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.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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