Week in FX Americas – The Loonie’s Flight of Fancy

USD/CAD bulls have been cocksure of themselves this year. Being long dollars against the commodity and interest rate sensitive currency has been many speculators’ go-to profitable trade for 2014. These positions have been helped along by dovish rhetoric from Canada’s minister of finance and by the Bank of Canada’s governor shying away from the hand-me-down easing bias he inherited from his predecessor last year.

Trading the loonie outright is a beast influenced by many varying qualities, ranging from commodity prices to safe haven flows, from interest rates differentials to the strength of its largest trading partner’s economy. Loonie outright ranges can be fickle; with liquidity sometimes a premium while cross action can have more depth. It’s not an easy intraday currency pairing to tame, but getting on the right side of a winning trade can be rather profitable. The head fakes are usually sharp and deep, but the deeper pockets prefer to be looking at the big picture and discount all that extra noise.

The loonie ends this week taking flight after economic growth exceeded expectations in the fourth quarter of 2013 (+2.9% versus +2.6%), in turn contributing to the biggest annualized gain in two years. Obviously aiding the CAD even more was the U.S.’s fourth-quarter gross domestic product reading being revised lower in the second reading to +2.4% from the +3.2% advance reading published a month ago. In the U.S., analysts saw weak consumer spending in the final quarter of 2013 (revised down to +2.6% from +3.3%). This is in stark contrast to Canada, where household consumption picked up steam to offset weakness in business investment. However, the Federal Reserve does not seem to be that worried yet. Fed Chair Janet Yellen said this week that cold weather had played a role in weakening economic data, but she also cautioned that it would take a “significant change” for the Fed to alter its taper plans. So, despite the growth report providing evidence that the Canadian economy is beginning to climb out of its slump that started nearly three years ago, it’s now gathering momentum from a pick-up in the strength in the American economy.

The market prefers to be long USD, however, the weak longs with tight stops were taken out of the picture this morning on Canada’s growth news as the loonie popped a quick 50 ticks higher to trade sub-$1.11. Month-end demand will distort some of the landscape, but the majority remains better buyers of the big dollar on these pullbacks to at least this Monday’s daily low of $1.1050 the first time around.

• US Consumer Sentiment Rises in February
• US Pending Homes Rise in January
• Bernanke Testifies At AIG Trial
• US GDP Revised Down in Q4
• Yellen to Stick to Script
• Fed Likely to Keep Trimming Asset Purchases
• Brazil’s Growth Surprises at 0.7 Percent
• US Home Sales Rise in January
• US Unemployment Claims Rise This Week
• U.S. Dollar Holds at Two Week High
• U.S. Dollar Maintains Strength
• U.S. Housing Posts Solid 2013
• U.S. Dollar Lower on Confidence Data
• US Economists Disagree on Tapering Timing
• Detroit Bankruptcy Plan Could Slash Pensions by 34 Percent

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