Foreign Exchange Weekly Wrap Up - Sept. 19 - 23, 2016

Steve Brown, Senior Corporate Trader | Stevebrown@vbce.ca

The USD uptrend continued during the early part of the week with repeated tests of last week's prior high and key tech 1.3248 level. Dips in USDCAD were limited to 1.3150. The trend changed abruptly after Wednesday's U.S. Fed announcement. Rates were left on hold with strong indications of a rate hike in December. After a quick spike from 1.3170 up to 1.3237, USDCAD plunged to 1.3100 in late Wednesday trade. The trend would continue into Thursday morning with a test of the 1.3000 level. Although the Fed statement can be viewed with a hawkish bias, the broad-based USD sell-off and risk-on market response was most likely attributed to the Fed's economic projections and interest rate dot plot. Economic growth and inflation rates were revised lower while the dot plot indicated a fewer number of interest rate hikes over the next few years. Also, benefiting the CAD was the 3rd straight weekly surprise draw from oil inventories. In what typically is a poor performing month for oil prices, surprise draws of 21.272 million barrels of crude oil from inventories over the past 3 weeks vs. expectations of a build of 7.37 million barrels has helped stabilize oil prices in the $43 - $46.53 range. The CAD was the worst performing currency on Friday. Lower than expected retail sales and inflation data combined with a 4% fall in oil prices (potential Saudi / Iran oil output freeze talk fell apart) saw USDCAD climb from 1.3034 up to 1.3181. The AUD was the best performing currency this week breaking parity vs. the CAD for the 4th time over the past year. The USD and the GBP were the worst performing currencies on week.

Weekly Open

Low

High

Weekly Close

USDCAD

1.3212

1.3000

1.3248

1.3165

EURCAD

1.4742

1.4615

1.4808

1.4778

GBPCAD

1.7182

1.6892

1.7242

1.7157

JPYCAD

0.01292

0.01284

0.01312

0.01301

AUDCAD

0.9896

0.9885

1.0042

1.0030

Themes for the week:

*U.S. Fed interest rate decision: unchanged @ 0.50% *indicates possibility of a rate hike in December

*U.S. economic projections – downgrades growth, inflation and number of expected future interest rate hikes - USDCAD falls from 1.3237 down to 1.3000 within 24hrs

*Canada retail sales: -0.1% (exp. 0.1% / prev. -0.1%) Core: -0.1 (exp. 0.5%/ prev. -0.6%)

*Canada core consumer price index m/m: 0% (exp. 0.2% / prev. 0%)

*Canada core CPI y/y: 1.8% (exp. 2%/ prev. 2.1%) – combination of weak data sent USDCAD back up to 1.3181

On Tap for Next week:


Wednesday, Sept. 28: EIA crude oil inventories

Thursday, Sept. 29: U.S. GDP 2nd quarter: (exp. 1.3% / prev. 1.1%)

Friday, Sept. 30th: Canada GDP (July): (exp. 0.3% / prev. 0.6%)

USDCAD was unable to break the key 1.3248 tech level for the first part of the week. With the assistance of stable oil prices and lower growth revisions by the U.S. Fed, USDCAD broke below its 1.3130/50 support zone effectively changing from a bullish trend to a bearish trend – a pattern that has been repeated several times over the past 5 months. However, the trio of poor retail sales, low inflation and a 4% fall in oil prices on Friday saw USDCAD break back above this support zone. Choppiness in USDCAD will likely continue with event risk coming late in the week (U.S. and Canadian GDP). Since August, the Atlanta Fed has revised U.S. 3rd quarter GDP growth lower from 3.6% down to 2.9%. The NY Fed has slashed Q3 growth from 2.8% to 2.3% and Q4 growth from 1.7% down to 1.2%.

Topside targets to consider: 1.3190, 1.3248, 1.3300

Downside targets to consider: 1.3120, 1.3090, 1.3030, 1.3000.

Sources: Reuters, Bloomberg, FXStreet, RBC Capital Markets, Bank of Canada, U.S. Federal Reserve, CNBC, Forexlive, CMEGroup

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