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’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.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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