Oil and Greece deep fry FX markets 5Jan15


Oil and Greece deep fry FX markets

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

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By Michael O’Neill

The FX markets kicked off the first full week of trading in 2015 deep fried in oil and Greece, sort of a New Year’s pierogi of political uncertainty battered in soft commodity prices.

A report in Der Spiegel magazine claiming that Germany was ‘Ok’ with Greece leaving the Eurozone sent the US dollar screaming higher in the early, ultra-thin Asia markets. A spokesperson for Angela Merkel sort of denied the statement, stating that “there is no change of course”.

Oil prices took another hit after Iran said it planned to increase crude exports, while Russia’s December production rose to a multi-year high.

The New York and Toronto sessions have seen a small reversal in the Asia and European moves an indication that the initial USD rally may be overdone. Having said that, the shallow retreat can also mean that there are plenty of buyers on "dips". With the Federal Open Market Committee (FOMC) meeting minutes and the nonfarm payrolls report due later in the week, it makes sense to expect the US dollar to maintain its bid tone.

A larger-than-expected increase in Friday’s US non-farm payrolls

data will spark a US dollar rally. Photo: Bill Pugliano Thinkstock.com

Patience and payrolls

Wednesday’s Federal Open Monetary Committee minutes release may provide more insight into the degree of patience that the committee members have toward maintaining US rates at current levels. The December 17 statement was viewed as “hawkish” and was a big contributor to the US dollar’s year-end rally. The minutes may help determine if that view was valid.

However, the minutes are also stale news and as such will be easily trumped by Friday’s nonfarm payrolls release. The current forecast is for a gain of 245,000 jobs, 77,000 fewer than the November print. A result anything close to November’s 321,000 gain would spark another massive US dollar rally on the assumption that US rate hikes will be much sooner than previously anticipated.

Loonie and oil correlation intact

The USDCAD surge overnight was in large part due to the drop in oil prices following production increases in Russia and Iran. The short-term technicals for oil are bearish with a move below $50.10-20 targeting $47.30 and then $44.20.

The longer-term Fibonacci retracement target is $32.49/bb representing the 100% retracement of the 2008-2011 range. A move above $52.05 could see a bounce to $55.00 but leave the downtrend still intact.

Oil and USDCAD daily

Source: Saxo Bank

Key Canada data releases

Wednesday: November Merchandise Trade (Forecast deficit $600 million). Falling oil prices are expected to have a negative impact on this data which will also be a Canadian dollar negative.

Thursday-Friday: December New House Price Index; Housing Starts, Building Permits. The Canadian dollar is under pressure and FX traders will be looking for any negative data releases to validate that view. Worse-than-expected results for any of the three releases will be used as another excuse to buy USDCAD.

Friday: December Employment Report (forecast: 10,000, unemployment rate: 6.7%). This remains a volatile data series and a weaker than expected result will encourage USDCAD buying. At the same time, a better-than-expected report will have on limited Canadian dollar support due to the underlying bullish USDCAD sentiment.

Key US data releases

Tuesday: December ISM Non-Manufacturing PMI (forecast: 58.5).

Wednesday: December ADP employment change (forecast: 226,000). Larger-than-expected gains or losses should see forecasters revising their NFP predictions while a result close to consensus should not have much impact.

Wednesday: FOMC minutes released.

Friday: December Nonfarm payrolls report (forecast: 245,000). Does Uncle Sam have two blockbuster reports in a row up his sleeve? A much larger-than-expected increase would raise expectations of a sooner-than-expected rate hike and spark a US dollar rally. A worse-than-expected report would lead to US dollar selling but also attract the “buy on dips” crowd.

– Edited by Oliver Morrison

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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