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Tuesday, November 04, 2014

Falling Oil To Punish The Loonie

This is a significant week when it comes to calendar events (RBA, BoE, ECB and NFP) and there was a danger that many would have to wait and see before participating.
Nevertheless, despite the significance of this rate setting week, the market has so far been dealt an opportunistic hand especially when it comes to interest and commodity sensitive currencies like the Aussie dollar and the Canadian loonie. For the remaining majority, the currency markets have been largely quiet and self-contained, with the ‘mighty’ dollar hovering close to its recent seven-year high against the yen (¥114.18) and near a two-year high against the EUR (€1.2456). The “mighty” dollar has managed to surge in recent days as investors react to the growing chasm in monetary policy between the Fed and other Central Bankers, particularly the BoJ.
Governor Stevens does not disappoint
In the overnight session down-under, Australia delivered the tri-factor of fundamental releases – trade, monthly retail sales and an RBA interest rate policy decision. The significance of these Tier 1 economic releases was not lost on AUD trading. It has been a rather volatile session amid the set of economic data and a policy statement. Stronger than expected retail sales (September +1.2% m/m) initially gave the Aussie a lift, before disappointing trade (-AUD$2.3b vs. -$1.8b est.) and an upward revision in unemployment (+6.2% vs. +6.1%) sent AUD/USD to its lows around $0.8650. The reaction to the RBA statement was largely positive however, and the AUD/USD has since rallied to its Euro highs of $0.8746.
As expected, the RBA left rates on hold (+2.5%) at record lows for the 14th consecutive time, adding the exchange rate is “above estimates of fundamental value particularly given further declines in key commodity prices.” There was no major change to Governor Steven’s guidance, as RBA members stuck with the well-worn Central Banker comment that it remains “prudent.” On inflation, the RBA added that recent data on prices confirmed that inflation is running between +2-3%, reiterating it would also be consistent with the target over the next two-years.
Loonie at crude’s mercy
The ongoing selloff in crude looks set to keep the CAD under pressure ($1.1382). Crude prices closed yesterday atop of multi-year low and again this morning is showing little sign of stabilizing with front-end Brent ($82.10) and WTI ($76.08) on the back foot. Prices have buckled on news that Saudi Arabia intends to cut prices for its North American customers. This would suggest that the Saudi’s are content with much lower prices as long as they can increase their market share.
Lower energy prices will obviously have a knock on effect. A continuation of the weak price trend will weigh further on the already low inflation dilemma and inflation expectations in the U.S, the U.K and the Eurozone. No inflation pressures should keep both the Fed and BoE in check, allowing policy makers to continue to signal that they are in no rush to begin a “normalizing” interest rate policy. For the ECB the rules are different. With a “deflation” overhang scenario, the ECB will be under pressure to deliver further stimulus. The market expects the ECB to provide further details on its ABS purchasing program at this Thursday’s meet, while next month provide further tinkering to the terms of its TLTRO (ultra cheap long term loan program). If the Eurozone economy happens to take another turn for the worse then there is a strong chance for full blow QE in H1 of next year.
Options a temporary barrier
For USD/CAD, market focus continues to favor the upside with a risk of breaking well through the five-year high ($1.1385) posted over a week ago. The market remains long U.S dollars, similar to other current major positioning. The techies are looking for a medium term move to $1.1650, nevertheless there is a significant amount of “wood to chop” before achieving this. There is rumored to be a plethora of USD/CAD offers touted pre-$1.1400 (option barrier level) and all the way up to $1.1450, just ahead of some weak USD ‘shorts’ stop-losses. Like most Central Bankers, the BoC’s Governor Poloz continues to be worried about downside inflation risk. He is due to testify, along with Senior Deputy Governor Carolyn Wilkins, before the House of Commons Standing Committee on Finance, in Ottawa this morning, two-hours after Canadian and U.S trade numbers. It was only a matter of weeks ago that he indicated that a weaker CAD was good for exporters. With commodity prices taking a beating other exporters need support!
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