Loonieviews September 17, 2013


USDCAD Open 1.0317-21 Overnight Range 1.0317-1.0332

Original post on Saxo Bank’s Trading Floor

FX markets are as skittish as Frankel at Maxim’s of Paris while they await the outcome of Wednesday’s Federal Open Market Committee (FOMC) meeting and press conference. The weekend news that Larry Summers had dropped out of the Fed chairmanship race triggered a wave of US dollar selling against the majors during the Monday Asian and European morning session which was completely reversed by mid-afternoon in North America. The quickly shifting fortunes of the US dollar is evidence that the recent FX moves were driven by short-term speculative positioning rather than long-term institutional accounts. It is hard to believe that the large hedge funds and real money accounts strapped on large long dollar positions based on rumour and speculation that Larry Summers: a) would get the Fed nomination b) would be approved by a Congress which won’t approve any Obama initiatives and c) and believing that if a and b occurred, that Summers would ignore the entire FOMC committee and arbitrarily end quantitative easing while jacking up rates. In addition, the size of the moves, in both directions and the fact that for the most part, the moves were completely unwound by mid-day New York time, support my view that the large accounts were not major players during that session.

Traders have to trade and today’s data releases including Europe August ZEW Economic Sentiment, UK August CPI and PPI and US CPI could provide some action on the CAD crosses.

GBPCAD has been in a steady uptrend since the middle of August and is currently probing strong resistance in the 1.6440-1.6500, a level it has not been above since the end of 2009. This dovetails nicely with GBPUSD which is attempting to crack above the 2013 peak of 1.6000. Weak UK CPI data may lead to selling pressure on GBPUSD and drive GBPCAD lower in the process.

GBPCAD chart 4-hour with uptrend and resistance

Source: Saxo Bank

EURCAD failed to move below the uptrend line from mid-May after the Larry Summer’s induced sell-off yesterday and is poised to rebound above 1.4000. This coincides with the overnight EURUSD bounce which is now looking for a retest of 1.3440-50 area. A better than expected ZEW print may give both currency pairs a lift.

EURCAD daily, closely tracking GBPCAD

Source: Saxo Bank

Nevertheless, the spectre of the FOMC meeting will haunt traders until the press conference concludes on Wednesday. Somehow, a USD 10 billion reduction has become the taper of choice and many consider that amount to be a "dovish" signal, which could lead to US dollar selling if one doesn’t believe that the "sell dollar move" has already occurred. Other concerns include the ever popular "forward guidance" issue which UK traders will get a taste of, first hand tomorrow. Definition of forward guidance: Central Banker speak for guessing what will occur if a series of data points deliver projected but fluid results over a predetermined timeframe. (See also Shell game or the Bernie Madoff Doctrine on Disclosure.)

It is very likely that Wednesday’s FOMC meeting and press conference will be very anti-climatic, especially if the outcome is close to the consensus view.

But that’s ok because once again President Obama is setting the table for another round of turbulent markets.Reuters reported today that Mr Obama warned Republicans in Congress that he will not negotiate over an extension of the US debt ceiling. It remains to be seen what he will do between now and when the Treasury runs out of money in mid-October. He recently said in a speech about Syria that "the US military doesn’t do pinpricks". He could add, "and neither does the US government because defaulting on USD 16.7 trillion dollars of debt, isn’t a pin prick, it’s amputation without anesthesia."

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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