Keystone XL bill. We point out that the impact was temporary because it was the ninth time the House of Representatives has passed a pro-Keystone XL measure and President Obama still has the power to veto it and he characterized the decision as, “it gets Canadian oil to world markets, it doesn’t help the U.S. consumer.”

 

Getting back to the price of oil, is this a new era of cheap oil? Crude Oil was down 3.5% last week as it got to as low as $72.23 at one point before closing out the week over $75. Oil prices have fallen 30% since peaking in June, pressured by a strong USD and rising U.S. light oil output. There appears to be no end in sight to the nose-diving prices on the oil market and the weekly chart of crude oil shows that it could conceivable drop to as low as $50. Last week, The Saudi Arabian Oil Minister, al-Naimi, made no reference whatsoever to any willingness to reduce production. This of course could simply be a tactical move on the part of Saudi Arabia so that it does not have to cut production on its own but it can also get other OPEC members on board too. Be prepared for more price volatility as other OPEC members make comments ahead of the next OPEC meeting on November 27. What ever happen to the peak oil theory of 2008? The short answer is the shale boom in North America. The real reason for the slump in oil prices, namely the rapid growth of US oil production, recorded a new milestone last week. According to preliminary figures from the U.S. Energy Information Administration, it reached over 9 million barrels per day again for the first time since the 1970s.

 

 

Falling oil prices have put the pinch on not only Canadian government revenues but the CAD as well. However,  falling  oil  prices  is  not  the  only  reason  why  the  CAD  has  been  under  pressure.  Falling commodity prices and the broad USD rally have also been contributing factors in the decline in the CAD. Having said this, in the short term, the inability of the CAD to recapture the 1.14 handle spurs a little hope for a brief rebound for the CAD. From a technical perspective, the RSI and MACDs are turning lower and the 5-day moving average is headed lower and looks to cross the 20-day ma. A move to the 1.11 handle may be in the cards. However, longer term, the CAD is headed lower so dips in the USD/CAD rate must be seen as a buying opportunity. The good news is that CAD will be stronger against the crosses - against the euro, pound, and yen.

 

 

‘Titanic Europe’ Sinks Slowly into a Lost Decade
 

About the only good thing one can say about the European economy is that it did not slip into a triple- dip recession, but just narrowly. According to growth rate statistics released by EuroStat last week, third quarter economic growth for the Eurozone came in slightly higher than expected at 0.2%, which is apparently enough for European politicians to proclaim that growth is back. However, the reality is that Europe risks a “lost decade” of economic growth without aggressive efforts to boost demand, according to U.S. Treasury Secretary Jacob Lew. Without major structural and fiscal changes, Europe could stall the sputtering global economic recovery if it slips into another recession. European politicians that doggedly cling to existing policies and plans are using this data to justify the avoidance of radical change in EMU policy, whether that might be a blitz of investment or full-fledged quantitative easing by the European Central Bank.

Mr Mohamed El-Erian, Chief Economic Advisor at Allianz SE, outlines in seven simple points how the sluggish European economy could destabilize global growth in an Bloomberg article found here.
 

 

The following chart tells you all you need to know about the European economy. The bottom line is that Europe is not in a recession, but it also still is not growing much.

 

 

 

 

VBCE Daily Foreign Exchange Update for Wednesday, Nov. 19th, 2014

USDCAD spot rate: 1.1337 - 1.1342 (AS AT 8:15AM PST)

RANGES:	Asia:	1.1295	to	1.1338
	Europe:	1.1322	to	1.1342
	North America:	1.1330	to	1.1356

Technical Support / Resistance:

S2	S1	R1	R2
1.1210	1.1265	1.1384	1.1440

Key Economic Data Releases:

-U.S. building permits: 1.08million (exp. 1.04 million)

-U.S. housing starts: 1.009 million (exp. 1.025 million)

-U.S. Federal Open Market Committee (FOMC) minutes: TBA ~ 11:00am

Key Event Calendar:

DATE	CANADA	U.S.A.
Nov. 20	Wholesale sales	CPI, jobless claims, Markit mfg PMI, existing
		home sales, Phil.Fed mfg survey, leading indicator
Nov. 21	Consumer price index

 

Yesterday, USDCAD traded from 1.1272 up to 1.1324 before falling back to hold a 1.1295 – 1.1315 range for the balance of the North American session. USDCAD rallied to 1.1328 late in the day on news that the U.S. Senate rejected the Keystone XL Pipeline after falling short by a single vote. There will be another vote in January. USDCAD climbed to 1.1342 overnight as global equity markets were in the red ahead of today’s 11:00am release of the U.S. FOMC minutes. With the recent decline in oil and absence of wage inflation, the Fed could show concern about low inflation and delay interest rate hikes. USDCAD opened this morning’s session at 1.1340, climbed to 1.1356, and then dipped to 1.1330. The pairing has since moved back up to 1.1345. The worst performing currency continues to be the JPY as USDJPY broke the 117 level in early Asian trade with the pair extending to a new 7 year high of 117.78. This is an extremely strong trend as USDJPY has climbed 19 out of the past 25 days. The yen has weakened by nearly 16% vs. the USD and 12% vs. the CAD over the past 4 months. The best performing currency is the GBP after minutes from the Bank of England were less dovish. Currently, the TSX and the DJIA are down 0.25% and 0.17% respectively. EURCAD is up 0.50% trading between 1.4156 and 1.4257. GBPCAD is up 0.75% trading between 1.7649 and 1.7805. JPYCAD is down 0.30% trading between 0.00963 and 0.00968. Gold is down 1.88% trading between $1,202 and $1,175USD/oz, silver is down 1.72% trading between $15.91 and $16.32USD/oz, while oil is down 0.16%, trading between $73.91 and $75.09.

Sources: Reuters, Bloomberg, FXStreet, RBC Capital Markets, Bank of Canada, U.S. Federal Reserve, CNBC, Forexlive

 

Please contact the VBCE trading desk at 604-685-1008 for more information on our foreign exchange and wire payment services. Updates by stevebrown@vbce.ca 

 

The information contained in this report has been compiled by our VBCE traders from sources believed to be reliable, but no representation or warranty, express or implied, is made by VBCE as to its accuracy, completeness or correctness.  All opinions and estimates contained in this report constitute VBCE’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility.  Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.  This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it.  This report is not an offer to sell or a solicitation of an offer to buy any currency or precious metals.  Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.  To the full extent permitted by law neither VBCE nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein.  No matter contained in this document may be reproduced or copied by any means without the prior consent of VBCE.

 

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