When will BoC make up its mind?

When will the Bank of Canada make up its mind?

Michael O’Neill Michael O'Neill
FX Consultant / IFXA Ltd

  • USDX direction unclear
  • Bank of Canada unclear on rate cut plans
  • Loonie rangebound until Wednesday

By Michael O’Neill

USDX: Breakout or fake out?

The USDX has survived a number of attempts to head lower in the past week and yesterday’s spike to 95.40, breaking resistance at 95.15 could be the start of another leg higher.

Then again, however, it could just be a false break suggesting further 93.70-95.15 consolidation. However, the long term uptrend from July 2014 is still intact but that trendline doesn’t come into play until 91.90, leaving plenty of scope for a downside correction.

A decisive break above 95.20 for a few days would suggest further gains ahead.

USDX daily with resistance and uptrend line shown
Source: Saxo Bank

Loonie nervous ahead of BoC

Bank of Canada governor Stephen Poloz has gone to great lengths to confuse FX markets and he has been successful. After blind-siding FX markets in January with a surprise rate cut, he then gave the impression that it was the first of at least two.

That view was reinforced in a speech by deputy governor Agatha Cote a week ago. But just when traders were buying into the rate-cut scenario, Mr. Poloz used a speech to tell markets that the rate cut was merely “insurance”… the conclusion was that a rate cut next week was no longer likely and USDCAD rallied.

Meanwhile, WTI prices are see-sawing between 48.75 and 51.75. The downtrend is intact but the trendline is steep. The Saudi oil minister was making noises suggesting that the worst was over –at least for Brent, which has managed to increase its spread over WTI. A move above $52.00/barrel would bolster the Canadian dollar.

Ahead of Wednesday’s BoC meeting, USDCAD is likely to bounce within a 1.2410-1.2550 range. That range is vulnerable on the top if EURUSD continues to push lower toward 1.1000.

USDCAD with pre-BoC meeting range highlighted
Source: Saxo Bank

Ceasefires brokered and broken

The Russian-backed rebels are appearing to be honoring the ceasefire and are pulling back heavy weapons from the front lines (perhaps under threat of new EU sanctions against Russia). Meanwhile, Ukraine is operating under the threat of its gas supplies being cut off by Russia – a move that would make it a truly "cold war".

Elsewhere, the US and Nato have pre-announced a spring offensive to retake Mosul with as many as 20,000 US ground troops. Big-time shooting wars tend to disrupt FX markets but that is unlikely to be the case this time. The so-called Islamic State of Iraq and Syria, or ISIS, lacks heavy weapons, aircraft and is not seen as a much of a threat to the heavily armed, well trained Nato/US forces.

There is a risk that Russian rebels take advantage of Nato’s distraction with ISIS in the spring to claim more Ukraine territory, and a move like that would certainly boost FX volatility.

The week that was

This week, the US dollar was like a dormant volcano coming to life – thunderous rumblings, hot air, plumes of ash-filled smoke, and finally an explosive eruption.

Monday’s Asia session was quiet with Chinese New Year celebrations still ongoing. Europe saw a barrage of headlines about the Greece debt negotiations but nothing to disrupt FX markets. The same held true in the New York session as traders bided their time until Janet Yellen’s Congressional testimony.

Tuesday was fairly dull in Asia and Europe, although Bank of England governor Mark Carney and friends stirred the GBPUSD waters in their testimony to the Commons Treasury Select Committee.

The New York session, for its part, received a double dose of hot air as Janet Yellen’s remarks were not as hawkish as anticipated and the US dollar came under pressure. More hot air followed from the Bank of Canada, where Stephen Poloz appeared to take next Tuesday’s rate cut off the table when he described the previous cut as “insurance” rather than a monetary policy action.

USDCAD dropped like a rock.

Balancing rock

"Wait for it…" Photo: iStock

Wednesday was a day of indecision. The market debated whether Ms. Yellen’s remarks were hawkish or dovish and the G10 currencies stayed within their recent trading bands.

