Loonieviews October 31, 2014

The Big Bang theory — when hawks and doves collide

Michael O’Neill

FX Consultant / IFXA Ltd



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  • BoJ surprises with another round of stimulus
  • US dollar bulls are in the driver’s seat
  • USDCAD poised for further gains

By Michael O’Neill

The Big Bang Theory ( with apologies to the Barenaked Ladies) goes like this:

"The whole FX universe was in a hot dense state
Then this week, expansion started, wait..
The German IFO began to cool
US Durable Goods began to drool
The BoJ made them look like fools
We bought dollars (we bought the Nikkei)
Yellen, Kuroda aren’t history
Unravelling the central bank mysteries
That all started with the Big Bang."

BoJ unleashes the bulls

The ghouls and goblins will soon be trekking the streets threatening tricks and demanding treats similar to the Bank of Japan’s (BoJ) approach, which was to trick USDJPY bears while treating Nikkei bulls. Today’s surprise expansion of the Japanese stimulus programme resulted in a 4.8% gain in the Nikkei while the JPY dropped 2.6%. The hawkish FOMC statement collided head-on with the doveish BoJ statement, and the result was the Big Bang.

On Hallowe’en night, the BoJ’s approach has been compared to a "Trick or treat" strategy.
Photo: Photos.com

The week that was

The early activity on Monday was all about stress; specifically, the results of the European Central Bank (ECB) stress tests. Not surprisingly, there weren’t any new concerns and the news quickly fell off the radar screens. That opened up the door to Federal Open Market Committee statement predictions. Most expected a doveish statement and the US dollar traded lower vs. the majors.

The soft dollar tone carried over into the Tuesday session, supported by US Durable Goods data, proving once again that they weren’t all that durable, dropping 1.3% in September.

Wednesday was deathly dull for Asia and Europe, right up until mid-afternoon in New York. Then there was the Big Bang or the hawkish FOMC statement, to be more precise. Labour markets were no longer “significantly underutilised” and inflation concerns were downplayed. Traders scrambled to buy US dollars and the rally was on.

Thursday started where Wednesday ended with the post-FOMC USD rally continuing in the early going. Better-than-expected US GDP data added to the demand but pre month-end portfolio rebalancing flows added an element of two-way risk into G7 trading.

The week that will be

The week will start with the US and Canada recouping the extra hour of sleep, lost on the shift to Daylight Savings time on March 9. These well-rested traders will be glad for the extra beauty sleep as this could be a real rock’n’roll week. It starts with the fallout from a slew of Manufacturing PMI data from China, the Eurozone and North America. Central bank policy updates will be provided by the Fed’s Richard Fisher and the Bank of Canada’s Stephen Poloz at 17:50 GMT.

On Tuesday, the Reserve Bank of Australia (RBA) interest rate decision and statement will set the tone for the Aussie dollar and its crosses. Later on, US trade data will be watched for evidence of a growing US economic recovery.

Wednesday is all about US releases, with traders looking to see if the data validates the hawkish conclusion for the previous week’s FOMC statement. There are two Fed speakers scheduled as well.

On Thursday, Australian employment data is the appetiser ahead of the entrees from the BoE and ECB’s rate decision and statements.

The Friday show has the Australian Monetary Policy statement as the opening act with the US nonfarm payrolls as the headliner.

USDCAD outlook

The Loonie doesn’t know if it is coming or going, and crashing into ceilings and floors as a confluence of contrary influences just confuses traders. Last week, the Bank of Canada dropped the word “neutral” from its statement, which FX traders quickly interpreted as hawkish. The Loonie soared.

However, WTI oil prices have tanked and are currently trading down 1.5% on the day ($79.91/bbl). That is important. The Globe and Mail reports that Stephen Poloz, the Bank of Canada governor, told the House of Commons and the Senate that oil at less than $90/bbl would deliver a significant hit to the Canadian economy. That should put to rest any lingering expectations of interest rate increases in Canada to match US moves. There is an underlying negative bias to the Canadian dollar. Concerns about Canadian economic growth lagging behind that of the US were reinforced today with the weaker-than-expected Canadian GDP report.

