US dollar bulls trample long CAD positions
FX Consultant / IFXA Ltd
• Is USDCAD move correction or trend change?
• Is risk aversion on the rise?
• FOMC minutes not news
The US dollar is sharpening its talons as the trading week comes to a close and is attempting to claw back losses incurred after the release of the Federal Open Market Committee (FOMC) meeting minutes. The Asia session was reasonably lively with AUD and NZD sinking but they recouped all their losses in Europe. EUR, GBP and CHF were mostly range-bound in a quiet session. That changed when the early New York traders arrived at their desks. Suddenly, the US dollar became bid. It may be merely due to the usual bout of profit-taking/position adjusting ahead of the weekend or there could be something more sinister. Perhaps there is a bad moon rising. Risk aversion seems to be creeping into the psyche of traders over rising tensions in Ukraine. Pro-Russian separatists continue to hold government buildings in eastern Ukraine, Russia is becoming more vocal over Ukraine debts to the Federation and the US is stirring the pot by talking of more sanctions and sending a destroyer into the Black Sea. Another source of risk aversion may be the performance of US equity indices, which are all down on the week and are setting up to have another down day today.
Chart: 5-day change in US equity indices
Food for thought
What happened this week that could explain the sudden demise of US dollar sentiment? The greenback gave up ground across the board (as much as 2 percent against CHF and JPY). It is as if someone flipped a sell dollar switch despite a distinct absence of game changing Tier 1 data or events. The big question is: is the US sell-off sustainable or like last month’s copper panic, just noise?
1) Tuesday’s Bank of Japan (BoJ) meeting unfolded as expected. No-one was looking for another stimulus package to be announced but USDJPY got hammered just the same when the policy was unchanged. Many of the global bank economists expect further easing from the BoJ and have pencilled in targets of 107 in Q4, so why the panic this week?
2) FOMC minutes – The market appears to have determined that the minutes were dovish and that earlier speculation of US rate increases in April 2015 are misguided. At the same time, future US economic data releases are expected to surprise to the upside as weather-related issues dissipate. If you buy into the strengthening US economic outlook, it makes sense to think that the market will be back talking about rate hikes again, in the near future.
3) US Equity Index sell-off – Equities have been sold all week with technology stocks and bubbles a popular topic. Perhaps the naysayers have missed the point that taking some profit is not a bad strategy, especially since the indices have enjoyed a strong run since the beginning of the year. Since no-one expects a US rate hike any time soon, it is hard to see the sell-off continuing.
The Loonie gets knocked for a loop
Just when you thought it was safe to like the Canadian dollar again, US dollar bulls angrily trampled the blossoming long Canadian dollar positions into the ground. USDCAD had peaked in March at 1.1270 and positions were at very elevated levels. The sell-off was orderly but accelerated during the last week of that month. USDCAD continued to edge lower up until Wednesday of this week when the release of the FOMC minutes knocked the floor out from under the currency pair. The minutes renewed the perception that the Fed remained extremely dovish while quashing fears of an early 2015 rate increase. USDCAD tanked, breaking key support at 1.0940 and falling below the 100-day moving average at 1.0895. That move shifted the short-term technical picture to bearish USDCAD, which predicted further weakness to the January 2014 break-out area (1.0735-70). Unfortunately for some, the move has shaped up to be a classic bear trap. It is readily apparent (in hindsight) that the FX market has not surrendered the bearish Canadian dollar bias but merely retreated. The sharp reduction of long USDCAD positions on the IMM and elsewhere were cut at profitable levels allowing traders to reload at better levels, which apparently is what has occurred.
USDCAD technical outlook
For perspective, the long-term USDCAD trend is bullish. The up trend from September 2012 remains intact while trading above 1.0570. Wednesday’s move below strong support at 1.0940 has proved to be merely an extension of the correction confirmed by today’s rally to 1.0980 and was showing signs of being oversold. Interestingly, the Wednesday sell-off bounced off the 61.8 percent Fibonacci retracement level of 1.0850(ish). The short-term technical outlook flipped to bullish today on the break of the down trend from the March 1.1270 peak but needs to extend gains through 1.1000 to suggest that a short-term bottom is in place at 1.0860. Until that happens, USDCAD could chop around within a 1.0860-1.1000 range.
Chart: USDCAD 4-hour with forecast range for next week
Source: Saxo Bank