Rising oil floats all Loonies 2Feb15

Rising oil floats all Loonies

Michael O’Neill

FX Consultant / IFXA Ltd


  • US data blurs the outlook
  • Oil rally stokes Loonie
  • USDX still consolidating

By Michael O’Neill

The oracles of the underground, the rodents of prophecy and potluck suppers to rednecks everywhere, Wiarton Willie and Punxsutawney Phil, emerged from their burrows and saw their shadows. According to folklore, when a groundhog sees its shadow on February 2, it means six more weeks of winter. Similarly in Europe, when another Greek political party grabs the reins of power in Greece, it means six more weeks of rehashing debt repayment schedules on the threat of default.

US data fails to inspire

There was a flurry of data from the US this morning and by most accounts it was mixed. The ISM Manufacturing data missed forecasts, coming in at 53.5 (Forecast: 54.5) However, the Markit PMI edged above the forecasts with a 53.9 result. Taken together, they are a wash. Meanwhile, the US income data was solid with a rise in personal disposable income notable. Today’s data may raise some questions about the health and the sustainability of the current US economic revival but not enough to change the overall outlook.

USDX consolidating

At various times today, AUDUSD, USDJPY and USDCAD have enjoyed bouts of volatility with large price movements. You would never know it by watching the USDX. The USDX has been a relative oasis of tranquility for the past week drifting within a 94.20-95.20 band. The fact that EURUSD is 57.5% of the weighting of the index has a lot to do with it. Having said that, the rally toward 2003 levels is firmly entrenched. The intraday technicals are bullish while trading above 94.08 looking for a break of minor resistance at 95.15 to extend gains to 95.80. A move below 94.08 could lead to a drop to 93.35.

USDX 4-hour

Source: Saxo Bank

Oil rallies on falling rig count

Bottom pickers apparently read of the drop in US rig counts to conclude that the worst was over for oil prices, and WTI has staged an impressive rally. Apparently, the crude over-supply concern has been alleviated by the drop in oil rigs. Meanwhile, oil refinery workers in the US are still on strike, targeting plants with a combined 10% of US capacity. What happens to the oil that isn’t getting refined?

The current WTI rally is merely a correction within the context of the short-term downtrend since September which remains intact while trading below $56.72/bbl, a level being guarded by resistance at $53.40/bbl and $51.45/bbl.

Until these levels break, nascent WTI bulls risk getting rolled over by renewed selling.

US oil daily

Source: Saxo Bank

Loonie takes flight on oil rally

USDCAD edged higher throughout the Asian session and then what started as an orderly decline turned into a full-fledged rout. USDCAD shed 0.200 points in concert with rising WTI prices. Stops were triggered on the move through 1.2710 and accelerated on the drop below 1.2620.
Today’s move has served to wipe out the weak US dollar long positions as well as re-introducing the concept of two-way risk back into the currency.

It had been absent since the Bank of Canada’s rate surprise. However, today’s move doesn’t change the short-term bullish USDCAD outlook. The latest economic releases have been soft and Friday’s employment report isn’t likely to change that.

USDCAD technical outlook

Today’s USDCAD retreat halted right on the rising trendline from 1.2150 when the Bank of Canada cut interest rates which comes in in the 1.2550 area. It needs to break below this level to extend losses to 1.2380. If it holds, look for additional 1.2550-1.2750 trading until Friday’s employment report.

USDCAD 4-hours

Source: Saxo Bank

Key US data releases

Wednesday: January ISM Non-Manufacturing Index (Forecast 56.4)

Wednesday: January ADP employment change (Forecast 225,000). This data’s importance rises with the size of the deviance from the forecast sparking non-farm payroll revisions.

Thursday: December Trade Balance (deficit $38 billion) Lower oil prices on imports may help to shrink the deficit for this month.

Friday: December Non-Farm Payrolls (Forecast 235,000). Although the headline number is still a key driver, more and more economists are focusing on wage growth as measured by average hourly earnings. Wage growth gains and an above consensus headline number should reignite the US dollar rally.

Key Canadian data releases

Wednesday: January Ivey Purchasing Managers Index (Forecast 55.4). This is a volatile data series dismissed by many bank economists. However, a worse than expected result would undermined the loonie as it supports a negative bias. A stronger than expected number would have a minimal impact.

Wednesday: December Merchandise Trade (Forecast deficit $1.1 billion) The slide in oil prices risks expanding the deficit suggesting that the result may be worse than forecast which would boost USDCAD.

Friday: January Labour Force Survey (Forecast 5,000). The forecasts for this data are notoriously bad and this month should be no different. A higher than expected number may give the loonie a short lived boost as the underlying USDCAD sentiment is bullish while a large negative number could lead to a 1.3000 print.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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