USDCAD technical outlook

The short-term USDCAD technicals are bullish following the break of the October downtrend line from 1.1380, which came into play at 1.1220. The subsequent move above 1.1260 suggests that a short-term low is in place at 1.1125. A break of resistance at 1.1290 targets 1.1360, 1.1390 and 1.1440. Only a move below 1.1180 negates the uptrend. Failure to break 1.1290 suggests further 1.1190-1.1290 consolidation

Chart: USDCAD hourly

Source: Saxo Bank


Loonieviews October 30,2014


USDCAD Open 1.1187-91 Range 1.1185-1.1221

USDCAD consolidated yesterday’s post FOMC gains but remained below resistance in the 1.1220 area even as the dollar extended gains against EUR and JPY. BoC governor Poloz took a doveish tact in a speech to the Senate Banking Committee but since it was at the end of the day it was mostly ignored and had little to zero impact on USDCAD. The RBNZ Bank governor was also cooing like a dove removing its tightening bias and admitting to insignificant intervention (NZD$30 million). US GDP is on tap.

The intraday USDCAD technicals are bearish while trading below 1.1220 but needing a move below hourly support at 1.1180 to extend losses to 1.1140. Above 1.1220 leads to 1.1260 and then 1.1290. Below 1.1140 points to 1.1120 and then 1.1070

Today’s Range 1.1160-1.1240

Loonieviews Mid week Oct.29, 2014

FOMC statement – are the doves crying wolf?

Michael O’Neill

FX Consultant / IFXA Ltd



  • USD selling squeezing stale long dollar positions
  • FOMC statement risks disappointing doves
  • Loonie has wings

By Michael O’Neill

The US dollar is under pressure in what appears to be a nervous market ahead of today’s Federal Open Market Committee interest rate decision and statement. The FOMC is widely expected to pull the curtain down on Quantitative Easing 3 (QE3), mainly because the decision was pre-announced in the September statement. The end of QE3 is a big deal and it is not unreasonable for the FOMC to be content to leave that as the key focus in today’s statement.

Doves may be crying wolf

A random review of expectations for today’s statement reveals a market that has spent a considerable time debating whether or not “considerable time” will be used to describe the duration of the current target range for the federal funds rate. Leaving it in is dovish, while omitting it is hawkish.

Another key focus is inflation. Bloomberg reports that some “policy members have, in recent days, mentioned below-target inflation as a risk that weighs against raising interest rates”. Last month, the statement said “economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate.”

It would be a fairly aggressive move for the FOMC to alter this statement considering that there is no post-meeting press conference to help explain their rationale, which is why it is unlikely to be changed.

The September FOMC statement was viewed as hawkish and it contained the reference to “considerable time”. If today’s statement contains more or less the same wording, than it would be difficult to conclude that it is dovish.

The US dollar has given up a lot of ground over the past week on expectations that today’s FOMC statement will be seen as dovish. The risk is that the move is overdone and that those crying “dove” are really crying “wolf”.

Loonie has wings

The Loonie has wings and it is flapping them madly. The USDCAD has traded erratically while slowly grinding lower since peaking at 1.1384 less than two weeks ago. Free-falling equity prices combined with plunging WTI oil prices drove USDCAD to the peak. Since then, equity markets have recovered all of their losses but the WTI price hasn’t. In fact, the outlook for WTI remains bearish.

Nevertheless, FX traders appear to have been caught on the wrong side of this move. The break above 1.1290 turned the technicals bullish with a 1.1550 target. The subsequent retreat looked to be merely consolidation prior to a renewed up surge. That sentiment ended with the break below the 1.1170-90 zone.

What has changed?

What has changed to shift USDCAD from a bullish bias to a bearish bias? Aussie and Kiwi have been steadily recovering from the prior USD rally and the Canadian dollar has lagged that move. (until yesterday).


Source: Saxo Bank

The Bank of Canada has gone to great lengths to alter the markets perception that they are dovish and would like to see a weaker Canadian dollar. The governor gave a speech on September 16 trumpeting the benefits of a floating rate, while stating that “trying to control the Loonie is off the table”.