Thursday, the volcano blew its lid. The US dollar was offered during the Asian session with the AUD, the kiwi and the loonie all in demand.

The action, however, didn’t continue on in Europe and the activity stalled. – that was the calm before the storm. A combination of positive US data and a hawkish comment from the Fed’s Bullard on rising US inflation fueled EURUSD selling. The break of 1.1270 triggered stops and suddenly the dollar was in demand across the board, setting the stage for a messy month-end on Friday.

The week that will be

It will be a busy week with loads of FX volatility due to key data releases and interest rate decisions from the Reserve Bank of Australia, the Bank of Canada, the Bank of England, and the European Central Bank.

Debates are currently raging about the prospect for further rate cuts from the RBA on Tuesday and the BoC on Wednesday. The announcement of a quantitative easing programme last month, however, makes this month’s ECB announcement anti-climactic.

The grand finale is on Friday when the US and Canadian payrolls reports are released.

— Edited by Michael McKenna

Michael O’Neill is an FX consultant at IFXA Ltd.


The BoC sings “Oops, I did it again”

The BoC sings: ‘Oops, I did it again’

Michael O’Neill Michael O'Neill
FX Consultant / IFXA Ltd

  • Traders are digesting Yellen’s remarks – decision still pending
  • Bank of Canada pulls u-turn
  • Loonie will remain choppy within broad range

By Michael O’Neill

We all live in a Yellen submarine

Well, we might not all live in a Yellen submarine, but US dollar bulls sure do and their hopes for rate hike clarity from the yesterday’s Congressional testimony weren’t sunk, but they were submerged.

Yellen’s speech was rather positive, noting improvements in the unemployment rate, a decline in long-term unemployment and gains in domestic spending and production. She noted the decline in long-term rates blaming it in part, on disappointing foreign growth and the drop in oil prices.

If anything, the speech wasn’t any less hawkish than the previous FOMC statement. However, many traders seemed to be expecting a declaration that June was FOMC Rate Hike month and were disappointed when that didn’t occur.

Sing a long with Stephen

Bank of Canada governor, Stephen Poloz is humming a familiar tune this morning. It’s “oops, I did it again” by Brittany Spears and he did it again, yesterday, in a speech in London, Ontario.

A month ago, the esteemed governor, blind-sided markets with the announcement of a 0.25% cut in interest rates, blaming falling oil prices for the move as they were “unambiguously negative for the Canadian economy”. The Canadian dollar lost nearly three cents in a day and nearly 8 cents in a week.

On Tuesday, he did it again. Apparently, the rate cut wasn’t because the oil drop was “unambiguously negative for the Canadian economy” but merely “insurance” to guard against lower inflation and financial instability. The bank cut rates to “buy time” to assess the economic impact. The impact on USDCAD was immediate. It has collapsed from 1.2640 to 1.2404 this morning and is currently sitting at 1.2440.

Polozfuscation is policy dissemination through obfuscation

The BoC made a deliberate decision to retreat from providing forward guidance to the markets, last fall, replaced by Polozfuscation.

Polozfuscation can be defined as central bank obfuscation using “known unknowns” as tangible, quantifiable data to formulate policy while considering the effects of changes to the flexible inflation targeting regime and possible side effects on policy credibility.

Yup, that doesn’t make sense in any language except for that spoken at 234 Laurier Avenue West, Ottawa, Canada.

v Bank of Canada has thrown another curve ball at the markets. Photo: istock

BoC credibility being tested

The steep drop in USDCAD over the past day is a direct result of Canada rate cut bets being unwound ahead of Tuesday’s decision. What seemed like a certainty just a last week is now a “known unknown”’. Other unknowns include whether Poloz’s “insurance policy” provided sufficient coverage in the event of lower oil prices before March 4, or whether he will respond to a soft CPI print on Thursday. The new BoC mantra may be "surprise-got you again"!

