On Tuesday, the Canadian dollar tumbled versus the US dollar for a variety of reasons, including a drop in the price of oil, disappointing Canadian retail sales, and hawkish comments by a Fed official. Meanwhile, USD/CAD faces additional event risk on Wednesday from the release of Canadian CPI. How will it impact the pair, and more importantly, will it help or hurt the case for price to rally toward 1.08?
Why Did USD/CAD Surge Over 100 Points Higher On Tuesday?
Oil Futures Down 2.9% - Since hitting a record high of $147.27/bbl on July 11, crude oil futures have fallen significantly. In fact, the commodity dropped 2.9 percent on Tuesday alone to close at $127.25/bbl amidst speculation that Tropical Storm Dolly would not disrupt production at the major oil-drilling and transport hubs in the Gulf of Mexico, and on news that US Senate Democrats won approval to proceed to debate legislation that would work to curb speculation in the energy markets. The bill would require the Commodity Futures Trading Commission (CFTC) to impose limits on speculative trading in oil and natural gas futures markets, and would require more reporting in energy markets to prevent market manipulation.
Why does this matter for USD/CAD? First, the Canadian dollar tends to show a strong correlation with oil prices, as the country is a net exporter of the product. As a result, the higher oil prices rise, the more the Canadian economy benefits from a trade perspective since the pure increase in export values will add to the country’s trade balance. Furthermore, oil producers will be more likely to hire workers, which may help to improve the Canadian labor markets and consumer spending. However, this correlation also works the other way, and a drop in the price of crude oil is likely to weigh on the Canadian dollar, as we saw on Tuesday. US Democrats have said that their legislation could reduce oil prices by as much as 50 percent, and if this were even remotely close to being the case, USD/CAD could be in store for substantial gains.
Canadian Retail Sales Rise Disappoint – Sign of Things to Come? – On Tuesday morning, Statistics Canada reported that retail sales only rose 0.4 percent during the month of May, falling short of expectations for a 0.6 percent increase. Looking into the components of the indicator, it was clear that much of the strength in the indicator was a component of price rather than demand, as the index is not adjusted for inflation. Gas station receipts were the greatest contributor the overall report with a 2.4 percent jump given skyrocketing gasoline prices. On the other hand, food and beverage sales were unchanged even as global prices were still elevated, while clothing sales slipped 0.7 percent. With the Canadian labor markets starting to loosen up a bit, as evidenced by the rise in the unemployment rate to 6.2 percent in June from 5.8 percent in February, and the cost of consumer staples like energy and food rising, there is a good chance that domestic demand in the country will continue to wane.
US Philadelphia Fed President Plosser Issues Hawkish Speech – A scheduled speech by Federal Reserve Bank of Philadelphia President Charles Plosser led the US dollar higher across the majors, including the Canadian dollar. Indeed, in the forex markets, a little jawboning by a central bank – especially from the Federal Reserve – goes a long way. Mr. Plosser voiced his hawkish concerns by saying that leaving rates low “for too long worsens our inflation problem” and that the Fed would have to raise rates “sooner rather than later.” That said, Mr. Plosser is one of the most hawkish members of the FOMC, along with Dallas Fed President Richard Fisher, as both dissented in March and April when the Committee cut rates. It is questionable whether these two hawks can actually garner enough support for a majority vote in favor of an increase to the fed funds rate in the near-term, specifically on August 5. In fact, it seems unlikely that the Fed would move to tighten monetary policy as it would have the potential to ignite an even more severe credit crunch in the financial markets that would only exacerbate the confidence issues plaguing US, European, and British financial institutions – not to mention Fannie Mae and Freddie Mac. Nevertheless, whenever the central bank sounds like they have every intention of raising interest rates in an effort to fight inflation, the US dollar will appreciate noticeably, even if just for a short time.
How Will Upcoming Canadian CPI Impact USD/CAD?
On Wednesday, Canadian headline CPI is expected to rocket 2.9 percent in June from a year earlier, marking the biggest gain since September 2005, versus a rise of 2.2 percent in May. However, the Bank of Canada’s core CPI measure is only forecasted to edge up to an annual rate of 1.6 percent from 1.5 percent, which is still below the Bank’s 2.0 percent target. This economic release will present heavy event risk for the Canadian dollar not only because any gains in CPI will be the result of energy prices alone, but also because there appears to be a large amount of room for headline CPI to miss expectations. If the figure, in fact, falls short of the estimate for a 2.9 percent gain, the Canadian dollar could fall quite a bit as CPI is a huge market-mover for the currency. On the other hand, a larger-than-expected rise – though unlikely – would fuel a Canadian dollar rally. Given Technical Strategist Jamie Saettele’s outlook for USD/CAD (read on for his full analysis), a weak CPI reading may have a greater impact on the currency pair, as the odds are in favor for further gains in coming weeks.
USD/CAD From A Technical Perspective…
USDCAD Daily Bars 07-22-2008
Charts Created Using TradeStation 8.3– prepared by Jamie Saettele
The rally from .9055 is corrective but has much more to go. First, we know that the rally is corrective because .9055-1.0378 is in 3 waves. A 3 wave move is either a completed correction or part of a larger and more complex correction. In this case, the latter is true because a triangle has unfolded since 1.0378. Triangles are continuation patterns (occurring as either 4th waves, B waves, or X waves). In this case, the triangle should give way to a continuation of the rally from .9055. A likely terminus is the 1.08 area. This is the 61.8% of the 1.1875-.9055 decline and very close to the important 8/16/07 reaction high at 1.0866.
USDCAD 60 Minute Bars 07-22-2008
Charts Created Using TradeStation 8.3– prepared by Jamie Saettele
Triangles consist of 5 waves (A-B-C-D-E…see the previous chart). The best way to trade the break of a triangle is to initiate the position as close to the terminus of wave E as possible. Wave E could be complete at .9974. Within wave E, the two legs of the zigzag would be equal at .9963; very close to what is perceived to be the bottom. A bullish bias is warranted against .9818 (wave C low), although price ideally remains above .9974. The risk is justified when taking into consideration that the target level is near 1.08.
[B]Written Terri Belkas and Jamie Saettele, Analysts for DailyFX.com
Questions? Comments? Send them to [/B][email protected]