USD/CAD – Commodity Prices A Blessing For Loonie Bears

  • Summer trading lull takes hold
  • Chinese data does not ease investor worries
  • CAD bulls losing out
  • U.S bills curve backing up as expected

It’s difficult to get excited by these markets, as the mid-summer lull seems to have already settled on us. Now that market moves seem to be more data dependent rather than Grexit led, this week is shaping up to be a rather slow endeavor, at least until this Thursday in the U.S.

It’s not a taxing schedule for data at all this week, not until Thursday’s U.S retail sales (+0.5%e vs. -0.3%) and Friday’s U.S industrial production (+0.3%e vs. +0.3%). The market whisper is that retail sales are expected to reveal some solid gains for last month, especially from the motor vehicle sector. There are similar expectations for industrial production on Friday, however, there is a distinct possibility that the manufacturing component could underachieve. Even though U.S inflation may be somewhat benign, any upward gains from either U.S retail sales or industrial production should have the last of the Fed and market doves on the run for next month’s FOMC meeting.

Chinese Data Does Not Ease Any Worries

It seems that some investors are still looking for that sure bet sign before deciding to wade any deeper into the market and acquire new positions. Even the disappointing Chinese data overnight has not been able to tease any new investor interest of note. Trading thus far in Europe and early stateside has been subdued. The weekend’s soft China trade and inflation data print renews expectations for further policy easing from Chinese authorities.

China trade surplus slowed to a three-month low, as exports (-8.3% v -1.5%e) saw their biggest decline in four-months, while imports also fell over -8% – their ninth straight drop. Exports to Europe and Japan were particularly soft, sliding -12.3% and -13.0% respectively, vs. -3.4% and -6.0% prior.

China’s inflation figures were also not that encouraging. CPI managed to print a nine-month high and came in slightly above expectations. However, it was the mix that should cause a concern. The price gains were mainly driven by the food component (Pork) rising +2.7% vs. +1.9% prior, while non-food CPI slowed to +1.1% from +1.2%. Meanwhile, PPI fell at its fastest pace in six-years, -5.4% vs. -5.0%E; the 41-month of declines.

The reports have the fixed income market considering the possibility of one or possibly two more PBoC rate cuts in the second-half of this year. Nevertheless, investors do not seem enthusiastic to follow that train of thought just yet.

As China continues to face real deflation risks, and the real possibility that their trade growth will not even recover this year is putting further pressure on commodity prices. Crude and gold trade up against multi-year support levels, while their respective commodity sensitive currencies (AUD, CAD and NZD) are finding it difficult to garner outright support on U.S rate differentials. Currently, the loonie (CAD$1.3163) looks the most vulnerable, especially after last Friday’s not so stellar Canadian jobs print (+6.6k and +6.8% unemployment rate). The report reflects the drag commodities are having on the broader economy.

Crude prices (WTI $44.71 and Brent $48.50) are again starting off the week under pressure, and are threatening to take out their multi-month lows in response to market concerns over excess supply and weak global demand.

Loonie Bulls Losing Out

On its own, the Canadian resource sector lost -2k jobs last month, but there were also declines in manufacturing, construction and financial services that reflect energy weakness. Part-time jobs trumped fulltime job losses again (+23.9 vs. -17.3). With global crude price levels looking to head further south, this persistent energy drag will only create further downside risks for Governor Poloz at the Bank of Canada (BoC) when forecasting any H2 GDP pick up.

Canadian policy makers will find it difficult to implement any further monetary easing any time soon (money markets are trying to price in an October cut), as the current CAD price levels should be doing some of the BoC’s easing work for them. Perhaps the BoC should now be looking at quantitative easing or QE? The CAD is once again encroaching on this year’s dollar high levels (CAD$1.3204), with market interest continuing to favor buying USD on any pullbacks at the moment.

Forex Market Enter August Lull

On the whole, the FX market is relatively quiet this Monday morning following last Friday’s volatility where the might dollar initially rallied after the U.S payroll report met market expectations (+215k and +5.3% employment rate).

For the dollar, it seems at this stage that it would require a number of disappointing U.S data reports to keep the Fed on hold in September. The only immediate barrier to the dollar running rampant across the board is investor’s falling risk appetite. If commodity prices continue to fall, this could easily temper rate expectations somewhat next month, and by default hurt the overcrowded long dollar positions.

Finally, the U.S T-bill market is waking from its long-term slumber. Bill yields have virtually been glued to zero since the financial crisis took a firm grip. Last Friday’s U.S jobs report is raising investors expectations for a Fed hike, and this has the bill curve finally backing up. Recent selling pressure has one-year bills rallying to +0.375%, its highest yield in five-years. However, yields remain very low from a historical standpoint as not everyone expects yields to significantly jump because of global sluggish growth and relatively subdued inflation.

Despite the July jobs report bolstering the case for the Fed to raise rates next month, it’s not a forgone conclusion that they will hike. U.S policy makers require a strong economy or rising inflation, and technically they do not have either. Fundamentally, it remains a coin toss on whether the Fed will act and the one thing that they do have, and that’s time, but Fed policy members are talking a good game.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell