FX market frothy on frosty Monday morning 12Jan15

FX market frothy on frosty Monday morning

Michael O’Neill

FX Consultant / IFXA Ltd


  • FX volatility kicks off the week
  • USDX argues for further US dollar gains
  • Sinking Loonie risks new lows

By Michael O’Neill

An absence of major US data releases and a Japanese national holiday would normally be the harbinger of a quiet and dull Asian FX trading session. That wasn’t the case today. The US dollar came under pressure in a continuation of Friday’s post-payrolls action. Although the headline data and upward revisions of the two prior months were undeniably US dollar positive, a decline in the hourly earnings component of the data led to US dollar selling.

That all changed when Europe started trading. Europe bought dollars across the board. It appears that traders have decided that the decline in hourly earnings in the US is not such a big deal after all.

Varying interpretations of US payrolls data made for a frothy session. Pic: iStock

New York traders apparently don’t see the world the same way the European traders did. They sold dollars, driving EURUSD back to 1.1840 from 1.1790 and USDJPY down to 1.1825 from 119.20.

The key takeaway from today’s price action is that it will likely be the norm for the balance of the week as traders look ahead to the European Central Bank meeting and Greek elections next week.

USDX rally merely resting – the uptrend remains intact

The USDX has backed off from the 2005 highs in the 92.60-65 area although the uptrend line from the December low of 91.15 remains intact above 91.90. A breach of the topside resistance will extend gains to 93.20 and then 93.50. A move below 91.90 risks a deeper pullback to 91.37.

USDX 4-hour with uptrend line and secondary support

Source: Saxo Bank

Daily USDX 2004 with next target on break of 92.65

Source: Saxo bank

Oil pumping

Oil prices have resumed their downward trend. Goldman Sachs’ call for $42/bbl isn’t helping matters. The issues of overproduction and market share protection continue to be the key factors behind the selling.

There is a school of thought that suggests Opec’s failure to support the oil price is a deliberate attempt by the cartel to destroy the US shale industry by making shale oil economically nonviable. It that’s the case then so far it’s working. The oil services industry is getting pummelled. Oil rigs are being idled and 10,000 people were laid off from Mexican oil service companies over the weekend.

US oil 4-hour with downtrends shown

Source: Saxo Bank

Loonie slumping

USDCAD kicked off another leg higher with today’s breach of the short-term double top in the 1.1870-80 area. The lethal combination of poor economic data, falling oil prices and bullish technicals have painted a target on the 1.2250-70 area which represents resistance from 2008. The plunge in oil prices is expected to shave off 1/3 of a percent from Canada’s GDP growth, jeopardise the federal government’s promise of a budget surplus and derail export growth.

The short-term rally in USDCAD from November at 1.1225 remains intact while trading above 1.1660. The intraday rally from the January breakout through 1.1680 is still in force while trading above 1.1840 supported by todays move through resistance in the 1.1870-80 area. 1.1940 and 1.1980 should provide minor resistance ahead of 1.2000 which could be sticky, only because of its psychological importance.

Chart: USDCAD daily with target

Source: Saxo Bank

Key US data releases

Wednesday: Dec. Retail Sales (forecast 0.0%, ex autos 0.0%, month over month). Slowing auto sales and lower oil prices will be behind the softer retail sales data. The question is whether the gas price savings are spent elsewhere or not.

Friday: Dec. CPI (forecast negative 0.4%, core 0.1% month over month). Lower oil prices will weigh on the CPI data but at this point in time, FX markets are not nearly as concerned with soft CPI data, unlike EURUSD and the European Central Bank.

There are no key Canadian data releases on the immediate agenda.

– Edited by Clare MacCarthy

Michael O’Neill is an FX consultant at IFXA Ltd

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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