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Loonie loses steam, Fed speakers in focus
USD/CAD sell-off stabilises despite lacklustre US data
After falling more than 4% over the last seven weeks, USD/CAD has been stabilising at around 1.3250. This sharp appreciation of the loonie was quite surprising, especially against the backdrop of falling oil prices. Indeed, WTI futures for delivering in August slid to $43.60 over the same period, down more than 16%. It would have been obvious that the Canadian dollar, which has been historically strongly correlated with crude oil, followed its footsteps.
From our standpoint, this positive reaction of the loonie is due to the concurrence of two separate actions. First, the Canadian economy was able to surmount the massive oil correction that started in 2014 as oil producers improved efficiency, especially in the shale industry. Furthermore, the economy is back on track again and is close to its long-term average yearly growth rate of between 3% and 4%.
Secondly, speculators were already short CAD before the recent oil clump. Indeed, they started to build their short positions in the wake of Trump’s accession to power, in anticipation of a tougher trade relationship between the US and Canada. By April 25th, net short non-commercial positions reached 25% of total open interest - as reported by the CFTC - and finally it hit 49% in the last week of May. When it reaches such extreme levels, a correction is highly likely. This is actually what prevented the loonie to slide further. Overall, we believe that USD/CAD has reached a temporary low and that further gains for the loonie are unlikely in the short-term.
EUR/USD may bounce higher in short-term
Today, no less than four Fed members will provide their views on monetary policy including Janet Yellen whose speech is tonight in London is expected to be on global economic issues. Financial markets will try and grab some hints regarding the Fed's path towards normalisation of monetary policy. Markets estimate the likelihood of a third rate hike this year below 50%. We believe the Fed will be very focused on economic data rather than geopolitical development and we consider that recent economic data is not fully supporting a continued normalisation of the economy.
Yesterday, non-defense capital goods recorded their highest decline since last December at -0.2% m/m below consensus 0.1 m/m. Earlier last week, the US Manufacturing PMI came in below expectations at 52.1 vs 52.7 expected. We recall that a level above 50 indicates expansion and we are slowly approaching towards this threshold.
On Thursday, the US GDP will be released and for the time being, data for the second quarter is significantly weaker than what has been released during the first quarter. We believe there are clear downside risks on the US GDP at the moment. Therefore, the EURUSD pair may bounce higher towards 1.1300 in the short-term.