CAD’s Loonie Bull Caught In The Headlights

There seems to be some hope for Greece avoiding being dumped out of the eurozone after the Greek government sent in its proposals of last chance to the European institutions last night.

The concessions seem to be well received and are being priced in ahead of Saturday’s Eurogroup meet and Sunday’s Euro Summit. The last minute compromise from PM Tsipras and his government along with a +5% rebound in China equities has given the green light to investors to strap on some risk.

Again, Chinese authorities (China Securities Regulatory Commission) have called on listed companies to choose among a number of measures to help shore up stock prices (share repurchase, stock ownership incentives and major holders to increase stake). With the Shanghai composite closing in the black is helping commodity and interest sensitive currencies like the Aussie and CAD to consider finishing out the week trading away from multi-month lows, while safe-haven favorites like the CHF and JPY are expected to weaken further.

However, it’s not the overnight action that the market should be concerned about, but the impact of the recent correction in the Shanghai composite (down -35% over the past two-months). The knock-on effect has yet to show up throughout China’s economy. It will take some time before the market can assess whether Chinese officials have been able to divert slower growth or stave off a financial crisis.

Greece’s Last Chance Saloon

This upcoming weekend should now be considered the final and definitive line in the sand for a more lasting agreement between Greece and its international creditors. Hence, Greek headlines are expected to dictate market direction as there are still a number of obstacles that Greece is required to over come over the next few days.

It’s expected that the European institutions will deliver their initial assessment of the latest Greek proposal by late Friday afternoon, and if its mostly positive, the Eurogroup will decide on Saturday whether to recommend opening negotiations with Greece on a conditional loan from the ESM (European Stability Mechanism).

For traders and investors, it will be the third consecutive weekend to experience event-risk market pricing. It seems obvious now that traders can expect some significant price gaps again on the Australasian open come Sunday, on either a positive or negative outcome.

The EUR bull (€1.1163) is currently winning the battle, aided by the last chance concessions delivered by Greece. Despite a compromise, it seems that traders and investors believe that the European Central Bank is better equipped to address any uncertainty should a Grexit occur. President Mario Draghi and his fellow policy members have been very vocal about their available arsenal (quantitative easing, Securities Markets Program, Outright Monetary Transactions) to avert contagion. Orderly pricing of eurozone periphery bond yields certainly proves their point. Other investors even believe that cutting out the eurozone’s weakest link is positive, and it’s this that may even persuade them to buy EUR-denominated assets.

Loonie Higher? Not So Fast

The CAD has had a torrid time of late, and is even finding it difficult to find some risk on traction this morning, and this despite the markets positive response to Greece’s last chance proposal.

There was hope that the loonie would have had more of a positive impact, as recovering oil prices should have provided the currency with more relief. Crude prices have found tentative support from two sources, China’s growth assessment and an impasse over nuclear program talks with Iran.

Thus far, U.S dollar bulls have welcomed pullbacks in USD/CAD below the $1.2700 handle. There are a number of event risks on the immediate horizon for CAD, starting with this morning’s Canadian jobs report, and followed up by next week’s Bank of Canada (BoC) meeting.

Today’s Canada job numbers (expected -9k and +6.9% unemployment) should be treated as a “non-event” when it comes to having influence on the Bank of Canada (BoC) rate decision.

Governor Stephen Poloz is expected to follow the dovish lead of central banks of other commodity-based economies like the RBA and Reserve Bank of New Zealand. The BoC is expected to cut its growth forecasts and frame the economy’s recent data deterioration as a vindication for the unexpected rate cut six-months ago.

Currently, fixed-income traders are pricing in a 100% chance of a -25 basis points cut by October (51.3), and they’re now starting to price in another cut in December (47.5), albeit a small chance.

With the USD well supported across the board, expect better buying of USD/CAD on pullbacks. Significant market resistance remains at CAD$1.2750, opening up to a new “handle” relatively quickly.

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