CAD and AUD at the mercy of Euro Rhetoric

Given the markets lack of focus on fundamentals lately, the loonie by all accounts, for a growth sensitive currency is holding its own outright, but for how long? Both the crosses and oil patch names to date have been able to slow the dollars rise somewhat. Until this morning, the currency outright had been trading tight against its upper band for most of the week. However, against the crosses, especially versus the EUR this week, owning the currency has been rather profitable.

Nevertheless, these levels are beginning to run short of dollar CAD buyers who are been beaten back by Euro toxic rhetoric. Without dollar resistance, at the weekly highs, the loonie has the ability to fall to its next target of 1.0350. Depending on how CAD performs on the crosses, investors can expect a slow grind to lower CAD levels that will give them a better entry average to wanting to own the currency.

Do not be surprised to see 1.0500 within the next two-week, mostly due to the lack of liquidity this time of year. EUR/CAD certainly found strong resistance just under 1.40, and with an unconvincing Euro-summit market outcome last week, continues to give the second tier “safer haven” a boost. With no domestic data until tomorrow, CAD traders have been relying on today's US headlines to provide them with some direction. Initially with softer US retail sales data print (+0.2% vs. +0.6%) gave the dollar index another boost. Oil patch names have not been able to compete with Euro sovereign negative headlines.

Governor Carney hit the wires this morning and is “under no illusion” that measures announced by Euro leaders last week are enough to ensure that the European monetary union functions effectively. The BoC believes that Europe has already entered a recession which will have a knock on effect on growth in Canada and the rest of the world. Carney would not be the only individual that sees the Euro-zone debt risk as been the greatest risk facing their own countries. Carney does not see Europe returning to pre-2008 levels until around 2014 and this is even a moving target. On the plus side, he saw the recent ECB moves as been ‘very important' which will help the European banking system and the global financial system as a whole. In respect to its largest trading partner, the US, the Governor said modest growth will persist there “for some time”. By default, Canada should benefit by association.

Tomorrow we get Canadian leading index, however, growth and interest rate sensitive currencies remain at the mercy of Euro toxic rhetoric and liquidity constraints.

The AUD along with its antipodean partner happened to rally ahead of US retail data earlier this morning, mostly in anticipation that US retail sales was capable of “adding to signs that the world's largest economy remains resilient”. The currency happened to stray away from yesterday's two week low with recovery action stubbornly underway intraday, and with a risk to move higher towards tomorrows option strikes above 1.0150. However, similar to other growth sensitive pairs, the currency outright will remain at the mercy of toxic Euro rhetoric.

Data last night revealed that NAB Australia business confidence index was unchanged at 2 in November. Business conditions improved to 1 from -1, likely due to the first RBA rate cut in early November. It seems that the RBA easing has helped to stabilize the business outlook after its deterioration, but at a lower level than before.

The de-leveraging of hedge funds is expected to continue to push this pair lower over time as global worries persist, adding to the negative situation. The rising Euro bond rates coupled with softer Chinese data over the weekend is punishing anything risk related. Technically, investors will be expecting short term rallies to fail. Again, with parity remaining in the technical crosshairs the market should expect this level to be well supported first time around despite being penetrated on several occasions of late. The level being broken to the downside could be a catalyst to fill the gap from a couple of weeks ago and push price down to the medium technical target of 0.9850. Similar to the CAD, there are far too many global problems to consider going too far out on the risk spectrum and with this in mind, the pair is expected to continue to struggle in the short term.

Other links:
EUR to be Bullied Lower?