A key shift in sentiment for the timing of the first US rate hike has led to widespread US dollar weakness and the Canadian dollar is rallying by default.

Canada’s Competition Bureau approved the takeover of Tim Hortons (THI:TSE) by Burger King (BKW:NYSE) yesterday. The news reminded traders that there is a potential CAD$12.5 billion dollars that needs to be bought to close the deal which is expected to occur by year end or very early in 2015. There may have been USDCAD selling on the back of this news.

USDCAD technical outlook

The USDCAD technicals are bearish following the break of the uptrend line from September at 1.1220 and triple bottom support at 1.1170 targeting the July uptrend line that comes into play at 1.1050. A break of that level would open point to further weakness to the long-term uptrend line from September 2012 which sits at 1.0790. In the short term, USDCAD support is at 1.1120, 1.1070 and 1.1050. Resistance is at 1.1170 and 1.1220.

USDCAD 4-hour

Source: Saxo Bank

– Edited by Oliver Morrison

Loonieviews October 28, 2014


USDCAD Open 1.1217-21 Range 1.1219-1.1250

USDCAD joined Aussie and Kiwi in drifting higher in a fairly dull overnight session. Anticipation for a meaningful FOMC meeting on Wednesday is the excuse offered to explain the lack of direction or movement. Sweden’s Riksbank cut the repo rate to 0.0% surprising the market and gave traders something other than the FOMC to talk about. US Durable Goods and Consumer Confidence may create some excitement this morning. Falling WTI prices will continue to limit USDCAD losses.

The intraday USDCAD technicals are modestly bearish while trading below 1.1240 looking for a break of support at 1.1200 to extend losses to 1.1170. A move above 1.1250 will lead to 1.1290.

Today’s Range 1.1200-1.1250

Loonieviews October 27, 2014

QE3 cruises into sunset

Michael O’Neill

FX Consultant / IFXA Ltd



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  • QE3 cruising into sunset
  • USDX suggests short-term FX consolidation
  • Soft WTI will support USDCAD

By Michael O’Neill

The final week of October has kicked off with German businesses a tad more pessimistic on the economic outlook, a lot less stress from the European Central Bank (ECB) stress tests and a new government in Brazil (which is the same as the old government). The voters may have been happy re-electing the incumbent president, Dilma Rousseff, but markets weren’t. BRL dropped 2.6% while Brazilian equities were down 5%. The focus for the week is on the Federal Open Market Committee (FOMC) meeting on Wednesday but the bar is set pretty low on the expectations front, which may allow the Reserve Bank of New Zealand’s (RBNZ) interest rate announcement and statement to hog the spotlight, later that day.

QE3 cruising into sunset at Port FOMC

The Federal Reserve Open Market Committee (FOMC) minutes of the September 17 meeting announced the end of the Quantitative Easing programme, dubbed QE3. That will be confirmed on Wednesday. The rest of the FOMC statement is widely expected to be a near duplicate of the September release.

Lurking in the weeds is a small camp that has jumped all over St Louis Fed president James Bullard’s suggestion that the Fed could consider a pause in its taper programme due to sliding inflation. That seems unlikely as it would destabilise financial markets, impinge on the FOMC’s credibility and expose it to widespread criticism about its motives and the strength and quality of the FOMC member’s economic outlook and assessments.

Stress test just beauty contest

The FX markets started the week with a sigh of relief. The highly-anticipated release of the European Central Bank’s (ECB) stress test on 130 European banks found only 25 banks with capital shortfalls and most of them had already addressed the issue by the time the report was issued.

Was there really any doubt? The Eurozone economy is teetering on the edge of recession and the ECB president Mario Draghi and his colleagues are contemplating extreme measures to jump-start economic growth. A cynic could be forgiven for concluding that the results and timing of the release of the Stress test is merely stimulus in the form of propaganda. If so, it has worked, so far.

FX in consolidation mode says USDX

The intraday USDX technicals are bearish while trading below 86.07 but support at 85.50 and 85.15 (the mid-August uptrend line) may contain weakness. The short term uptrend from July remains intact above 84.30 and will accelerate on a break of resistance at 86.10.

