Loonie sinks under weight of Swiss lessons-16Jan15

Loonie sinks under weight of Swiss lessons

Michael O’Neill

FX Consultant / IFXA Ltd



  • US CPI slightly disappointing
  • EURCHF fallout to continue
  • FX lessons relearned on Thursday

By Michael O’Neill
Today’s US CPI release may provide some support for those calling for a later start to US rate hikes but at the same time, the fallout from yesterday’s Swiss National Bank action is the main focus.
Loonie and Swiss on toast

Loonie and Swiss cheese on toast is a poor substitute for the old lunch bag favourite of ham and Swiss cheese on rye. And both the loonie and CHF are pretty much toast today…

USDCAD initially sank following the SNB decision, dropping from 1.1930 to 1.1805 on the back of general US dollar selling and then rallied again just as dramatically. It has followed suit today.

Canada has been the recipient of a host of bad news in recent days. Monday’s Bank of Canada Business Outlook survey was mixed to pessimistic.

Oil industry investments have been slashed, oil workers are being laid off and government finances have been trashed.

Oil prices didn’t have anything to do with Target’s decision to lay off 17,000 Canadian employees, close all their 133 stores and head back across the border, but poor management and a potential $5.4 billion loss likely did.

The Bank of Canada dropped what was interpreted to be a broad hint of a dovish tack to next week’s Monetary Policy Statement in a speech by deputy governor Tim Lane.

The steep drop in oil prices has managed to intrude on the Canadian government’s Christmas vacation (December 12 to January 26) forcing federal finance minister Joe Oliver to announce that he was delaying the tabling of the 2015-16 budget from sometime in February to sometime in April.

It appears that Canadian ministers may have to cut their winter break short

and deal with collapsing oil prices. Photo: Ingram Publishing

This budget is a little more important than others as it is an “election budget”. The small surplus (but still a surplus) would allow the incumbent Conservative party to bribe voters with enough money to appeal to every special interest group and(it hopes) lead it to another election victory.

USDCAD technicals

The intraday USDCAD technicals are bullish while trading above 1.1970 with today’s break above 1.2015 pointing to further gains toward 1.2200. As stated previously, there is not a lot in the way of resistance between 1.2000 and 1.2200. The short term technicals are also bullish. USDCAD support is at 1.1970 and 1.1920. Resistance is at 1.2050, 1.2090 and 1.2120.

USDCAD four-hour with uptrends noted

Source: Saxo Bank

FX lessons (re)learned in a volatile week

There are two kinds of traders today. Those who were long CHF against anything and therefore ecstatic on the Swiss National Bank’s abandonment of the EURCHF peg and those who weren’t.

Those who weren’t long CHF may have indirectly benefited from the US dollar selloff providing that they were both nimble and any stop losses were not triggered.

Lesson No. 1

When a Central Banker says “We will not abandon the peg”, the “today” is silent.

Lesson No. 2

A “Stop-loss” rate is not an absolute. Any interbank trader will tell you that a stop-loss is not a guaranteed trade level but an order to buy or sell at the next available price. Most of the time, the slippage on the execution of a stop loss is minimal. But that is only most of the time… other times it is substantial (See Financial Crisis 2008, Russia Crisis 1998, Asia Crisis 1997, ERM 1992, Maastricht Treaty 1985 and so on) and slippage can leave a mark.

Thursday’s Swiss debacle is a textbook example: all offers, no bids.

Just because you set a stop loss at 0.9980 in USDCHF or 1.1980 in EURCHF does not obligate any bank to fill you at that level. Instead, they will fill you at the next available price on a first come, first served basis. Your happiness about the fill does not enter into the equation. That is the reality in all trading markets. No bank is expected or obligated to back-stop your trading losses. Sometimes, reality bites.

Lesson No. 3

Leverage is fun until someone loses an eye. The magnitude of the elation felt when a 10:1 or even 50:1 leveraged trade wins is exponentially amplified in the form of distress when that same leverage is on a losing trade.

Lesson No. 4

Owning FX puts or calls are the best stop losses as they provide an absolute execution level rather than a "best efforts" basis.

The week that was

This was a barn burner of a week and the flames were already raging when it started.

Monday started with AUDUSD on a tear, USDJPY on a roller-coaster and then saw EUR and the Cable sliding in Europe. The loonie got beat up following a mixed-to-negative Bank of Canada Business Outlook Survey.

Tuesday was more of the same. The aussie and kiwi initially rallied on better than expected Chinese Trade data while a USDJPY rally in Asia became a rout starting in the European session. GBPUSD got trashed on poor inflation data. The rising volatility continued during the New York session, with early US dollar gains reversed by the end of the day

Wednesday’s FX markets were even more erratic than the previous two days combined. The World Bank announced that it was cutting its global growth forecast, commodity prices were sinking and the European Court of Justice apparently gave its blessing to the European Central Bank’s plan for Outright Monetary Transactions. ECB QE, here we come.

It was this sort of week, minus the queues and cotton candy. Photo: iStock

Thursday was absolute carnage. The Swiss National Bank (SNB) abandoned the EURCHF peg established in 2011 despite their prior reassurances that “we will defend the peg”. "Holy Deja vu Batman!"

(That’s what the Bank of England told George Soros in 1992, moments before the exit of sterling from the European Rate Mechanism (ERM).)

The week ahead

The week ahead is fraught with risks from various Central Banks, key data releases and the continued fall-out from the SNB-induced wreckage while the Martin Luther King holiday in the US on Monday may impact FX liquidity during the North America session.

The ECB monetary policy statement and press conference on Thursday is widely expected to announce a US-style quantitative easing program. Those expecting widespread EURUSD selling should take note of the nearly 10 big figure drop in the currency pair in less than a month.

The ECB isn’t the only game in town. The Bank of Japan (BoJ) Monetary Policy statement is due Wednesday followed by the Bank of Canada. The BoC may create a stir if its policy statement is deemed to be dovish sounding (as was hinted by deputy governor Tim Lane’s speech earlier this week).

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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