“No pipeline for you”

The lame duck US president is proving not to be so lame. President Obama did as promised and vetoed the Republican bill approving the Keystone XL pipeline. That decision may come back to haunt him later on this year if the Republicans attach language to approve the pipeline, to other legislation. Put that in your pipeline and smoke it. USDCAD didn’t react to the news as it was widely expected.

USDCAD Fundamentals

Tuesday’s BoC interest rate decision may prove to be anti-climactic following yesterday’s Poloz speech. The rate cut that was widely expected appears to be off the table at least until April 15, leaving a month and a half worth of data to set the tone.

WTI oil prices are the wild card. The short-term downtrend remains intact below $51.20 while a break above $54.50 would argue for further gains while suggesting that a short-term floor is in place. The debate as to whether the price drop has curtailed the oversupply situation has not been resolved.

USDCAD continues to be vulnerable to expectations of a rate hike in the US. Yesterday, Janet Yellen’s speech was thought to be on the dovish side which may only be due to the elevated expectations that she would preannounce a June rate hike. If US data continues to come out strong the risk of a rate hike increases and USDCAD will move higher.

Intraday, USDCAD is vulnerable to further losses stemming from the unwinding of stale long dollar positions combined with the risk of month end portfolio rebalancing leading to US dollar selling.

USDCAD technicals home on the range, once again

The intraday USDCAD technicals turned bearish with the breaks of both 1.2540 and 1.2490. The move below support at 1.2440 suggests that 1.2540 will serve as a short-term cap, while targeting additional support in the 1.2340-60 area.

The short-term technical story is one of the Loonie being home on the range. USDCAD has traded within a 1.2340-1.2780 band since January 22, managing to look bid near the top and offered near the bottom. That is likely due to WTI oil prices in the $45.00/bbl and the prospect of another BoC rate cut being fully priced in. If so, it makes sense to buy USDCAD around 1.2380, with a stop below 1.2310 and to sell USDCAD near 1.2760 with a stop above 1.2820

USDCAD 4-hour with trading band highlighted
usdcadSource: Saxo Bank

– Edited by Oliver Morrison

Loonie flatter than a pancake on Shrove Tuesday 17Feb15

Loonie flatter than a pancake on Shrove Tuesday

Michael O’Neill

FX Consultant / IFXA Ltd


  • WTI rally fading in early NY trading
  • Loonie bounces off support
  • Easy ride in EURUSD coming to an end

By Michael O’Neill

The long Valentine’s day weekend in the US and most of Canada has ended and traders have returned to their desks to look at a world that isn’t a whole lot different than the one they left on Friday.

It was a less-than-cherubic weekend for many. Photo: iStock

If love was indeed in the air, there is scant evidence of it in Europe and the Middle East at the moment. Greece is still trying to renegotiate a new debt repayment (or non-repayment) deal, the Russian-Ukraine ceasefire is (at least around Debaltseve) a free-fire zone and ISIS continues to destabilise the Middle East. What is different, however, is the FX market.

EUR may be finding a short term floor

EURUSD was not bothered by the “no deal” news from Greece. In fact it rallied and is currently trading higher than it was on Friday. Part of the reason for the rally can be explained by the IMM Commitment of Traders (COT) report: Short EURUSD spec positions total €17.3 billion.

So who is left to sell it? EURUSD has dropped from about 1.4000 in May 2014 to a low of 1.1140 in January 2015. Almost all of the decline can be attributed to rate cuts and expectations of a quantitative easing programme.

What’s left? There is an old adage that says something like “currencies will move in the direction where they can hurt the most amount of people in the shortest amount of time”. EURUSD may well be heading to par or below, but in my opinion, that move is unlikely to occur until there is a positioning shakeout.

Tick tock, tick tock

EURUSD is a ticking time bomb. It has dropped continuously for almost a year without a meaningful correction. That may change. The easy money has been made and any hint of an extend rally could turn into a stampede.

Any way you slice it, Fibonacci retracement projections from the May 2014 peak, the September break of support or the December 2014 drop all point to the risk of a significant correction, while leaving the underlying downtrend intact.

