Loonie up on the week but range remains 27Mar15


Loonie up on the week but range remains

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

Original post on TradingFloor.com

  • US data fails to inspire
  • Fed President Yellen will close out the week
  • USDCAD will remain home in the range

By Michael O’Neill

The US dollar has given up gains won in Europe as the latest batch of data is not a rousing endorsement for a policy change by the Federal Open Market Committee. In fact, it supports the argument that the outperformance of European data compared to the US means a more prolonged period of consolidation in EURUSD. At the same time, the US dollar retreat could be merely position adjustment ahead of remarks by Ms Yellen at the end of today.

BoC rate cut in April unlikely

The Bank of Canada will not be cutting rates in April, which some had expected, if the governor’s remarks on Thursday are any indication.

The BoC is quite happy with the results of the January cut with financial conditions easing and oil prices stabilising close to the January projections. Stephen Poloz, Governor of the Bank of Canada said in his speech on Thursday, “The negative effects of lower oil prices are beginning to appear; the positives will take longer to emerge. So we need to watch these competing forces play out in the economy, and the January rate cut has bought us some time to monitor the situation as it evolves”.

That statement implies a longer period of watching the data.

The BoC is quite happy that oil prices are stabilising. Photo: Statoil

BoC won’t spoon feed markets, either

The governor also admitted in the speech on Thursday that he “knew financial markets would be surprised by the rate cut in January, and we generally prefer to avoid surprises. But we will do what is necessary to fulfill our inflation-targeting mandate”. He went on to say that they would continue to watch the data closely and added that “we will look to market participants to keep watch on the same data, and form their own opinions about what they mean”.

Poloz, like many central bankers, is not a big fan of “forward guidance” believing that it handicaps the decision making process. He is likely a bigger fan of the Alan Greenspan school of communications, who is famously quoted as saying “I know you think you understand what you thought I said but I’m not sure you realise that what you heard is not what I meant”.

Central Bank baffle gab and Orwellian double-speak will be the language du jour in many policy statements, going forward.

Loonie continues to circle within broad band

USDCAD has been trapped within a broad 1.2340-1.2680 trading band since January 22 and there doesn’t appear to be any domestic data releases next week to break it out of the range. Two key pieces of data, GDP on Tuesday and Merchandise Trade figures on Thursday won’t have enough “oomph” to change the course of the medium term outlook for the domestic economy. Just as the oil price collapse sideswiped the Canadian dollar, an oil price recovery is needed to bolster the Loonie. The ongoing oil glut in the US suggests that relief isn’t in the cards any time soon.

USDCAD direction is still a US dollar story and that story may get very interesting next Friday when the US payrolls report is released. The US is almost the only market open on Good Friday. An outsized number in either direction would have an outsized impact due to poor liquidity. Until then, the current USDCAD range will remain.

USDCAD technical outlook

The intraday USDCAD technicals are bearish while trading below 1.2550 looking for a break of support in the 1.2410-40 area to extend losses to the 1.2340-60 zone. A break here could get messy with a quick plunge to 1.2050. A move above 1.2550 would suggest further 1.2410-1.2680 consolidation.

Chart: USDCAD 4-hour

Source: Saxo Bank

USDX still pointing lower

The US dollar index is still pointing lower and a decisive break of support at 96.35 would suggest steeper losses to 93.40 were likely. The intraday downtrend from the March 13 peak has survived multiple probes and remains intact below 98.20. Minor support at 97.20 guards the short-term uptrend line at 96.80 which is protecting the March bottom of 96.35.

Chart: USDX 4-hour

Source: Saxo Bank

The week that was

It was a choppy, sloppy week in FX land and although the violent currency pair swings seen in the previous week were missing, it wasn’t for lack of trying.

Kiwi traders got a lively start to the week with a better-than-expected consumer confidence number which gave NZDUSD a lift. Traders may have got to thinking about the vulnerability of their short EURUSD positions as EURUSD got squeezed rather hard in Europe, a trend that continued throughout the New York day.

On Tuesday, following soft China manufacturing PMI data a modest AUDUSD rally was nipped in the bud. In Europe, modestly better Eurozone PMI’s may have supported another EURUSD rally. US CPI didn’t create much of a stir with traders maintaining their post FOMC bias to trim positions.

Wednesday saw a disappointing New Zealand Trade number undermine NZDUSD which was the highlight of a dull Asian session. USDJPY traded sideways ahead of the March 31 fiscal year-end. Europe saw more demand for EURUSD on decent German IFO data. US Durable Goods missed the mark but for the most part, the G-7 currencies just traded sideways in New York.

Thursday held to its recent trend of being the most volatile day of the week. The Saudis launched an attack on insurgents in Yemen and traders launched an attack on short oil positions. USDCAD tanked as did USDCHF and USDJPY. That move occurred during the Asia and Europe sessions.

