Slip Sliding Away - "soft economic data" you Need to know about Tomorrow's US FOMC Statement

　

Just how fragile is the US dollar right now? It can’t even muster up a gain against the political backdrop of its cross Atlantic rivals, the UK and Europe. The GBP was the best performer last week despite all indications that the UK general election on May 7th will end with no clear cut winner resulting in a coalition-forming government with potential referendums on Scottish independence or an exit from the EU. Meanwhile, the euro was the second best performer despite not being able to come to an agreement with Greece and its mountain of unpayable debt.

The U.S. economic outlook continues to be plagued by soft data, which is making USD bulls nervous as their bullish stance appears to be slip-sliding away. The USD bullish case is predicated on the fact that the Fed will raise interest rates between June and September while the rest of the global central banks stand pat, but the continued tide of soft economic data questions this thesis. Last week it was the combination of new home sales, initial jobless claims, Markit PMI, and the durable goods report. All were less than stellar, which weighed on the USD. Of course, this string of bad news is good news to the equity markets which rallied to a record high as U.S. Treasury yields slipped.

Ever since the Fed dropped "patience" from their FOMC statement the media has proclaimed that the Fed has become data dependent. You have good reason to chuckle because when hasn’t the Fed been data dependent? With this in mind, market participants now pay more than cursory attention to second and third tier data, which barely drew attention in the past, in hopes of gleaming insight into the timing of the Fed’s first interest rate hike in more than 6 years. Having said this, the market appears to be less confident in the US economy and in the ability of the Fed to deliver said rate hike which is weighing on the USD.

 

Tomorrow's FOMC statement could spell more problems for the USD as the Fed meets. Without a news conference or updated projections, the FOMC statement will be the focus. If the statement acknowledges the broadly weaker data for consumption, manufacturing, and the labor market in recent months then the USD will sell off quickly. However, if the Fed sticks with their transitory argument for the recent string of weak data then USD bulls will breathe a collective sigh of relief. We suspect that the greater challenge for USD bulls will be the April employment report on May 8, especially after the disappointing March report.

 

 

USDCAD falls to 1.2021 ahead of tomorrow's U.S. Fed Announcement

VBCE Daily Foreign Exchange Update for Tuesday, Apr. 28th, 2015

USDCAD spot rate: 1.2036 - 1.2041 (AS AT 8:36AM PST)

RANGES:	Asia:	1.2085	to	1.2110
	Europe:	1.2057	to	1.2116
	North America:	1.2021	to	1.2093

Technical Support / Resistance:

S2	S1	R1	R2
1.1984	1.2020	1.2100	1.2200

Key Economic Data Releases:

-U.S. Case Shiller home price indices: 5.0% (exp. 4.7%)

-U.S. consumer confidence: 95.2 (exp. 102.5)

-U.S. Richmond Fed manufacturing: -3 (exp. -2)

Key Event Calendar:

DATE	CANADA	U.S.A.
Apr. 29	Raw mat / industrial prod. prices	GDP, pending home sale, Fed interest rate
Apr. 30	GDP	Personal income/spending, jobless claims
May 1	RBC Manufacturing PMI	Markit/Ism Mfg., consumer sentiment index

Yesterday, the downtrend continued with USDCAD falling from 1.2200 down to 1.2081. The pairing bounced marginally to hold in a 1.2090 – 1.2110 range for the balance of the session. USDCAD had been confined to a 1.21 – 1.23 range last week after the large move lower (from 1.2650 down to 1.2088) the week before. USDCAD dipped to 1.2052 in early North American trading before bouncing to 1.2093. Again, U.S. economic data was weaker than expected today, a common trend recently, and USDCAD has fallen to 1.2021 amidst broad-based USD weakness. A brief bounce to 1.2038 has been followed by a re- test of 1.2020. The main event risk comes tomorrow with the U.S. Fed interest rate policy announcement. After a string of weaker than expected data, the Fed could push back raising interest rates to September now – the main reason why the USD has been under pressures vs. most currencies these past few weeks. Currently, the TSX is down 0.33% while the DJIA is up 0.14%. EURCAD is up 0.35% trading between 1.3145 and 1.3225. GBPCAD is up 0.25%, trading between 1.8377 and 1.8489. JPYCAD is down 0.16% trading between 0.01012 and 0.01017. Gold is up 0.81% trading between $1,199 and $1,214USD/oz., silver is up 1.07% trading between $16.32 and $16.66USD/oz., while oil is up 0.37% trading between $56.11 and $57.79.

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

 

 

 

 

An Air of Optimism

　

With the CAD ringing in its best weekly performance in four years, the question on the desk and with our clients is – is the bottom in? We will answer that in a moment. The CAD was up on a combination of less than stellar US economic data, firming Canadian economic data, a less dovish Bank of Canada, and a firmer oil price.