EURUSD four-hour with Fibonacci from May 2014

Source: Saxo Bank

USDX near the middle of the range

The US dollar index is failing to provide any near term direction to the US dollar. It appears to be as confused as the rest of the market as it waffles around within a 93.35-95.34 band.

The mid-December rally appears to have ended with the break below 94.25-30 early in February, although additional losses have been shallow. On the other hand, the long term uptrend from October remains intact and while trading above 93.35, the outlook is for additional gains.

In the short term, trading action above 94.25 targets a break of resistance at 94.50 to extend gains to 95.10. Below 94.25 suggests further losses to 93.95.

USDX daily

Source: Saxo Bank

Oil gains may prove too slick to hold

Price movements are rarely one-way and oil prices are no different. WTI has dropped significantly since Opec chose not to reduce production in November. The recent bounce, then, should be no surprise.

Oil prices found a short term bottom close to $44.10/barrel and have since popped higher. The rally has been attributed to falling rigs and most recently, the risk of supply disruption following Egyptian bombing raids into Libya.

From a Fibonacci retracement standpoint, the rally is shallow and corrective. It hasn’t even tested the 38.2 retracement of the November-February range. The peak-to-trough retracement (September 2013-February 2015) isn’t even close to the 23.6% Fibonacci retracement.

Arguably, WTI is a sell below $55.00/b.

WTI with Fibonacci retracement

Source: Saxo Bank

Loonie rallies with oil

Rising oil prices in a market well long USDCAD gave wings to the loonie. After spending Monday in a 1.2420-80 range, USDCAD fell through support at 1.2420, triggering stops at 1.2415 and gain at 1.2380.

The weekend’s news that Egypt bombed ISIS targets is part of the reason for the rally. If true, the WTI move will be short-lived as Libya isn’t much of an oil producer, lately.

There isn’t a lot of domestic data to drive USDCAD trading this week, at least not until Friday’s Retail Sales report. A stronger than expected result (December Retail Sales forecast negative 0.4% month-over-month) and even higher WTI prices could push USDCAD below key support at 1.2320 and trigger a sharp and nasty plunge to 1.2050.

The Canadian dollar needs oil to continue its rally if it is to post any gains. Photo: iStock

On the other hand, if Wednesday’s Federal Open Market Committee minutes are hawkish (implying a June rate hike) USDCAD should be well above 1.2500, limiting the fallout from Friday’s data.

USDCAD technical outlook

The intraday USDCAD technicals are bearish while trading below 1.2440 supported by the break of support at 1.2415. Failure to climb above 1.2390 risks another probe of support in the 1.2340-60 area.

The line in the sand is 1.2320. A break here would lead to 1.2050 in a hurry. A rally above 1.2440 negates the downtrend and argues for further gains to 1.2550.

USDCAD daily with downside break highlighted

Source: Saxo Bank

— Edited by Michael McKenna

Michael O’Neill is an FX consultant at IFXA Ltd.

CAD employment good, US NFP better-Loonie all-aflutter 6 Feb15


February 6. 2015

Loonie spinning like a top

USDCAD Overnight Range (including post payrolls) 1.2385-1.2495

The post payrolls pyrotechnics’ were spectacular and the Loonie was dazzled, jumping up and down like cold feet on hot sand. Canada posted a whopping 35.4 gain in jobs, greatly surpassing the mere 5K predicted and a huge jump from last month’s 11.3 K loss. USDCAD plunged to 1.2385 from 1.2430 and then roared straight up to 1.2595 because the US data was even more impressive. Nonfarm payrolls rose 257K, average hourly earnings were higher and November and December data were revised higher by another 147K.

Loonie’s head still spinning.

USDCAD traders don’t know whether they are coming or going this morning. The impressive rally from 1.2385 topped out at 1.2495 and it has retreated steadily. In fact USDCAD is sitting pretty much where it started before both employment reports.