Chart: USDX Daily

Source: Saxo Bank

Sliding oil prices undermine Loonie

USDCAD will struggle to make gains while WTI oil prices continue to slide. Oil is in a steep and well-defined downtrend with a break of support in the 79.60 level suggesting further weakness to 77.50, a level last seen in July 2012. Only a recovery above 84.05 will negate the downward pressure. In addition, natural gas prices (a key Canadian export) are sliding as well, providing a one-two punch to USDCAD bears.

Chart: WTI Oil and USDCAD

Source: Saxo Bank

Chart: Natural Gas and USDCAD

Source: Saxo Bank

Key US data releases

Tuesday: September Durable Goods (Forecast 0.6%, ex-transportation 0.5%, month-over-month) The huge swings over the past couple of series will diminish the impact of this month’s release on the US dollar. At the same time, a better-than-expected gains will give the US dollar some support on an improving economic outlook.

Tuesday: Conference Board Consumer Confidence Survey (Forecast, 87). The expected gain may be lost in the fog ahead of Wednesday’s FOMC meeting.

Wednesday: FOMC rate decision and statement.

Thursday: US Real GDP Q3 (Forecast 3.0%, quarter-over-quarter). A better-than-expected print will give the US dollar a boost on interest rate hike timing revisions, especially after the official end of the tapering programme.

Friday: September Personal Income and Expenditures (PCE) (Forecast Income 0.3%, Spending 0.1% month-over-month).

Key Canadian data releases

Friday: Real GDP- August (Forecast 0.1%). The risk is that this data disappoints, which will undermine the Loonie.

Loonieviews End of week Oct. 24, 2014

Loonie traders cast a wary eye south

Michael O’Neill

FX Consultant / IFXA Ltd



  • CAD prospects dependent on USD
  • FOMC meeting to set course for the dollar
  • Stress tests could sway euro crosses

By Michael O’Neill

The week is drawing to a bit of a choppy close in FX markets, a situation that is likely due to the usual weekend positioning adjustments (with next week’s Federal Open Market Committee meeting adding a bit of extra concern).

Skittish traders may also have lingering concerns about the possible New York Ebola patient. Realistically, the concern should be less about Ebola and more about why a physician fresh from treating Ebola patients in West Africa was allowed to use public transportation.

USDCAD outlook

The Canadian fundamentals appear to be at odds with the technical picture. The fundamentals are mixed to soft while the intraday USDCAD technicals are bearish.

The Canadian dollar got a boost on Wednesday when the Bank of Canada dropped the word “neutral” from its interest rate statement. That move was not a signal that Canadian rates weren’t moving lower or higher, but merely an admission that the term may be misleading to markets.

In fact, many economists agreed that the monetary policy report did not feature any material changes to the BoC’s view. The bank remains concerned about inflation and is still not convinced that the recent increases are due to anything more than temporary factors.


The lack of Canadian data next week leaves the CAD’s direction at the mercy of the US dollar and FOMC meeting sentiments. The BoC is still neutral despite dropping the term, and domestic fundamentals are mixed and a little shy of inspiring. Manufacturing sales were soft and real gross domestic product data for August could be slightly negative. Commodity prices have bounced a tad, but remain in a downtrend.

Last week’s sharp plunge in the WTI oil price (which sank to $79.10/ barrel from $84.08/bbl) broke major support at $84.00/bbl. That level will revert to resistance and as long as prices remain below this level the outlook is bearish for WTI.

Tumbling oil prices are bad news for Canada’s energy sector. Photo: Doran J. Clark iStock

This is also a longer term bearish development for the Canadian dollar, as persistent lower prices will hurt the economy. At the same time, the US dollar overcame a case of the jitters and has started to move higher on expectations for a mid-2015 interest rate increase while both Japan and Europe threaten to cut rates further.

The loonie is also vulnerable to selling from month-end and portfolio rebalancing flows.


USDCAD is slowly grinding lower following last week’s rally that registered a new 2014 high. The jury is still out as to whether the spike through resistance in the 1.1270-90 area signalled a new bull run with 1.1550 as a target, or if it was merely a “one-off” spike in a panicking and illiquid market.