The Canadian economy seems to have gone from an "atrocious" first quarter as described by BOC Governor Stephen Poloz to an air of optimism. Canadian retail sales racked up their biggest increase in eight months for the month of February while core inflation saw its fastest pace in 6 years. This helps to explain why the BOC upgraded their assessment of the domestic economy. They revised Q1 GDP to flat from 1.5%, but Q2 was revised up to 1.8% from 1.5% and Q3 to 2.8% from 2.0%. Overall, the BOC sees 2015 growth at 1.9%. They also upgraded their inflation outlook which indicates that they see the oil impact mostly behind them. All in all, the BOC’s more optimistic mood has pretty much ruled out the chance of another rate cut this year.

The over 50% hair cut in the price of oil has been the main culprit in the roughly 16% decline in the value of the CAD since mid-2014. The price of oil surged about 8% last week, hitting a 2015 high of $57 at one point. The price action has the earmarks of a reverse head-and-shoulders bottoming formation. With the price of oil slicing through the neckline the technical analysis demonstrates that the price of oil has now bottomed. Ironically, this comes at a time when inventories are growing at least three times more than had been expected. Be that as it may, the recent price action speaks volumes.

So has the CAD bottomed? During this year we have been ask many times by clients as to what level the CAD would fall to. Our response has always been that the level is unknowable, however, the one thing that we are sure of is that the CAD will find its bottom once the price of oil has bottomed.

 

USDCAD Big 5 Forecasts from earlier this year:

 

 

The USD was taken to the woodshed last week after another round of weaker U.S. economic reports drove it sharply lower against all of the major currencies. Since the Fed jettisoned "patience" from their FOMC statement it is understood that the Fed will be data driven. Last week’s uninspiring economic data (US industrial production, Empire Fed, and Fed Beige Book) is causing some market participants to wonder out loud if the Fed will actually raise interest rates at all in 2015. This has caused market sentiment to change dramatically in the past week with market participants now questioning if the rally in the USD is over. Furthermore, with the economic calendar a little on the light side this upcoming week for US data, there will be little in the way of the USD’s current downward path. The one thing that could change its path next week could be safe haven flows due to the renewed fears about the risk of a Greek debt default and possible exit from the euro.

 

Negotiations between the Greeks and the Eurozone are reaching its climax and the endgame is finally visible. Greek Finance Minister Yanis Varoufakis doesn’t really have any choices if no deal is struck: Greece must either accept the terms of the bailout or risk going bust. An article written by Simon Nixon for the Wall Street Journal nicely summarizes the current situation.

It’s still possible that Greece can remain in the Eurozone — though that is no longer the base case for many policy makers. At the very least, most fear the situation is going to get much worse before it gets any better. No one now expects a deal to unlock Greek bailout funding at this week’s meeting of Eurozone finance ministers in Riga — originally set as the final deadline for a deal. The new final, final deadline is now said to be a summit on May 11.

But among European politicians and officials gathered in Washington DC last week for the International Monetary Fund’s Spring Meetings, there was little optimism that a deal will be agreed by then. The two sides are no closer to an agreement than when the Greek government took office almost three months ago. "Nothing, literally nothing has been achieved," says an official. In fact, it is worse than that: so far, the bulk of Athens’ reform plans would actually cost money or reduce government revenues, according to Eurozone officials.

They say that when you add up all the government’s proposals, the budget surplus required under the current program turns into a 10-15% deficit while debt soars far above the 120% of GDP targeted for 2022. There is no way that the Eurozone — let alone the IMF — could disburse funds on the basis of such fantastical numbers.

The bottom line is that Athens won’t get any money unless it can reach a deal that satisfies the IMF that Greek debt is on a sustainable path and that it has a medium-term funding plan in place. The Eurozone won’t disburse its own bailout funds without a deal that carries this IMF seal of approval.

The IMF has agreed to streamline its demands, but that hardly diminishes the scale of the compromise required of Prime Minister Alexis Tsipras; even a slimmed-down deal will require either Athens to commit to an ambitious third bailout program or the Eurozone to agree to provide substantial debt relief—which it won’t until Athens can convince the Eurozone it is serious about reform.   

