Grease is the word and Greece is the worry 29Dec14

Grease is the word and Greece is the worry

Michael O’Neill

FX Consultant / IFXA Ltd



  • Greece returns with new drama
  • Copper price drop — beware the Ides of March?
  • USDX looks bullish

By Michael O’Neill

The Christmas gifts have been exchanged and for many, this is the week that they are exchanged again; this time for a different colour, size, style or just plain ol’ cash. The real unhappy people are those who wish they could return their downloaded copies of Sony’s The Interview — a cinematic equivalent of "root canal without anesthesia".

This week is another short week, interrupted by New Year’s Eve celebrations and the New Year’s Day holiday. As usual, North American markets will try to get a head start on the partying by closing early. However there is a risk of early fireworks stemming from month, quarter and year end repatriation and portfolio rebalancing flows.

Greece heading back to the polls

Grease was the word in a 1978 movie with John Travolta and Olivia Newton-John, and Greece is the worry for the last three trading days of 2014. News of another general election in January and the rise in popularity of the anti-austerity Syriza party could endanger the bail-out and raise havoc in the Eurozone. The news didn’t faze the EURUSD though, which traded in a 1.2168-1.2220 band.

Copper barometer stokes China slowdown fears

Copper prices touched a four-year low today and are down 15% for the year. This doesn’t bode well for Chinese economic growth expectations as copper prices are seen as a barometer for the health of the domestic economy. Additional evidence of a Chinese slowdown may be found on Wednesday with the release of the HSBC China PMI index (Forecast 49.5). The conclusion will be that global economic growth is at risk and commodity currencies are vulnerable.

However, nine months ago, in March, a sharp drop in copper prices raised all the same concerns. The USD rose and fell with every tick in copper prices. Eventually, the consensus concluded that speculation rather than an overwhelming shift in demand played the major role in the price correction. The global economy survived.

Chart: Copper daily

Source: Saxo Bank

US dollar index points to further gains.

The US dollar index (USDX) continues to grind higher within the rising channel, intact since December 15. The break of long-term resistance at 90.05 led to a probe of additional resistance at 90.35 which has held (so far). A break of this level projects further gains to the 90.86-90.95 area, which was last seen in 2009. A move below 90.05 could extend losses to 89.60.

Chart: USDX 4 hour with uptrend channel

Source: Saxo Bank

USDCAD outlook for the week

There isn’t any data of note from Canada that will provide any trading insight or direction this week, leaving the currency pair at the mercy of US dollar direction and oil prices. USDCAD and Oil are tracking fairly well and the lack of trading activity is arguing for another deathly dull week.

Range for the week is 1.1550-1.1650

Chart: USDCAD 4 hour and Oil

Source: Saxo Bank

Portfolio rebalancing may favour the Canadian dollar

The dull, weak sentiment could change rapidly (at least for brief moments) on Wednesday on the back of month-end portfolio rebalancing flows. The large gains in US equities compared to that of the TSE suggests the possibility of Canadian dollar demand for the Fix. Realistically, the actual direction and size of the flows are hard to predict due to the sheer numbers of players involved,
Chart: TSX comparison with US indices

Source: Yahoo Finance

Key US data releases

Tuesday: Conference Board Consumer Confidence Survey. Falling gas prices may help to bolster this data series, which is already at seven-year highs.

Wednesday: Initial Jobless Claims (Forecast 290,000) released a day ahead of time due to New Year’s Day holiday.

Wednesday: Chicago PMI Index

Friday: ISM Manufacturing PMI (Forecast 57.6) Markit Manufacturing PMI

There are no key Canadian data releases this week.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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