‘Tis the season to be jolly well alert 17Dec14

‘Tis the season to be jolly well alert

Michael O’Neill

FX Consultant / IFXA Ltd



  • Time of year a major factor in FX moves
  • ‘Considerable time’ heads for dustbin of history
  • USDCAD approaches long-term peak

By Michael O’Neill

The usual quiet day ahead of the Federal Open Market Committee (FOMC) meeting failed to materialise today, thanks to AUDUSD weakness, the UK employment report and Russian ruble prospects. News that Jeb Bush was considering a presidential run to complete a Bush Trifecta failed to cause a ripple in markets. The opening of Sony Pictures’ The Interview in New York has been delayed because Kim Jong-unhappy. USDJPY traders ignored this development.

Poor liquidity equals volatility

FX volatility has exploded higher over the past few weeks as RUB and NOK traders can attest to. However, it hasn’t been limited to those currencies. Recently, USDJPY didn’t know if it was coming or going so it went in both directions. EURUSD suffered the same fate. Emerging market currencies have been hit hard as well, with the currencies of South Africa and Mexico at four-year lows.

It didn’t all start with a big bang but it was close. The Opec decision on November 27 not to cut production toppled the dominoes. Oil prices plunged as did petro-currencies. Russia, already suffering from G7sanctions, got hit hardest with the spectre of the 1998 “Russian flu” hanging in the air.

US Retail Sales figures have enjoyed an upturn due
partly to festive shopping bonanzas. Photo: Getty

The Greek election call reminded the world that the Eurozone was still, “if not a basket case” then dazed and confused. The Japanese election added another element of uncertainty to Asia while ongoing slowing growth concerns for China undercut commodities.

The US economy is rebounding. There are ever-rising expectations of a US rate hike against a global backdrop of currency devaluations to stimulate growth and the world has bought US dollars.

There is a fifth dimension beyond that which is known to man. It is a dimension as vast as space and as timeless as infinity. It is the middle ground between light and shadow, between science and superstition, and it lies between the pit of man’s fears and the summit of his knowledge. This is the dimension of imagination. It is an area which we call the Twilight Zone” (Opening narration, The Twilight Zone, Season 1).

And that is where FX traders find themselves today. The oil shock and Russia meltdown occurred during the least liquid time of year (December) when the big liquidity providers close their books for the year. There are only nine or ten trading days (depending on where you live) left in the year and days such as Christmas Eve and New Year’s Eve shouldn’t even be counted. The FX moves and the effects of the events are exaggerated and should be taken with the proverbial “pinch of salt”.

The storm before the calm

The run-up to today’s FOMC meeting has seen an unusual amount of volatility this week that is a contrast to the norm. Instead of the usual “sit on the sidelines” awaiting the decision and statement, traders have been jockeying for position having been distracted by oil price movements, equity market sell-offs and concern over another bout of “Russian flu”.

A considerable number of people expect the FOMC to drop the “considerable time” reference in today’s statement. So what? Since including the reference, the Fed has stated time and again that any rate hikes will be data-dependent. Since the US has enjoyed a string of rather robust economic reports lately, the reference is now misleading. Data dependency is the key.

USDCAD outlook

The Canadian dollar is the wallflower at this FX market dance. USDCAD has been torn between falling oil prices and a strengthening US economy. At the moment, the oil focus has been winning but a lack of liquidity in year-end markets may be having an out-sized impact. A lack of domestic data has contributed to the USDCAD strength.

However, that may change on Friday. Canadian CPI, PPI and Retail Sales are all due. If inflation beats expectations (Forecast 2.2% headline vs 2.4 previous, year-over-year and Core 2.4% vs. previous 2.3%) despite the impact of falling oil prices, the Bank of Canada may be forced to change their “deflation risk” tune. US Retail Sales jumped due to Black Friday/Cyber Monday shopping. Canada may see a similar gain for the same reason with Canadians taking advantage of cross border deals.

USDCAD technical outlook

The USDCAD rally since July has been relentless and although the intraday technicals remain bullish above 1.1600, there are signs that the rally is running out of steam with the failure to extend gains below the intraday downtrend at 1.1660. A confirmed move below 1.1590 suggests further losses to 1.1490.

Longer term, 1.1775 represents the 38.2% retracement level of the entire 2002 peak of 1.6140 and the 2008 low of 0.9060. Furthermore, the 1.1830-70 level has been both support and resistance on a number of occasions from 2005-2009.

Chart: USDCAD 1 hour with potential downside target

Source: Saxo Bank

Chart: USDCAD 15 year weekly with Fibonacci retracement

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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