A volatile end to a volatile week 23Jan15


A volatile end to a volatile week

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Today’s US data appears sluggish
  • Aftershocks from ECB still shaking FX
  • Canadian CPI supports BoC actions.

By Michael O’Neill

A volatile week is ending in a fairly volatile manner as G7 traders attempt to position for the next moves while simultaneously trying to protect profits. US dollar sentiment is bullish, but it has been bouncing erratically against most of the majors ahead of next week’s key events.

ECB aftershocks continue to shake up FX

If Thursday’s European Central Bank announcement of a quantitative easing programme was an earthquake, it would have been in the magnitude of 9.5 on the Richter scale. The after-shocks are continuing to shake up the FX markets today as the US dollar has made impressive gains across the G10 spectrum (with the exception of JPY). EURUSD continues to drive lower with parity looking like a reasonable objective.

The markets are still attempting to digest and analyse the details of the QE ECB style while simultaneously concerned about the rising probability of the anti-austerity Syriza party forming the next Greek government.

Supporters of Greece’s anti-austerity Syriza party rally in Athens. Photo: Oli Scarff Getty

Greece isn’t the only worry. The death of Saudi Arabia’s King Abdullah has raised worries over the stability of Saudi Arabia, their American relationship and oil pricing.


CPI vindicates Bank of Canada

Canadian CPI data did not disappoint those looking to be disappointed – it was bad. And it makes Wednesday’s surprise Bank of Canada rate cut a tad more palatable. The month-over-month, non-seasonally adjusted number was minus 0.7% while the year-over-year print was 1.5%. Both were lower than expected.

Any negative reaction to this data was offset by the better than expected Retail Sales report (Actual 0.4, ex-autos 0.7% vs. minus 0.2% and ex-autos 0.1%).

USDCAD retreated from 1.2450 down to 1.2375 but has since bounced to 1.2410.

Change in Canada CPI

Source: Statistics Canada


Was a currency devaluation the goal behind the BoC action?

The BoC press release for the rate cut decision stated that “this decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada”.

A sceptical person may conclude that what the BoC was really saying was “this decision is in response to the sharp drop in G7 currencies against the US dollar which would be negative for Canadian economic growth due to Canadian exports becoming less competitive”.

Whatever the real reason was, the BoC is not unhappy with the fact that the Canadian dollar has lost 4% this week and 6.6% in the past month.

USDCAD 30 minute

Source: Saxo Bank

The week that was

It was a week of flash bangs, shock and awe and fireworks, and that was just from the Bank of Canada. Mario Draghi proved himself to be the “little engine that could”, managing to pull the European Central Bank – including a reticent Germany – into a massive quantitative easing program.

Monday’s US Martin Luther King Day holiday managed to dampen trading activity in North America but Asia and Europe had their moments. The dust still hadn’t settled from the Swiss National Bank’s decision to pull the floor out from under the EURCHF 1.2000 peg and traders fretted about the looming ECB meeting and the January 25 elections in Greece.

Tuesday started with a barrage of Chinese economic data. China’s reported 7.3% year over year GDP growth got mixed reviews. At the end of it all, both AUD and NZD lost ground. The Americans returned to their desks and promptly bought dollars, with the kiwi and the loonie the biggest victims.

Wednesday kicked off with the Bank of Japan’s Monetary Policy announcements which proved to undermine USDJPY. Sterling hogged the spotlight in Europe on the Bank of England minutes and the labour report. The switch to a unanimous decision to leave rates unchanged rather than have two dissenters gutted GBPUSD.

Then it was the Bank of Canada’s turn. The announcement of a quarter-point cut in the overnight rate confirmed Canada’s entry into the Currency Devaluation Club. USDCAD soared from 1.2065 to 1.2390 in minutes.

Thursday, the ECB unleashed a massive and arguably open-ended QE program which managed to kick the legs out from under an already weak EURUSD and roil FX markets globally.

The week that will be

Monday’s Australian Day holiday will certainly impact FX liquidity at the start of the week which would be a major shortcoming if the Greek elections result in a massive win for the anti-austerity Syriza party. For EURUSD traders, forget “where’s Waldo?”, as it will be “where’s the bid?

Tuesday’s action should be data driven with UK GDP, US Durable Goods, CPI and New Home Sales all due. Strong US data will underscore the economic divergence between the US and the rest of the G7.

Wednesday is another “Central Bank Day”, but not until late in the New York afternoon. The Federal Reserve Open Market Committee rate decision and press conference is followed a few hours later by the Reserve Bank of New Zealand’s interest rate statement. That will add the nitro to the glycerin.

Thursday will be all about dealing with the fallout from the FOMC and RBNZ decisions, and Friday will be very interesting. Eurozone CPI, US GDP and the Chicago Purchasing Managers Index will compete with month end portfolio rebalancing flows and end of week position adjustments.

— Edited by Michael McKenna

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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