• Bank of Canada talks down Loonie
• US dollar index trending higher intraday Various FX markets have been chopped and diced like vegetables at a cooking demonstration even though the economic rationale for the moves is based on second tier data. A worse than expected Australian Q1 CPI result (Actual 2.9 percent vs. forecast 3.2 percent, year over year) saw AUDUSD give up 0.0100 points, even though the Reserve Bank of Australia (RBA) is expected to raise interest rates later this year. Better than expected Eurozone PMI data helped lift EURUSD which had started to retreat when the worse than expected US April Markit Manufacturing PMI was released. EURUSD demand was renewed, encouraged by a soft US housing report. The 14.4 percent drop in March New Home Sales to 384,000 vs. a forecast of 450,000 will certainly provide fodder for interest rate discussions next week. In Canada, retail sales rose to the occasion and surpassed forecasts rising 0.5 percent in February and both January and December results were revised higher. The initial news appears to have been ignored by traders but it may help explain why the USDCAD rally stalled above 1.1040.
Next week is key
This week is merely a side show at the FX circus and tickets are now on sale for next week's "Big Top" event. It is very likely that the existing ranges in the majors remain intact ahead of next week's three ring show which includes the Federal Reserve Open Market Committee (FOMC) meeting, US non-farm payrolls report and the month end portfolio rebalancing flows. The annual Japanese golden week holidays start on Tuesday removing a large chunk of liquidity from the market in the process.
Offsetting economic impact of Keystone Pipeline delay
The Canadian dollar is not only struggling to hang on to its recent gains, it is trying to avoid another wholesale sell-off. The positive effect from the recent series of strong domestic data releases including CPI and retail sales is being off-set by Stephen Poloz, the governor of the Bank of Canada. His constant references to deflation and admissions of rate cuts not being off the table are deliberate and not very subtle attempts to devalue the currency. He may have a very good reason for his actions. In his former role as President of Export Development Corporation (EDC) he became well aware of the benefits of a weaker currency on exports. The on-going discount applied to prices paid for Canadian oil (Western Canada Select-WCS) and West Texas Intermediate (WTI) is currently around $21.00 per barrel and mainly due to pipeline congestion in Cushing, Oklahoma. The US administration announced another delay in the approval of the Keystone XL pipeline which would have alleviated the congestion and the discount. Perhaps Mr. Poloz views a weaker currency as an effective measure to counteract the US politics.
USDCAD technical outlook
The USDCAD rally from October 2013 ended at the beginning of April with the move through the up-trend line at 1.0990. The ensuing sell-off was contained by the 38.2 percent Fibonacci retracement level in the 1.0850-80 area and USDCAD has steadily risen. The intraday up-trend from the 1.0855 low remains intact above 1.0990 but faces good resistance in the 1.1040-60 zone. A break above 1.1080 would argue that a short-term bottom is in place at 1.0855 and re-target 1.1270.
Chart USDCAD 4-hour
What is the US index telling us?
The US dollar index suggests that the dominate US dollar downtrend from last June remains intact although there is good support in the 79.20 area. Intraday, the USDX rally is intact above 79.75 looking for another test of the 80.10-20 area. If the up trend continues it would support a retreat in EURUSD and add to the upside pressure on USDCAD.
Chart US dollar index