On the weekly chart, the move could easily be interpreted as a “one-off” spike suggesting that the key resistance area has held although the underlying trend is bullish above 1.1110. This view gains further credence due to the retracement back below 1.1290 and the three failures (on the daily chart) to get back above 1.1300.

On the other hand, the daily USDCAD outlook is bullish while trading above 1.1180-1.1200 with the retreat from 1.1380 viewed as merely corrective.

The intraday USDCAD technicals are bearish while trading below 1.1240 and we are looking for a decisive break of 1.1180 to extend losses to 1.0980, a level projected by the break of the existing triangle. Until we get a decisive break either side of 1.1180 or 1.1300, however, USDCAD will be confined to that range.

USDCAD four-hour with broken triangle projection

Source: Saxo Bank

The week that was

This week had a tough act to follow. The explosive FX volatility and near-panic selling in some equity indices for the week ending October 17 fizzled like a wet wick in a Jack-o’-lantern.

This was likely a relief for frazzled investors. Photo: iStock

Monday started tentatively as Federal Reserve vice-chairman Richard W. Fisher helped to ease some of the previous week’s panic by stating that his economic outlook was unchanged despite the recent volatility. USDJPY rallied on a rising Nikkei, although the stronger dollar theme didn’t continue into Europe or North America. EURUSD made a foray above 1.2800 while GBPUSD probed resistance at 1.6170.

Tuesday was all about a Reuters story stating the European Central Bank may discuss the purchase of corporate bonds at its December meeting. Despite the flimsy premise, this was all EURUSD bears needed to crank up the “additional stimulus” tune.

Wednesday saw a continuation of EURUSD selling on the ECB bond buying story. FX activity gained some momentum on fairly dovish Bank of England minutes and a rally kicked in on a higher-than-expected US inflation report. USDCAD churned within a 1.1185-1.1290 range on weak retail sales and the removal of the word “neutral” from the Bank of Canada interest rate statement.

Thursday had plenty of action starting in New Zealand, where inflation was well below forecasts. The action continued in Europe with French Purchasing Managers Index data undermining EURUSD prior to German PMI figures lifting it from its lows. UK data was soft followed by strong US data and a strong US dollar during the New York session.

The week that will be

Next week will be a two-parter, thematically speaking. Part one is “what do we expect the FOMC statement to say?” and part two is “what did the FOMC statement mean?”. A dash of month-end portfolio rebalancing flows will cap off the week

Monday kicks off with the euro-area bank stress test results (released on the weekend) which could create a stir in EURUSD and euro crosses.

The results of Tuesday’s US durable goods and consumer confidence reports will certainly influence the FOMC statement debate, but will ultimately be overshadowed by the statement itself.

In a divergence from the pattern established over the past two weeks, Wednesday has all the makings of a dull trading session, at least until the end of the New York session when the FOMC releases its interest rate decision and statement.

Thursday should be lively with the fallout (if any) from the FOMC statement front and centre, followed by a slew of German and US data including 3Q GDP.

Friday will see Eurozone Consumer Price Index figures, Canadian GDP and US personal consumption and expenditures data. In all likelihood, the week will end on a note of disruptive month-end portfolio rebalancing flows.

Loonieviews October 23, 2014


USDCAD Open 1.1240-45 Range 1.1235-1.1262

USDCAD was largely sidelined in an otherwise active FX market. Kiwi tanked on inflation missing forecasts, mixed China HSBC PMI data failed to give Aussie much traction while USDJPY climbed on a falling Nikkei. European PMI’s led to a bit of chop in EURUSD and soft Retail Sales data undermined cable.

The Loonie may get a bit of a ride today from the MPR press conference that was delayed from yesterday. WTI oil prices remain soft and another drop below $80.00/bbl will lead to USDCAD flirting with 1.1300

The intraday USDCAD technicals are mixed with USDCAD resting comfortable in the middle of the 1.1200-90 trading band. There is a small bias for a drift lower to test support in the 1.1200-20 area while trading below 1.1260. Longer term support resides at 1.1190. Above 1.1260 puts 1.1300 in play.

Today’s Range 1.1190-1.1260