USDCAD Overnight Range 1.2223-1.2323

The US dollar is Mr. Toad and it has been on a wild ride this morning. Another bout of weak US economic data (Jobless Claims rose, Housing Starts and Building Permits fell) revered hard won US dollar gains in Europe. USDCAD which had scraped back above 1.2310 prior to the data plunged and is now 1.2228, below the overnight low. The break of major support at 1.2330 combined with a re-evaluation of the Canadian economic landscape and the prospect of higher oil prices have triggered a wholesale bail-out of stale Long USDCAD positions.

The overnight session was entertaining. AUDUSD took over where Canada left off in a lively Asian session. Short AUDUSD traders scrambled to cover positions when Australia announced a whopping 37,700 jobs increase and a drop in the unemployment rate to 6.1% from 6.3% and AUDUSD soared. Kiwi followed AUDUSD higher. USDJPY traders saw the carnage in AUDUSD and USDCAD and sold dollars as well. In Europe, EURUSD traders bought dollars and then reversed course just ahead of the New York opening. The US dollar has been offered ever since.
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The Loonie soared following the Bank of Canada slight shift to a more neutral stance supported by tweak of the language around inflation. It’s now “roughly balanced” rather than “more balanced” which in my opinion does not justify a 0.0125 point drop in USDCAD (From 1.2550 to 1.2425). That move was more a factor of intraday long USDCAD positions getting stopped out. The ongoing drift higher in WTI prices also contributed to the Loonies strength.

Overnight, the US dollar clawed back most of yesterday’s Retail Sales induced losses in a lively session. Economic data from China (GDP, IP and Retail Sales) came out on the soft side but didn’t have much of an effect on FX markets. European traders apparently decided that a minor miss in US Retail Sales didn’t warrant the reaction, especially when Greece’s EU membership is looking more fragile by the day. EURUSD has given back nearly all of yesterday’s gains.
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Our neighbors to the north have had a rough time of it lately. Only recently, the government announced the Canadian economy shrank 0.1% in the January of this year.The reason for this slowdown is obvious; it’s the crash in the price of crude oil which has severely hurt economic activity. Pundits and professors are coming out of the woodwork as we speak, crowing that the Canada is doomed—dogs and cats living together, fire and brimstone, end of the earth kind of stuff.


I’d like to take a contrarian view.

Yes,there is a current divergence in interest rates between the two currencies. The Fed is most likely to raise at some point this year while many analysts say the Canadian central bank could cut another 25 basis points in light of the recent, dismal economic performance. However, this view ignores a growing imbalance in Canada—rising levels of consumer debt. This problem was enhanced by the surprise rate cut in January, a cut meant to cushion the economy from the consequences of the falling price of oil, a major Canadian economic sector. I don’t think the central bank will want to exacerbate the credit bubble any further in Canada so I don’t think they will cut barring a major economic downside shock.

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USDCAD dropped from the early New York highs following comments from and advisor to Japanese PM Abe stating that JPY is too high at 120.USDJPY plunged from 120.80 to 119.75 taking the US dollar down across the board.

Overnight,China posted weaker than expected trade data and AUDUSD tumbled, dragging down Kiwi and the Loonie with it. Adding to the AUDUSD’s woes was a report that the Australian Treasurer was considering reducing iron ore revenue forecasts by $25 billion over next four years.

The “buy-the-US dollar theme continued into Europe although there wasn’t a clear catalyst for the move. The dollar rally fizzled in early New York trading following the JPY comments by one of Mr. Abe’s advisors.
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EUR/USD Reversed direction, trading sharply lower last week as continued uncertainties for Greece and a possible Fed rate hike in June pressured the rate. The week began with the pair declining after making its weekly high of 1.1035 on Monday despite Spanish Unemployment Change showing a drop of -60.2K, significantly higher than the anticipated -18.3K, while U.S. ISM Non-Manufacturing PMI came out in line with expectations at 56.5. The rate continued its decline on Tuesday despite Spanish Services PMI printing at 57.3 versus 56.6 expected and German Final Services PMI, which printed at 55.4, in line with expectations.
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Most economists will tell you that the real reason for the economic recovery in the United States over the last several years has been the shale oil boom across the country that was generated by the private sector, with no help from the U.S. government. However, that did not stop the Obama administration from taking credit for the recovery, anemic as it has been. Now as the price of crude oil has crashed, the American economy has slowed concurrently. This is not rocket science; but, I doubt the administration will admit this.

