Loonieviews Sterling is poll dancing while dollar is firm-September 10, 2014


Sterling is poll dancing while dollar is firm

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • World watches Sterling jitters
  • FOMC anticipation keeps US dollar bid
  • US jobs data disappoints

By Michael O’Neill

The world is getting stranger every day. It is strange when Calgary, Canada’s oil industry head office, shovels 30cm of snow over the past two days while the calendar still shows that it is summer. It is strange when the EU issues sanctions on Russia for brokering a ceasefire between Ukraine rebels and the Ukraine government. It is even stranger when Apple (NASDAQ:AAPL) stock rises following the release of Maxwell Smart’s wrist watch.

Queen Elizabeth is said to have had serious talks with the UK’s prime minister David Cameron over the prospect of Scotland’s possible breakaway. Photo: Getty

Blind spot for ‘Better Together’
It’s the middle of the week and the Scottish independence referendum has hogged the limelight. Cable traders are dancing to polls and pseudo-polls purporting to predict the outcome. Support for both sides is now fairly even although the "Yes" camp appears to be gaining the momentum as the campaign heads to the finish line, on September 18.

British parliamentarians are finally smelling the smoke and hearing the fiddles. The UK government has announced plans to provide more powers for Scotland and the main UK party leaders will be in Scotland to support the "No" side, which campaigns under the slogan "Better Together". However, it could be too little, too late to sway the 23% of undecided voters over to the "No" camp.

Fun with figures

Scotland’s 5.3 million inhabitants represent just 8% of Great Britain’s 63 million people. If (and this is a stretch) the GBPUSD June peak of 1.7170 represented fair value for an economy of 63 million people, then the correct value for GBPUSD without Scotland in the fold is 1.5811.
This calculation is just like a poll; it factors in only a tiny fraction of the myriad economic indicators inherent in a currency’s value, with a margin of error of at least plus or minus 3%.

"Start your engines"

"Gentlemen, start your engines" is considered (by Americans) as the most famous words in auto racing, just ahead of "F%$%*$, I hit the wall". This week, the US dollar not only started its engines but kicked in the after-burners as well, on speculation that the Federal Open Market Committee (FOMC) statement next week will be hawkish. The US dollar index (USDX) climbed from 83.57 to 84.54, which is an aggressive move and mildly perplexing.

The FOMC tapering programme will be completed in October and the committee has been saying ad nauseam that "the Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run".

Tuesday’s Job Openings and Labour Turnover Survey (JOLTS) reflected continued improvement in the labour market, a key condition required before US rates increase. However, the hiring rate remained unchanged at 3.5%. This data suggests that employment concerns will still be an issue.

Rumour vs fact

Anticipating data releases and policy changes is a cornerstone of FX trading but an argument can be made that the 10 big figure drop in EURUSD since May and a 5 big figure gain in USDJPY since August should more than offset an amended FOMC statement, unless in contains actual dates and rates. Last Friday’s US nonfarm payrolls report was disappointing but the market reaction was more along the lines that only "good news" counts. The magnitude and steepness of the drop in EURUSD plus the proximity of major support at 1.2750-1.2800 area may be a sign that the FOMC meeting is a sell-the-rumour, buy-the-fact trade.

Chart: Daily EURUSD with Fibonacci

Source: Saxo Bank

Report of Loonie’s demise greatly exaggerated

Just like reports of Mark Twain’s death 117 years ago, reports of the Loonie’s demise may have been premature. USDCAD bulls got excited on the break of strong resistance at 1.1000 and had visions of sugar plums and 1.1270 before their eyes. However, the USDCAD bears did not get the message and the first line of defence in the 1.1030-60 zone held. The lead-up to the FOMC meeting and the lack of top-tier Canadian data releases to offset the bullish US dollar bias will continue to support USDCAD. The short term USDCAD technical picture is bullish while trading above 1.0860, with a break of 1.1060 pointing to 1.1270. However, failure to take out 1.1060 followed by a move through support at 1.0940 would suggest that another short-term top is in place and more 1.0830-1.1030 consolidation is on the cards.

Chart USDCAD 4-hour

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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