WTI and Data at odds

The headline Canadian employment number is misleading as all the gains were part-time. In addition, recent history questions the accuracy of this Stats Canada data. On the other hand, WTI enjoyed an impressive rally yesterday and it is higher today ($51.61/bbl). Further gains in oil will likely put even patient long USDCAD positions to the test and result in a test of support at 1.2320.

Bullish CAD data at odds with US report

The mix of the better than expected Canadian employment report (headline number) and oil price gains have given new found life to the beleaguered Loonie. Unfortunately, getting bearish USDCAD on this mix at this level (1.2445) may be as dumb as passing on 2nd and 1 in a super Bowl game with Marshal Lynch on your team and on the field. The reason is simple. The US data was strong and with the large revisions, way better than expected. The added bonus was the rise in average hourly earnings. Taken together, it strengthens the case for a midyear US rate hike.

USDCAD technical Outlook

The intraday USD technicals are bearish USDCAD while trading below 1.2480 but needing a break below 1.2420 to extend losses to 1.2380. A break of 1.2380 would lead to a test of the short term uptrend line currently at 1.2320. A move above 1.2480 targets 1.2580

Greece is the word-again 5Feb15


Greece is the word-again

USDCAD Open 1.2527-32 Overnight Range 1.2511-1.2584

USDCAD drifted off the Asian high of 1.2584 in Europe, on broad-based US dollar selling against the G-10 (except JPY) sparked by a re-think of yesterday’s late day Greece news. On Wednesday afternoon, the ECB announced the removal of a waiver that allowed Greek bonds to be accepted as collateral despite not meeting minimum credit requirements. EURUSD was sold hard in late day trading and in Asia. Europe traders appear to be far less concerned with news and EURUSD is back above the pre-news levels. The bounce in EURUSD served to encourage US dollar selling against the majors. Elsewhere, The Bank of England didn’t surprise anyone and left interest rates unchanged at 0.5%.

Trade data from Canada and the US as well as Jobless claims could provide trading fodder this morning as traders start jockeying for position ahead of Friday’s employment figures from both countries.

The intraday USD CAD technicals are bearish with the overnight move below 1.2550, representing a break of the uptrend from yesterday’s low of 1.2390 and the downtrend from Monday’s peak of 1.2765. A break of the 1.2490-1.2505 area risks a return to 1.2380. A move about 1.2580 points to 1.2665.

Today’s Range 1.2490-1.2560

USD bulls pass through the looking glass-4Sep15

USD bulls pass through the looking glass

Michael O’Neill

FX Consultant / IFXA Ltd


  • ADP report keeps strong NFP hopes alive
  • Loonie and oil remain joined at the hip
  • Ivey PMI boosts USDCAD

By Michael O’Neill

USDCAD was already bid to start the New York session, drifting higher in an orderly manner. That all ended with the release of the Ivey PMI index which printed 45.4 versus expectations for 53.0.

USDCAD spiked from 1.2490 to 1.2530 on the news. Senior Canadian economists tend to dismiss this report, unhappy with its monthly volatility, but it nevertheless has had a short-lived impact on USDCAD trading.

This morning’s ADP employment report is another data series that doesn’t quite get respect but it continues to viewed by many as a harbinger of the nonfarm payrolls report that follows. Such being the case, today’s 213,000 gain – slightly worse than forecast – indicates that Friday’s NFP will match the consensus.

Prolonged correction or trend change?

Yesterday’s trading left US dollar bulls feeling as if they had been transported to a parallel universe. Their previously unshakeable belief that the US dollar could only rise on US and global growth divergence was shaken to the core.

Objects in the rear-view mirror may appear less overbought than they are. Photo: iStock

A 7% rise in oil prices fed a seemingly insatiable demand for Canadian dollars and Norwegian kroner. EURUSD skyrocketed on speculation that fears about a Greek default and/or exit from the Eurozone were overblown.

What wasn’t overblown were the FX moves. In fact, they provided conclusive evidence of an overbought US dollar. The question being bandied about this morning is “did yesterday’s dollar selloff signal the start of a more prolonged correction”?

