Week In FX Americas: Loonie Bears Take A Drubbing

by: Dean Popplewell

By Dean Popplewell

    • On its third attempt CAD Blows through $1.08.
    • Will the BoC waver away from downside inflation risks?
    • Expect Governor Poloz to focus on weak Canada Job growth.

Year to date, the Fed has succeeded in communicating its rate outlook in an incremental manner. US policy makers have done this by edging up its 2015 and 2016 view on Fed funds and by its downward adjustment to Fed funds over the long haul.

In reality and under forward guidance, capital markets has been spoon fed, resulting in a low volatility-trading environment. In short, investors and traders have been focusing on what the Fed "says" rather than on what it "thinks."

Nevertheless, over the coming months the Fed debates should begin to heat up, assuming that the US economy continues to strengthen while inflation targets hit their objectives. The forex market requires sustainable Central Bank rate divergence to break the monotony of the contained currency range cycle.

A potential change in Central Bank tone certainly provides market movement and opportunity. An example was Friday's Canadian inflation (+2.3% - the fastest climb in 27-months) and core retail sales print (+0.7%).

The loonie happened to fly through three key levels, finally punching through the optioned protected $1.08 outright threshold on its third attempt this month. The CAD eventually touched a new five-month high ($1.0767) on the back of dealers assuming that Governor Poloz at the BoC will have to shy away from the downside risk to inflation rhetoric. Maybe so, but the increase in Canadian prices will not come as a surprise to the Governor.

A large percentage of the price surge will have come from a weaker loonie - an issue that has been clearly been flagged by the BoC. Expect Canadian policy makers to now lean on weak employment numbers to walk the currency down again. Canada has produced a six-month average job gain of only +3k - not something to be very proud of.

Commodity prices aside, the risk reward favors the dollar bulls to accumulate more dollars ahead of a last January's high CAD print first time around.

On tap for next week:

The market will be focusing on global manufacturing PMIs, starting with China this weekend. Chinese indices are mixed going into Sunday's flash PMI release. The most recent figure of 49.4 was a five-month high, albeit the fifth consecutive month in contraction. Europe and Germany follow on Monday. In the midst of the first round of the World Cup, traders will get to gauge German business and US consumer sentiment. After US durables the week wraps up with German preliminary inflation numbers.