The Loonie And The FOMC

The Bank of Canada governor, Stephen Poloz, has been accused of being an advocate for a weaker Canadian dollar in part due to his former stint as CEO of Canada's Export Development Corporation (EDC).

Yesterday, Poloz attempted to debunk that accusation. In a speech called Floating the Loonie, he said that "in short, I believe in markets. Manipulating or trying to guide them is just not in our game plan. What the bank has done and will continue to do is be as clear as possible about how it sees the forces at play in the economy, and where the major sources of uncertainty and risks lie".

Concluding, he wrote: "But trying to control the loonie is off the table, as far as we are concerned at the Bank of Canada. A floating loon is a thing of beauty, and so is a floating loonie, at least from this economist’s perspective."

If Poloz has convinced you that the Bank of Canada does not manipulate the Loonie, on Halloween, ask the Great Pumpkin his thoughts. Poloz knows exactly what happens to the Canadian dollar when he speaks of deflation risks, employment slack, weak exports and elevated consumer debt.

Not The Time To Omit 'Considerable Time'

The FX world is awash in opinions and analysis of the potential wording of today's Federal Reserve Open Market Committee (FOMC) statement. It has spent a considerable time fixated on whether or not the statement will contain the reference to "considerable time". Last week, at this time, the U.S. dollar was in demand across the board on the assumption that the spate of better- than-expected US economic releases provided enough evidence to warrant the FOMC shifting to a slightly hawkish stance.

This week, the U.S. dollar has been sold mostly because Jon Hilsenrath, the Wall Street Journal's chief economics correspondent opined that the reference to "considerable time" would be kept, but "qualified". His opinion is well-written and well-researched but not necessarily the Gospel according to the FOMC, a notoriously opinionated bunch.

The parsing and dissection of the pending FOMC statement may be an entertaining exercise for some and will provide some great intraday trading opportunities for nimble traders. However, the reality is that: a) U.S. economic growth is starting to accelerate; b) The Eurozone economy is soft; c) U.S. rates are going higher sooner rather than later while the opposite is true for Europe and Japan.

The risk of a much steeper plunge in the currency pair following a "doveish" FOMC statement has diminished due to the earlier correction. Even if the "considerable time" reference is not altered today, the fact remains that the recent U.S. economic performance points to higher rates sooner not later and an encore performance in October. Canada is still expected to lag U.S. rate increases and commodities are still soft. The only thing that has changed is the USD/CAD range that in August was 1.0800-1.1000 to September's 1.0900-1.1100.

USD/CAD Technicals

The intraday USD/CAD technicals are bearish following the failure to extend gains above 1.1100 and the subsequent retracement through support at 1.1030 and 1.0980, suggesting a short-term top is in place. At the same time, significant support is residing between 1.0930-60 representing uptrend line, and multi-tops/bottoms. The USD/CAD rising channel is intact between 1.0900 and 1.1130.

Source: Saxo Bank

-- Edited by Kevin McIndoe

Michael O’Neill is an FX consultant at IFXA Ltd.