 

VBCE Daily Foreign Exchange Update for Wednesday, Apr. 22nd, 2015

 

USDCAD spot rate: 1.2245  - 1.2250 (as at 8:00am PST)

Ranges: 

Asia	1.2252 to 1.2287
Europe	1.2208 to 1.2257
North America	1.2225 to 1.2260

Technical Support / Resistance:

S2	S1	R1	R2
1.2090	1.2180	1.2280	1.2350

 

Key Economic Data Releases:

  -U.S. existing home sales m/m: 5.19 million (exp. 5.03 million) % change: 6.1% (exp. 3.0%)
  -EIA crude oil stocks change: 5.3 million barrels (exp. 2.7 million barrels)

 

Key Event Calendar:

Date	Canada	U.S.A.
Apr. 23 Apr. 24		Jobless claims, Markit mfg., new home sales Durable goods orders

 

Yesterday, USDCAD climbed from 1.2225 up to 1.2280 (resistance area) during the London session before falling back to 1.2212 in early North American trading. The pairing then briefly broke above 1.2280 extending gains to 1.2297. Trade above the 1.2280 level could not be sustained and USDCAD fell back to 1.2250. A third attempt was successful as USDCAD briefly touched 1.2305 but the pairing drifted back towards 1.2280  late  in  the  N.A.  session.  Overnight, USDCAD  dropped  to  1.2208  on  general  USD weakness. The pairing bounced to 1.2255 and has remained range-bound between 1.2225 – 1.2260 in the absence of any key data. After holding a 1.2350 – 1.2835 range for much of the first quarter of 2015, the market appears to have shifted its sentiment towards USDCAD from bullish to bearish. The main catalysts were the Bank of Canada affirming a neutral interest rate policy, higher oil, and recent weaker U.S. data suggesting that U.S. rate hikes may be fewer and far between. Previous strong support at 1.2350 should cap rallies in USDCAD for a test of 1.20 this quarter. Currently, the TSX is down 0.60% while the DJIA is up 0.29%. EURCAD is down 0.20% trading between 1.3118 and 1.3201. GBPCAD is up 0.70%, trading between 1.8281 and 1.8465. JPYCAD is down 0.40% trading between 0.01021 and 0.01026. Gold is down 1.28%  trading  between $1,186  and  $1,205USD/oz.,  silver  is  down  2%  trading  between $15.71  and $16.12USD/oz., while oil is up 0.50% trading between $55.72 and $57.16.

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

 

VBCE Daily Foreign Exchange Update for Tuesday, April 21st, 2015

 

USDCAD spot rate: 1.2270  - 1.2275 (as at 8:00am PST)

 

Range:

Asia	1.2225 to 1.2272
Europe	1.2241 to 1.2281
North America	1.2212 to 1.2297

 

Technical Support / Resistance:

 

S1	S2	R1	R2
1.2090	1.2180	1.2280	1.2350

 

Key Economic Data Releases:

  -Canada wholesale sales: -0.4% (exp. 0.0%)

 

Key Event Calendar:

Date	Canada	U.S.A.
Apr. 22   Apr. 23   Apr. 24		Existing home sales, crude oil stock change Jobless claims, Markit mfg., new home sales Durable goods orders

 

Yesterday, USDCAD traded from 1.2230 down to 1.2180 before climbing to 1.2260. The move up was short-lived with USDCAD falling back to 1.2190 as oil broke above $57 after a quick dip below $55. Also, Bank of Canada Governor Poloz re-iterated the Bank’s decision last week to uphold a neutral bias and not cut interest rates further. The change in the Bank of Canada’s tone last week surprised markets and lead to one of the largest one-week rallies the CAD has ever seen (USDCAD declined by 5.5 cents).  The move below 1.22 was short-lived and USDCAD climbed to hold near 1.2230 for the balance of the session. Overnight, USDCAD tested 1.2280 resistance during the London session before falling back to 1.2212 in early North American trading. The pairing then briefly broke above 1.2280 extending gains to 1.2297. Trade above the 1.2280 level could not be sustained and USDCAD fell back to 1.2250. Another move higher to break 1.2280 failed to materialize and the pairing has since eased to 1.2255. After holding a 1.2350 – 1.2835 range for much of the first quarter of 2015, the market appears to have shifted its sentiment towards USDCAD from bullish to  bearish.  The  main catalysts were  the  Bank  of Canada affirming a neutral interest rate policy, higher oil, and recent weaker U.S. data suggesting that U.S. rate hikes may be fewer and far between. Previous strong support at 1.2350 should cap rallies in USDCAD for a test of 1.20 this quarter. Currently, the TSX and the DJIA are down 0.43% and 0.29% respectively. EURCAD is up 0.40% trading between 1.3059 and 1.3187. GBPCAD is up 0.60%, trading between 1.8180 and 1.8326. JPYCAD is up 0.12% trading between 0.01023 and 0.01027. Gold is up 0.23% trading between $1,193 and $1,203USD/oz., silver is up 0.15% trading between $15.92 and $16.20USD/oz., while oil is 1% trading between $57.19 and $58.04.

 

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