FX traders find April anything but enchanted
FX Consultant / IFXA Ltd
• April’s market theme is under pressure
• FOMC minutes may revive US rate hawks
• USDCAD technicals are bearish
T.S. Eliot’s poem The Waste Land opens with "April is the cruellest month". Forecasters and FX traders with long US dollar positions would have to agree. Arguably, the predominant themes in the market at the start of April were: a) The Fed would start tightening six months from September; b) The European Central Bank (ECB) would announce a rate cut or other stimulus measures; c) A new round of Japanese easing would begin post-March 31 year end, which would see USDJPY heading towards 107.00. These were good reasons to be long dollars but April showers appear to have washed these themes away or, at the very least, severely eroded them. The Federal Reserve has back-pedalled on the implication that rates would rise six months after the end to quantitative easing (QE). The ECB remains in a wait-and-see mode with its president Mario Draghi stating that the "moderate recovery is proceeding in line with our previous assessment". Yesterday, the Bank of Japan left rates and the policy statement unchanged and the governor said that additional easing measures weren’t on the table. It’s only been a week but the principal themes have put a dent in the profitability of long dollar positions with the FX majors gaining across the board. Will today’s FOMC minutes provide any relief?
FOMC minutes may renew dollar bid
A mere three weeks ago, financial markets worked themselves into a lather following the Federal Open Market Committee (FOMC) meeting and Janet Yellen’s press conference. The US dollar firmed on what was thought to be a "hawkish" statement with the dot-plot indicating that a potential rate increase was creeping forward. Yellen inflamed the speculation when she defined "considerable time" as six months. Subsequent news reports and US Federal Reserve speakers have led the FX market to retreat from this view over the past few sessions. If today’s minutes are determined to be hawkish, the US dollar could recoup some of the losses.
Russian for cover
The FX markets seem to have lost interest in the events unfolding in and around Ukraine. Pro-Russian activists (or anti-Ukraine terrorists) have occupied government buildings in east Ukraine and are proclaiming themselves to be a sovereign state, with plans to hold a referendum by May 11. Not surprisingly, Ukraine officials see this action as a Russian-orchestrated provocative action. The US Secretary of State, John Kerry, described the actions as "more than deeply disturbing" and repeated threats of more sanctions. At the very least, as long as these tensions keep being ratcheted skywards, the US dollar should find support.
The Canadian dollar perspective
The Canadian dollar has managed to hang on to last Friday’s post-employment data gains even though the Canadian report was deceptive. The headline 43,000 job gain masked the fact that the new jobs were mostly part-time, which historically are not harbingers of a booming economy. Yesterday’s housing starts report was weak, falling to 156,800 and well below the forecast of 190,000. However, once again, inclement weather is partially responsible for the result. That ended a streak of better-than-expected releases (GDP, Merchandise Trade, Ivey PMI) which, when combined, contributed to this month’s Canadian dollar rally. Another factor was the apparent capitulation of the bullish USDCAD trade that resulted in a massive unwinding of short CAD positions as reported by the Commitment of Traders report and various major bank positioning studies. The short-term technical studies turned bearish as well adding an element of two-way risk to the currency pair, which had been lacking. There is very little in the way of Canadian data until the Bank of Canada (BoC) interest rate decision and statement next Wednesday, which leaves external influences to drive direction. If this afternoon’s FOMC minutes are a non-event, the pending Chinese data could have an out-sized impact, at least initially.
USDCAD technical outlook
The short-term USDCAD technicals are bearish but in a fairly steep downtrend channel since peaking at 1.1265. The top of the channel is now at 1.0980 on a four-hour chart, which is guarded by resistance at 1.0950 (former multi bottom base). The 38.2 percent Fibonacci retracement level of the 2014 rally (1.0580 to 1.1265) was broken on April 4. The subsequent drop to the 50 percent level (1.0938) failed to contain the correction, which puts 1.0845 (61.8 percent Fibonacci) clearly in the cross-hairs. The 100-day moving average at 1.0902 and a triple bottom (4-hour chart) will provide some support. Only a recovery above 1.0980 would negate the downward pressure, which would suggest a broad consolidation range, likely 1.0900-1.1100.
Chart: USDCAD 4 hour with downtrend channel and triple bottom support
Source: Saxo Bank
Chart: USDCAD daily with Fibonacci and moving averages
Source: Saxo Bank