The real question is, when will the economy finally start to accelerate in a normal fashion as it has historically after such a severe downturn? I mean a real recovery, across all sectors of American economic activity? The answer lies in policy, not in some magic bullets from the Fed.
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EUR/USD Continued its rally last week as the Eurozone reported mostly better than expected economic data and the United States reported the lowest Non-Farm Payrolls number since December of 2013. The week began on a soft note, with the pair declining despite German Preliminary CPI increasing +0.5% m/m compared to +0.4% expected and Spanish Flash CPI, which declined -0.7% versus -1.0% expected. U.S. data had Pending Home Sales increase +3.1% m/m, significantly higher than the +0.5% that was expected. The rate extended its losses on Tuesday, making its weekly low of 1.0712 as uncertainty over Greece — which is due to make a payment to the IMF on April 9th — pressured the Euro. Continue reading

USDCAD climbed steadily higher overnight and during the early North American session. Falling oil prices are to blame. WTI dipped to $47.70 with expectations that an Iranian nuclear deal could lead to another million barrels per day of crude hitting the market as sanctions get removed. Anticipation of better than expected US data this week, including nonfarm payrolls on Good Friday, is also providing the US dollar with support.
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EUR/USD Extended its previous week’s gains last week as the United States reported mixed economic numbers while Eurozone economic data was for the most part better than expected. The week began with the rate gaining ground on Monday after making its weekly low of 1.0766 after ECB President Draghi in a speech stated that, “We expect inflation in the euro area to remain very low or negative in the months ahead, because the recent fall in oil prices will continue to influence the figures until later in the year. However, inflation rates are expected to start increasing gradually towards the end of the year. They will be supported by aggregate demand, by the impact of the lower euro exchange rate and by the recovery of oil prices from their current troughs in the years ahead.” Also on Monday, US Existing Home Sales came out at 4.88M compared to an expected 4.91M. Continue reading

The US dollar barely budged on the Q4 GDP report (2.2%) and is ending the week on a down note having lost ground across the G-10 spectrum. The debate is still raging as to whether the current bout of US dollar weakness is merely a correction of the massive oversold positioning or perhaps the start of a consolidation phase. The outperformance of European data vis a vis the US data is behind the consolidation arguments.

USDCAD traded higher overnight due to a retreating oil price and general US dollar strength. (it has since come off) Oil traders have apparently concluded that the Saudi/Yemen hostilities doesn’t mean much for oil supplies and WTI has traded lower. EURUSD traded heavily in Europe with traders awaiting Monday’s revised Greek debt reform package. In the UK, BoE’s Mark Carney said that the next interest rate move is likely up. It wasn’t news.
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EUR/USD Reversed direction, trading sharply higher last week as the FOMC Statement was interpreted by the market as more dovish than expected, and with mostly lower than expected economic data out of both economies. The week began on a positive note, with the rate gaining after making its weekly low of 1.0479 on Monday after ECB President Draghi stated in a speech that, “We are meeting against the backdrop of a steadily recovering economic situation in the euro area. Most indicators suggest a sustained recovery is taking hold. Confidence among firms and consumers is rising. Growth forecasts have been revised upwards. And bank lending is improving on both the demand and supply sides.” Continue reading

America’s influence is waning in the world, militarily, economically, and culturally. The global financial structure which has been in place for decades is unraveling and it will not end well for the United States’ currency and economy. This change is being driven by a desire of many nations with totalitarian capitalism to rid themselves of a reliance on the US Dollar which gives the U.S. power over them through threats to remove a country or institution from the dollarized financial system.

We’ve discussed the consequences to the dollar and America in previous posts as far as reserve currency status and interest rates are concerned and the severe problems they could bring. What I’d like to get across right now is the level of uncertainty which is building up across the global financial architecture.
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I learned from my years on the “street” to buy on the rumor, sell on the news. Well, the news for weeks now has been the European Central Bank (ECB) starting its quantitative easing program and the Federal Reserve Bank of the United States possibly raising interest rates to ward off inflation and bring America out of its free-money bliss. In fact, it seems that this sentiment has become a very crowded trade, pushing the dollar to levels not seen in over a decade.

