EXODUS: Oil Gods and Loonie Kings 12Dec14

EXODUS: Oil Gods and Loonie Kings

Michael O’Neill

FX Consultant / IFXA Ltd



  • Oil drops 10% in the week and Loonie loses 1.5%
  • BoC comes across as negative on economy
  • USDCAD on track for spike to 1.1675

By Michael O’Neill

EXODUS: Gods and Kings opened this week telling the tale of 600,000 slaves fleeing Egypt in the time of Pharaoh Ramses. That wasn’t the only exodus this week.

Bullish oil traders headed for the exits in droves, driving WTI through a five-year low of $60.00/bb.l. It is currently trading at $58.78/bbl. Both NOK and CAD got hammered. USDCAD broke above resistance in the 1.1530-40, opening the door to 1.1675, the 61.8% Fibonacci retracement level of the 2009-2011 range of 0.9430-1.3040.

The renewed oil selling was blamed on a comment by the Saudi oil minister, Ali Al-Naimi who said “Why should I cut production?” according to Reuters. Before Chicken Little could say “crude is falling, oil traders saw visions of $40.00/bbl prices dance on their heads. WTI is down 10% this week.

The falling oil prices have created merger and acquisition opportunities with the shares of oil companies getting whacked. Repsol is reportedly making a Sterling 4.0 billion bid for Talisman Energy (TLM:TSE), which may help the Loonie down the road, depending on how it is paid for.

Oil and Loonie going down together

The Loonie was already reeling from the 10% decline in oil prices that reached a five-year low this week when the Bank of Canada Financial Services Review (FSR) was released on Wednesday. According to the opening statement “the purpose of the review is to highlight key vulnerabilities and the catalysts that could turn those vulnerabilities into a risk”. It is sort of a "doomsday outlook".

Unfortunately, some headline writers took statements out of context, printing display copy such as “up to 30% overvalued housing big risk to economy”, and USDCAD rallied. Yesterday, the BoC governor Stephen Poloz said, in an interview: “Given what we’ve been through and the process of serial disappointment, it’s natural to be more concerned about the downside than the upside. Even though the US has had strong growth the last while, you’d have to say: “Yeah but it’s with interest rates at zero. What would you expect?”

Together, the interview and the FSR combined to show Canada and by default, the Canadian dollar, in a negative light.

USDCAD also rallied due to residual negative sentiment arising from Friday’s disappointing headline employment number and a total drought of domestic data to provide additional support. It doesn’t get any better until next Friday.

USDCAD technical outlook

The intraday and short-term USDCAD technicals are bullish while trading above 1.1450 with the overnight extension of gains above 1.1550 clearing the way for a move to 1.1675, a level last seen July 10 2009. On that day, USDCAD traded down from 1.1675 to 1.1500. A move below the 1.1500-10 area would lead to a test of the uptrend line, currently at 1.1450. A range of 1.1475-1.1675 sounds appropriate in light of recent trading patterns.

Chart: USDCAD 4-hour

Source: Saxo Bank

The week that was

The US dollar was in demand to start the week, which was really just a residual reaction to the previous Friday’s blockbuster nonfarm payrolls (NFP) report. That was the only top-tier US data available to traders until the Thursday Retail Sales data, leaving them wandering around like a herd of zombies looking for lunch.

Monday led off with disappointing Chinese trade data. The AUD and Kiwi both retreated on the news but the losses were short-lived. The early bid for US dollars changed to a big offer for dollars when the New York session started and the dollar retraced all of its post NFP gains.

The weak US dollar theme continued in Tuesday’s Asian session with both USDJPY and EURUSD experiencing sharp moves that became even more acute during the North American day. Weak oil markets and falling equity indices were said to be partially at blame for the moves.

Wednesday saw a continuation of the erratic moves and poor liquidity laced with a little central bank drama. The Reserve Bank of New Zealand (RBNZ) surprised markets with a hawkish sounding statement. The Bank of Canada’s (BoC) Financial Services Review (FSR) led to some inflammatory headlines and oil prices continued to leak lower.

Volatility was the norm on Thursday. The Eurozone eagerly awaited the results of the TLTRO from the ECB but there wasn’t much of a reaction when the results came out as expected. The US dollar staged an impressive rally against the majors, supported by a healthy Retail Sales report. AUDUSD traders ignored bearish comments from the Reserve Bank of Australia (RBA) governor while USDCAD traders paid attention to the BoC governor’s remarks and sold Loonies.

The week that will be

Next week could be of the barn-burning variety. It is rife with an election, central bank meetings and major data releases from all over, in a long US dollar environment with ever-shrinking liquidity. This is a surefire recipe for riches (or rags) depending upon your agility and luck.

Japanese voters will go the polls this Sunday, with implications for USDJPY. Photo:iStock

Monday is likely to start with volatility from the Japanese election results. A big mandate for Abe and USDJPY could soar.

Tuesday gets better with the release of the RBA minutes. Perhaps they will contain some clues as to the likelihood of a rate cut in the near future. A slew of PMI releases starting with China, France, Germany and the Eurozone will be a major focus as will UK data including CPI and PPI and a speech from Bank of England governor Mark Carney

Wednesday is the main event. The Bank of England minutes and the Eurozone CPI data will keep European traders interested while North American traders will await the Federal Open Market Committee (FOMC) rate decision and statement. Considerable time has been spent wondering if “considerable time” will be omitted from this statement.

Thursday, the Asian and Eurozone markets will deal with the fall-out from the FOMC statement. In addition, German IFO data and UK retail sales will enter the mix. Oil traders and petro-currency traders will take note of the American Petroleum Institute monthly report.

Friday will be all about the Bank of Japan (BoJ) policy statement and press conference and end with Canadian CPI and Retail Sales data.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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