The bottom feeders were out in full-force throughout the New York session and the US dollar recouped most, if not all of the Asia/Europe losses. The BoC governor, Stephen Poloz’s speech didn’t create a ripple in USDCAD trading although it may have disappointed those looking for another rate cut in April.

The week that will be

The week will start with European traders a little crankier than usual after forgoing an extra hour of sleep following the switch to daylight saving time. The usual month end portfolio adjustments will take place on Tuesday with small demand for US dollars expected. It will end a day earlier with most of the market closed for Good Friday, although New York will be open and that will make it interesting as it is also a nonfarm payrolls day.

– Edited by Clare MacCarthy

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Where the mob rules, fools rush in-24Mar15


Where the mob rules, fools rush in

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

Original posted on TradingFloor.com

  • US data beat forecasts, dollar beats up bears
  • EURUSD rally may have run its course
  • Loonie at mercy of US dollar direction

By Michael O’Neill

The mob is ruling in FX markets today with nasty swings seen across the G7 currencies. It is a full contact, no-holds-barred tug-of-war contest between short term positioning and long term US rate concerns. Slow-fingered day traders are getting diced and sliced on sharp, data-induced spikes.

The modest rise in US CPI got the dollar moving in a hurry as future CPI gains could trigger earlier than expected rate hikes. It’s a stretch, but with both PMI and housing data better than expected, the US dollar correction may be running out of steam.

Hard landings

A mere week ago, finding US dollar buyers was as easy as checking the profit column on any FX trading blotter. Every Tom, Dick and Draghi were strutting like George Soros in his heyday —masters of the universe and the FX world as well.

It was not unlike a playground teeter-totter, in fact: all the dollar buyers were at the top, held up by the big, fat Fed sitting on the other side. But the Fed got off, the teeter-totter tumbled and for some, the landing was painful.

It’s all fun and games until someone loses half of their portfolio. Photo: iStock

Last week, EURUSD was parked at 1.0460 looking for par while today it is currently sitting at 1.0985 staring at 1.1280 (50% retracement of its 2015 range).

Dovish is as dovish does

Forrest Gump’s mama told us that “life was like a box of chocolates. You never know what you’re gonna get” and that adage holds true for the Fed as well. Prior to the Federal Open Market Committee statement on March 18, analysts and strategists convinced themselves that dropping the word “patience” was a signal that a rate hike was imminent. June was given as a possible date, but the majority were leaning toward September. Those dates are still realistic.

What changed was the dot-plot graph. It suggests a much slower pace of rate hikes, and this is what sparked the USD’s retreat.

At first glance, the nearly six big figure rally in EURUSD would appear to be way overdone on the assumption that US economic growth would not support more than one rate hike in 2015, especially considering that US rates are close to zero. It is more overdone when you add in the FOMC’s insistence that any rate increase would be data-dependent. Nevertheless, the rally has legs and those legs are more a factor of positioning than fundamentals.

Ripe for the picking

The IMM Commitment of Traders report released on March 18 showed short EURUSD speculative positions of EUR 18.0 billion. Arguably, there were a lot of paper profits that needed to be crystallised.

The other G7 currencies were also in similar straits although the positions were substantially smaller. The speed and size of the FX moves indicates that profits were booked.

Now the question is "has the low hanging fruit been picked?" Maybe so. EURUSD has been unable to even touch the 38.2% Fibonacci retracement level of the 2015 move and the US dollar index correction has stalled at the uptrend line.

EURUSD: the technical outlook

The short term downtrend from the December peak of 1.2575 appears to be breaking with today’s move above 1.0975 setting up a test of 1.1090 (38.2% Fibonacci retracement of 2015 range) and then 1.1280 (50% Fibonacci retracement of 2015 range). The intraday technicals are bullish while trading above 1.0920, while the post-FOMC rally remains intact above 1.0775.

However, the long term EURUSD technicals are bearish while trading below 1.1500. The current EURUSD rally is a counter trend move and vulnerable to the resurgence of US dollar demand arising from divergent interest rate trajectories in the US and Europe as well as the risk of sovereign debt shocks (Greece).

EURUSD daily with downtrends and Fibonacci levels shown

Source: Saxo Bank

Tales from the US dollar index

The intraday USDX technicals are bearish with the downtrend from last week’s 100.75-80 peak intact while trading below 99.00-10, and with a steeper decline noted below 97.60 looking for a test of support at 96.45-55. If broken, it points to further losses toward 95.20.

Meanwhile, the long term USDX technicals are bullish. The breach of the 50% Fibonacci retracement level at 96.00-10 on the weekly chart exposes the index to further gains toward the 61.8% retracement level in the 101.70-90 area. The short term USDX rally from the December low remains intact while trading above 96.50. Below 96.50 argues for additional weakness to 93.65

USDX four-hour

Source: Saxo Bank

USDCAD outlook

The story for USDCAD for the balance of the week is the story for EURUSD, although oil price movements add an element of uncertainty to the loonie. The longer term fundamental view points to a widening of US and Canadian interest rate spreads in an environment of an expanding current account deficit as two key reasons for USDCAD strength moving forward. The risk of a prolonged slump in oil prices will also limit USDCAD losses.