However, this is now maybe an old story and judging from the PPI data today, the conventional wisdom could very well be wrong. The numbers that came out this morning showed a decline in the Producer Price Index when the consensus estimate was for an increase of 0.3%. Of even more importance is the fact that this was the fourth monthly decline in a row. The PPI is down over the last year where economists expected a flat reading.
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EUR/USD Continued its sharp decline last week as the ECB started its government bond purchase program and the market continued pricing in anticipated guidance for the Fed’s interest rate policy. The rate started the week consolidating at a slightly higher level after making its weekly high of 1.0906 on Monday after the ECB began purchasing bonds under its recently expanded QE program. Also, the Sentix Investor Confidence Index printed at a 7 year high of 18.6, significantly higher than the reading of 15.3 that was expected. The pair then began selling off sharply on Tuesday after speculation in the market that the Fed would remove the word “patient” from their upcoming statement next Wednesday, which would set the stage for a rate hike this summer. Economic numbers had U.S. JOLTS Job Openings at +5.0M, in line with expectations and French Industrial Production, increasing +0.4% m/m versus -0.2% expected. Continue reading


Dictators don’t have a good track record of financial management. Just look at Russia, Venezuela, Argentina, etc. if you don’t believe me. Okay, China may be the exception but I don’t think the fat lady has sung there yet. Turkey is channeling Russia big time right now and this will not end well. Stay away from the lira.

The problem is the same tired old scenario that we are unfortunately seeing too many times around the globe these days. Of course the situation in Turkey has the special circumstance that we are dealing with the old Ottoman Empire right next door to the Islamic State and a rising Iran, but that’s another story altogether.
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EUR/USD Extended its previous week’s losses, closing at a level not seen since September of 2003 last week. The loss in the rate was in large part due to a better than expected U.S. Non-Farm Payrolls release and the ECB leaving rates unchanged and reiterating its stimulus program which begins this month. Then pair began the week making its weekly high of 1.1240 on Monday after Eurozone CPI Flash Estimate declined -0.3% y/y compared to an expected decline of -0.5%, while U.S. ISM Manufacturing PMI printed at 52.9 versus an expected reading of 53.4. The rate then consolidated on Tuesday after Spanish Unemployment Change declined -13.5K versus -10.5K expected and German Retail Sales increased +2.9% m/m compared to +0.5% anticipated. Continue reading

AUD/USD Fundamental Outlook
AUD/USD reversed direction in February, gaining +0.7% for the month overall. The increase in the rate was in part due to lower expectations of a possible U.S. rate hike and despite the RBA reducing its benchmark Cash Rate by 25 bps. Australian economic numbers showed strength in the housing sector, with Home Loans increasing +2.7% m/m compared to an expected +2.5%, while Building Approvals showed a decline of -3.3% m/m versus an expected decline of -4.8%.
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USDCAD Overnight Range 1.2460-1.2620

The US dollar exploded higher against all the G-10 currencies on a surprising 295K gain in nonfarm payrolls that has traders chanting ”rate hike in June, rate hike in June. They may get disappointed later on, but for now they are on a roll. EURUSD was already heavy going into the data but still managed to drop another .0100 points from 1.0960 to 1.0860 in a flash. The details of the report were a tad less than stellar-hourly wages were weak and the January result was revised lower. But for now, no one cares.

The loonie got an extra whack with the bad news stick in the form of a weak Merchandise Trade report. The 2.8% decline in exports (due to the drop in oil) combined with the NFP data drove USDCAD from 1.2462 to 1.2620 in a flash.