Those believing that a more prolonged correction may be occurring cite the following:

  • The sheer size of long US dollar positions combined with the steepness of the fall in EURUSD from the middle of December provides plenty of scope for further gains while leaving the dominate downtrend intact.
  • The number of central banks cutting interest rates in the past two months to combat the risk of deflation could be a sign that the Federal Open Market Committee may need to address the risk of low US inflation, delaying expected rate hikes. Minneapolis Federal Reserve president Narayana Kocherlakota certainly believes inflation levels are a concern.
  • The belief that oil prices may have found a floor in the $43.25-$44.00/bbl level, alleviating short term deflation risk and renewing demand for commodity currencies.
  • The US equity market retreat was merely a correction and that the “low rates forever” sentiment is still valid, allowing equity markets to probe for new highs.

Those believing that yesterday’s correction was merely a speed bump on the highway to US dollar highs, however, suggest that:

  • Yesterday’s US dollar selloff was a much-needed flush of long US dollar positions occurring, coincidentally, just ahead of the monthly nonfarm payrolls report.
  • The Eurozone’s open-ended, $1.2 trillion quantitative easing program has never been described as being bullish for EURUSD… and it hasn’t even actually started yet.
  • Numerous central banks remain concerned about deflation and have been cutting rates with further rate cuts on the cards.
  • US economic growth continues to outperform the G10 keeping the belief of a Q2 rate hike alive.
  • Oil prices remain well below the $55.00/bbl average price forecast for 2015 (the year is still young) and even further below what reportedly is the break-even cost for much of the US shale industry.

The jury is still out, but in my opinion the US dollar selloff is merely a correction and not a trend change. The fact that all the major central banks have spoken has taken policy risk shocks off the table for the next month. It also removed short term trading catalysts, which probably convinced more than a few traders to lighten up long dollar positions.

The recent heightened FX market volatility increases the risk for adverse moves around the nonfarm payrolls report, providing further justification for trimming positions.

WTI and the loonie: the correlation continues

USDCAD and WTI moves have been highly correlated for the past few months and there is nothing on the horizon to suggest that this relationship will change. The Bank of Canada remains fixated with deflation and kick-starting exports.

Meanwhile, there is zero evidence that the over-supply of oil (see TradingFloor.com’s “Don’t get optimistic about oil”) ,which according to Bank of Montreal is running at about 0.4% higher than the long run average growth rate of 1.6%, is waning.

Furthermore, the G10 economic slowdown (except for the USA) has also contributed to the oil glut, and that slowdown is continuing – otherwise the central banks wouldn’t be cutting interest rates.

WTI and USDCAD four-hour

Source: Saxo Bank

— Edited by Michael McKenna

Michael O’Neill is an FX consultant at IFXA Ltd.

Loonie shrugs off oil price rally 3Feb15


Loonie shrugs off oil price rally

USDCAD Open 1.2535-40 Overnight Range 1.2533-1.2640

The Canadian dollar staged an impressive rally overnight, thanks to the Reserve Bank of Australia (RBA). The RBA joined the rate cut party and cut the cash rate by 25 basis points to 2.25%, surprising many traders and triggering a 0.0150 point drop in AUDUSD. It also led to demand for Canadian dollars as AUDCAD plunged as well. At the same time WTI prices continued to climb in part due to profit taking and in part because some traders think that the oil supply glut has miraculously diminished. However, USDCAD buyers emerged as NY traders got to their desks and USDCAD climbed from 1.2540 to 1.2580 (currently)

There isn’t much in the way of data to encourage trading today although a couple of Fed speakers (Bullard, Kocherlakota) will provide some headlines.

The intraday USD CAD technicals are bearish following the move through the post BoC rate cut uptrend line at 1.2590. The downtrend from yesterday’s peak of 1.2665 is also at 1.2590 which if it caps the current intraday rally argues for a retest of 1.2510

Today’s Range 1.1.2510-1.2590