It's the middle of the week and FX markets are as skittish as a squirrel at a Hillbilly picnic.
The violation of Syria's sovereignty in a quasi-invasion by a US-led coalition in pursuit of Islamic State militants has all the makings of a "risk-off" scenario.
Added to the mix was Israel shooting down a Syria fighter jet and the shooting dead of a terrorist suspect in Australia after he attacked two police officers.
Meanwhile, even as Russia troops are pulling back from the Ukraine border, the US continues to goad Russia by announcing the sale of mid-range missiles to Poland.
FX markets are watching these developments with indifference, preferring to focus on speeches by Federal Open Market Committee members or European Central Bank officials.
Regroup, rethink and reload
The G-7 currencies (with the exception of GBPUSD) have given up a lot of territory to the US dollar over the past week. The key driver has been US data and speculation over the timing of the first US interest rate hike.
Traders will be focused on US data for the balance of the week as they regroup, rethink and reload ahead of next week's month- and quarter-end portfolio rebalancing flows, ECB meeting and nonfarm payrolls.
Thursday's headline Durable Goods data will not be much of a factor, as a big decline from the previous month's blow-out result is almost a given.
However, any disappointment in the remaining data, jobless claims or Markit PMI will reheat the "considerable time" debate. Friday's GDP figures and Reuters Michigan Consumer Sentiment Index pose similar issues.
Recapping USDCAD pro's and con's
USDCAD pro's:
- Falling commodity prices, particularly WTI oil.
- Economic slowdown in China.
- Widening long-term US and Canada interest rate differentials.
- General US dollar strength vs. majors.
- FOMC deputy governor's speech viewed as doveish.
- International investors continue to view Canadian housing market with jaded eye, remaining concerned about correction.
USDCAD con's
- Rising Canadian CPI reduces Bank of Canada's ability to remain doveish.
- Canadian dollar demand against EUR and JPY offsets some general US dollar strength.
- Rapidly improving Canadian economic data (except employment) including manufacturing shipments.
- Last week's BoC governor's speech viewed as shifting from "neutral doveish" to "neutral hawkish".
- Canada Mortgage and Housing Corporation reported yesterday that the current House Price Analysis and Assessment results show "that despite some overvaluation there are no immediate problematic housing market conditions at the national level".
Conclusion
The Canadian dollar remains vulnerable to falling commodity prices and rising US interest rates, which explains the widespread bullish USDCAD bias. The BoC governor's admission in an interview at the Jackson Hole Symposium that "the main thing people should understand is that our policy is quite capable of being fully independent, as it has been these past few years,” was tantamount to giving a green light to sell Canadian dollars.
With the spotlight continuing to shine on US rate expectations and the risk of Canadian dollar selling into month- and quarter-end, USDCAD is likely to grind higher, albeit in a choppy, churning manner.
USDCAD technical outlook
The short-term USDCAD technical's are bullish while trading above 1.0940. The intraday uptrend remains intact while trading above 1.1060 and this morning's breech of strong resistance in the 1.1090-1.1110 area puts the 1.1135-50 area in play.
A break of his area targets the 2014 peak of 1.1270. A move below 1.0990 and then 1.0960 risks a retest of 1.0880. USD support is at 1.0990, 1.0960 and 1.0920. Resistance is at 1.1120, 1.1135, 1.1150 and 1.1190.
