- CAD hits six-week low with ease
- Neutral currency positions affects volatility
- Loonies fair value is where exactely?
Markets may still be underpricing geopolitical risk to a certain extent, but no one has told that to the main commodity currencies as they continue to struggle.
The Kiwi remains under pressure from Governor Wheeler at the RBNZ “dovish tightening” moves mid-week ($0.8546). He hikes and then tells “c’est tout” for now. His equal at the RBA, Governor Stevens, continues to try and verbally beat his Aussie lower (0.9404). Governor Poloz at the BoC is the odd man out, he alone is not influencing the CAD, remaining somewhat neutral and in the shadows.
The CAD bull’s positions are becoming undone this Friday afternoon, mostly on the back of algos unwinding their cumulative short USD/CAD positions that they started selling on a break of $1.09 and have been adding to sub $1.08 and even $1.07. The technical oversold alarms began to ring below $1.07 and the recent dollar squeezer higher this week has persuaded the algos to cover.
The loonie is ending this geopolitical eventful week pushing through the previous CAD monthly lows (dollar highs – $1.0785). The dollar has it sights trained on key secondary resistance levels beyond the psychological $1.08 handle ($1.0825 & $1.0850). Ever since the market breached key support levels on the Euro/North America handover, and combined with market liquidity constraints, it has been easy to sway the current unsupportive market heading into the weekend.
The market is positioning itself for a busy U.S economic calendar next week. The loonie has little support from the Canadian economic agenda until the end of the month when we get GDP data for May – the loonie remains at the mercy of the dollars moves.
What’s the CAD’s fair value? Obviously it’s a fairly subjective question that’s based on commodity prices, short-end rate spreads and currency volatility. A couple of months ago the techies, influenced by the fundamentals, pegged the loonie somewhere between $1.12-1.14. All it did was go immediately higher (USD lower), influenced by long dated “short” CAD positions basically unwinding. Now, the forex market is somewhat neutral in most major currency pair’s positions. This is due to the lack of sustainable market volatility and direction; mostly on the back of CBanks handcuffing the FX market with their ‘low’ interest rate policy.
Due to neutral positioning, the loonie requires a fair amount of strong Canadian economic data for support, and that is something not on the immediate horizon. USD supporters prefer to buy on dips and still expect the mighty buck to out perform and again head towards fair value.
What to expect next week
Investors have a plethora of data to chew on next week with the highlight being the “grandaddy” of economic releases – non-farm payrolls. The Fed takes centre stage with Wednesday’s FOMC meet and no press conference. Currently Ms. Yellen and company are taking refuge behind US inflation numbers. Europe gets to take a peek at recent price activity, while China will be focusing on manufacturing PMI’s. The BoJ’s Kuroda gets to deliver some thoughts at the Research Institute of Japan on Thursday.
For NFP, the markets early thought is looking to build on June’s headline print (+288k). The Jolts (Job opening and labor turnover survey) and aggregate average for initial claims points to U.S unemployment rate falling again. Current US weekly claims are straddling the lowest levels in eight-years. Initial estimates are for a +6.1% (unchanged) next Friday, but could easily see +6.0%. A fall below +6.0% will be a huge psychological breach. Historically, the participation rate in July tends to be stable/lower if you look over last 14-yrs. A miss either way in the headline numbers should keep all asset classes very interested.