However, it is not all doom and gloom for the Canadian dollar. The short term outlook for oil prices has improved and WTI is still above $50.00/bbl. Demand for Canadian dollars against EUR, GBP and JPY will help offset USDCAD demand. And, most importantly, USDCAD remains confined to the 1.2360-1.2660 range, intact since early February.
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NZD/USD Fundamental Outlook

NZD/USD gained ground last month, increasing an impressive +4.2% in February overall. The increase in the rate was in part due to the interest rate differential and mostly better than expected economic data out of New Zealand. Highlights for the Kiwi in February were the Trade Balance, which showed a surplus of +56M, significantly better than the expected deficit of -162M, Retail Sales, which increased +1.7% and the Core number increasing by +1.5% while Employment Change increased +1.2% q/q versus +0.8% expected, nevertheless, the NZ Unemployment Rate increased to 5.7% from 5.4%.
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Oz to me seems like a no-brainer. The Aussie dollar has been beaten down over a commodity slump and a rate decrease by the Reserve Bank of Australia in the face of the ECB’s quantitative easing program. But the real clincher has been the price action over the last few weeks. If you google Aussie currency news, and review the day to day articles, you will get an idea of what I am talking about. It’s enough to give a day-trader whiplash—Aussie dollar fades, Aussie dollar bounces, Aussie dollar beaten down, Aussie dollar rallies…

I call this a good-ole-fashioned consolidation. After almost reaching parity with the USD last summer, the Australian dollar is building a nice base here in the high seventies. Although the currency could obviously fall further against the USD if the world economy (and especially China) slumps further, I believe investors looks for good value should at least start watching the Aussie for a good entry point and maybe even start taking partial positions.
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There’s nothing that can throw cold water on irresponsible populist rhetoric than cold hard reality staring you in the face. It looks as though we are seeing this happen in Greece as we speak. Faced with imminent default, the Greek government stated over the weekend that they would pay their debts owed to the European Union.

With a conciliatory tone,the Greek Prime Minister said this, “The deliberation with our European partners has just begun,” Tsipras said. “Despite the fact that there are differences in perspective, I am absolutely confident that we will soon manage to reach a mutually beneficial agreement, both for Greece and for Europe as a whole.” In other words, Greek is looking to walk back some of the inflammatory comments after the election that caused Greek markets to tumble and drastically increased the market’s perception that Greece will not pay its debts.

The Greek situation is the biggest tail risk out there that could cause material volatility in currency markets. The problem is, it could go either way. If Greece swallows the red pill and refuses to abide by previously negotiated agreements, the tiny country would become the first domino in the destruction of the Eurozone as we know it today. Spain, Italy, and possibly others are watching with baited breath to see what happens as they would be right behind Greece in demanding their debts be forgiven or renegotiated. Then all bets are off and there will be unintended consequences in currency markets around the globe. The dollar will spike further.
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Well, what a week! I can’t remember seeing such sustained volatility in the markets for a long time. The over-riding theme remains the almighty dollar, currently at 6 year highs against the Loonie and 11 year highs against the Euro. Although everyone knew it was coming the sheer size of yesterday’s ECB QE announcement caused some shock and with concerns about the make-up of the next Greek government will ensure the Euro stays on the defensive for the foreseeable future. Those analysts that are calling for Euro parity with the USD could soon be proved right.

Canadian CPI came out yesterday and was none too pretty (-0.7%), clearly this was in the BoC’s thoughts regarding Wednesday’s surprise rate cut.
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Financial markets over the past year have been defined by diverging monetary policy settings with shifting rate expectations changing the dynamic of broader forex markets. Having initially traded up above the 94 US Cents mark as recently as September the Australian dollar has now lost more than 15 percent over the past four months a shift made even more notable given its been more than three years since the Australian dollar hit its all-time high of 1.10 in August 2011.

With its weakness being driven mainly by a strengthening US dollar, investors are no longer tying macro developments directly to their implications for QE. Looking ahead over the coming year an eventual tightening of policy by the US Federal Reserve during the first half is expected, a move which should ensure the upward trajectory of the US dollar is maintained.

Keeping in mind the key theme remains Greenback (US Dollar) strength; significant falls across broader commodity prices, softer growth indicators from China as well as a relatively dovish domestic outlook have also played their part.

Looking ahead over the coming 12 months, more of the same is likely with higher rates of return available offshore reducing the attractiveness of the Australian dollar, as a result heightening the risks of a further depreciation.

Michael Judge, OzForex Corporate Dealer


Michael Judge is Corporate Foreign Exchange Dealer at OzForex, a global provider of online international payment services and a key provider of Forex news.
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