Walking wounded and Walking Dead
FX Consultant / IFXA Ltd
- US dollar index suggests US retreat is just a correction
- Meager slate of top tier US data this week
- Canada CPI may boost Looney at end of week
By Michael O’Neill
The week started in Asia on a lively note with the Aussie dollar and JPY trading erratically. USDJPY broke key support at 107.50 and dropped to 107.07 before rebounding. That rally petered out and it has since drifted back towards 107.20. AUDUSD started soft and then rallied aggressively following better-than-expected trade data while the Kiwi followed suit. The action continued in Europe with EUR and GBP eking out modest gains.
It’s Thanksgiving weekend in Canada. In the greater Toronto area the trees are in their full autumn splendor with red leaves dominating the panorama – much like last week’s FX volatility that left many traders awash in red ink.
Cataracts Provincial Park in Canada is framed with colourful autumn leaves – the markets were similarly splashed with red ink last week. Photo: James Wheeler Thinkstock
It is also Columbus Day in the US. American’s commemorate the discovery of the New World, although in the interests of historical accuracy, Norway’s Leif Erikson beat him by around 500 years.
The post-apocalyptic horror drama television Walking Dead. How would
US equity exchanges deal with this one? Photo: AMC/TMZ .com
It is also a day for the walking dead to reflect on FX volatility. They are the traders that are not on holiday and who got burned in last week’s volatile trading sessions. Did the death of one person in Texas from the Ebola virus justify huge losses on US equity exchanges? Perhaps it’s a pop culture phenomenon. Season 5 of Walking Dead started on Sunday and the Zombies are a product of a virus gone wild. Just saying.
Why did traders become unnerved when the Federal Open Market Committee minutes revealed that the Committee considered the global outlook in their deliberations about the US economy? Were traders surprised that the governing body charged with overseeing American monetary policy would consider the economic outlook of the country’s major trading partners?
Were the FOMC minutes really dovish or just not as hawkish as anticipated?
Will Mario Draghi, governor of the European Central Bank unleash a large-scale sovereign bond purchase programme or is he still awaiting further data?
And what’s up with oil? How low can it go? Is OPEC fracturing? The Wall Street Journal reported on Sunday that cooperation among cartel members has broken down amid competition for market share.
Summer rally, October swoon
Last week’s US dollar retreat has traders questioning whether the move is the start of something new or merely corrective. Short-term Fibonacci analysis on daily charts for EUR, GBP, JPY and AUD suggest that further dollar weakness could still be seen inside a dominate US dollar uptrend.
Source: Saxo Bank
USDX supports dollar correction theory
The US dollar index provides further support to US dollar correction theory. Last week’s pullback stalled just below the 23.6 % retracement level of the July Oct move. Even further losses to 83.32 on the USDX still represent healthy gains since July. October has a history of “spooking” markets and it isn’t just because of Halloween.
Source: Saxo Bank
Key US data releases
Wednesday: September Retail Sales (forecast 0.1%, ex-auto’s 0.2%, month-on-month). Economists are looking for a small decline due to softer gasoline prices and weaker autos sales. A weaker-than-expected print could lead to renewed US dollar selling as traders are already protecting profits.
Thursday: September Industrial Production/Capacity Utilisation (forecast IP 0.4%, Cap. Util 79.0). Economists expect a rebound this month on general improvement in the US economy which should be US dollar supportive.
Friday: September Housing Starts (forecast 1.01 million, Permits 1.03mn) Economists expect this data to rebound following last month’s disappointing results providing renewed US dollar support.
Key Canadian data releases
Thursday: August Manufacturing Shipments (Forecast down 0.5% month-on-month) The decline in shipments is expected due to the strength of the previous month’s data. Weak data may exacerbate Canadian dollar weakness.
Friday: September CPI (forecast headline 2.0%, core 2.1% year-on-year). Higher-than-expected readings will give the Loonie a boost on anticipation of a more hawkish sounding Bank of Canada statement the following week.
– Edited by Oliver Morrison