Loonieviews May21, 2014

Why the Forex Vortex is not all hot air

Michael O’Neill

FX Consultant / IFXA Ltd


• Trend change likely in AUDUSD
• No relief in FOMC minutes
• USDCAD consolidating within 1.0850-1.0940 range

It is the middle of another week characterised by sporadic bouts of activity. (AUDUSD, USDJPY and GBPUSD). In the case of AUDUSD, the volatility may be due to a trend change while USDJPY and GBPUSD merely probe extreme support and resistance levels. AUDUSD was beaten up by what were viewed as doveish Reserve Bank of Australia (RBA) minutes and then by a report by Standard and Poor’s opening the door a crack to the possibility that Australia’s AAA credit rating could be at risk. GBPUSD resumed its uptrend following better-than expected UK Retail Sales and the Bank of England (BoE) minutes revealing a more active interest rate discussion. Further sterling gains may be seen tomorrow if UK GDP data beats expectations. US home sales data on Thursday and Friday will only be important as additional support to the US economic recovery theme.

The "Forex Vortex"

The winter of 2014 gave us "Polar Vortex" a swirling mass of air unusually found around the North pole, which was pushed south by a large high pressure system, plunging a large part of North America into a deep freeze. This year also gave us the "Forex Vortex", a swirling fog of hot air usually found in the halls of central banks that blanketed FX markets and plunged volatility to multi-year lows. Indecision and contradictory messages from senior officials have confounded traders and made a shambles of the dominant trading themes espoused at the beginning of the year. Additional stimuli from the Bank of Japan (BoJ) was widely expected to drive USDJPY near 108.00. The stimulus package is still on the shelf and this morning’s BoJ statement has raised concerns that it will stay on the shelf for a lot longer. The European Central Bank’s (ECB) deflation concerns gave rise to rate cut speculation ahead of every meeting this year and disappointment after every meeting when they remained inactive. The Federal Open Market Committee (FOMC) have been spinning their wheels like bald tyres on ice. The changing of the guard at the top and forward guidance fading to forward gas have left markets befuddled. Today’s release of the FOMC minutes from April 30 will not provide any relief from the Forex Vortex.

The Canadian dollar outlook.

USDCAD trading can be best described as a restless sleep – a lot of tossing and turning but not really going anywhere. That is unlikely to change for at least the rest of this week. Thursday’s March Retail Sales data (forecast 0.3 percent, ex-auto’s 0.4 percent, month-over-month) will not be strong enough to raise expectations of an expanding domestic economy fuelled by the consumer. On the other hand, a strong April CPI print on Friday (Forecast 0.2 percent, core 0.3 percent) would go a long way into putting to rest any thoughts of domestic rate cuts to combat deflation. If it doesn’t lead to outright demand for Canadian dollars it should help to put a cap on any USDCAD strength.

USDCAD technical outlook

The intraday and short-term technicals are bullish while trading above 1.0895, which is also the break of the downtrend from the March peak of 1.1270. There is resistance between 1.0920-40 and then again at the 100-day moving average at 1.1003. A move below 1.0995 would lead to another test of 1.0850 and likely additional, 1.0850-1.0940 consolidation.

Chart: USDCAD 4-hour

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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