USDCAD technicals

The intraday USDCAD technicals are bearish while trading below the 1.2540-60 area looking for a break of support in the 1.2440-60 area to extend losses to the next key support level at 1.2340. A break above 1.2550-60 suggests renewed consolidation within the 1.2460-1.2660 band.

The short term uptrend from November remains intact while trading above 1.2360 making the 1.2340-60 a key pivot area. Below 1.2360 opens up a drop to 1.2025.

USDCAD daily

Source: Saxo Bank

— Edited by Michael McKenna

US bears are on a tear with spring in the air 20Mar15


US bears are on a tear with spring in the air

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

• Long dollar unwind continues
• Canadian data mostly as expected
• FX Market learns what is sounds like when doves cry

By Michael O’Neill

USDX suggests consolidation ahead

The USDX reversed from 100.70 and collapsed following the FOMC meeting but held the December uptrend line at 96.40-50 (if you ignore the “blip” to 94.80). The intraday outlook is modestly negative while USDX is trading below 99.75 with a move below 98.70 targeting 97.20 and then 96.50. A move above 99.75 will lead to 100.30 and then 100.70.

Chart: USDX 4 hour with support and rising trend line shown

Source: Saxo Bank

Bearish oil outlook could weigh on Loonie

The fundamental outlook for oil isn’t all that rosy. Yesterday, the Kuwait Oil Minister implied that Opec’s production levels would remain unchanged at the June meeting. He expressed concern that even though the oil price decline would negatively impact the country’s budget, keeping market share was of paramount importance.

Those hoping that lower rig counts in the US would lead to a reduction in the oil glut got a rude awakening this week, as well. On Tuesday, the American Petroleum Institute reported an increase of crude supplies to 10.5 million barrels, handily beating forecast for a 3.7 million barrel rise.

And if that wasn’t enough bad news on the supply front, oil traders are worried that a nuclear deal with Iran would lead to a removal of sanctions and a flood of Iranian oil. The rig counters will get an updated count later today, which could provide some support for WTI on a slow day.

The short term WTI technicals are bearish. The downtrend in WTI that began in October with the break of support at $89.75/bbl remains intact and the trendline wasn’t even tested when oil prices bounced after the FOMC meeting.

USDCAD outlook

The Canadian dollar has shrugged off a rather ugly retail sales report this morning (actual down 1.7% vs. forecasts of down 0.7%) probably because traders were expecting just such a result. The CPI release was in line with expectations and did not provide any additional incentive for further rate reductions by the Bank of Canada.

USDCAD is being pulled in opposite directions. The generally soft profile of the US dollar, post FOMC, is providing some support as is the unwinding of some speculative long positions. Meanwhile, expectations of lower oil prices, increasing economic uncertainty and a doveish leaning Central Bank are attracting the “buyers on dips” crowd.

It appears that the FX risks in USDCAD are more evenly balanced than they were a week ago. The lowered risk of a US rate hike in June combined with the recent extreme price volatility points to further consolidation in the US dollar against the majors.

USDCAD is likely to trade within a 1.2550-1.2750 band. As usual, the wild card is another steep plunge in oil prices, which if they occur would lead to another test of 1.2880

USDCAD technical outlook

The USDCAD uptrend from November remains intact while trading above 1.2280, a level guarded by multi bottom support as well as the 38.2% Fibonacci support of the January-March range at 1.2350. Topside resistance is in the 1.2820-30 area. The Intraday technicals are bearish while trading below 1.2720. The break of support in both the 1.2640-60 and 1.2610 areas targets 1.2550 with a move Wednesday’s 1.2450 lows not ruled out.

Chart: USDCAD daily with Fibonacci

Source: Saxo Bank

The week that was

This past week was another triumph for turbulence over tranquility. It was also when we learned what it really sounded like when Doves cry-It’s like Seinfeld’s Soup Nazi, “No rate hike for you”.

Monday was quiet. It felt like traders were in full “wait and see” mode ahead of the Federal Open Market Committee rate decision and press conference. Blackrock Inc., the world’s largest asset manager kicked the shrimp off the “barbie” in a report stating that AUDUSD was a sell. It wasn’t – at least for this week.

Dance away Central Bank’s announcements – St Patrick’s Day helps. Photo: iStock

Tuesday was a lot like Monday, except of course, for the Irish, Irish wannabe’s and the Irish-for-a-day. A wee bit of St Patrick’s Day tomfoolery helped traders ignore the Reserve Bank of Australia (RBA) minutes and the Bank of Japan (BoJ) statement, neither of which added anything new. Eurozone data also received scant attention. Fortunately, cable volatility entertained sterling traders. Pre-election jitters got the blame for the GBPUSD sell-off.

Wednesday’s Asian and European sessions were quiet but that changed in the New York afternoon. GBPUSD rose than dropped on the UK jobs report and the MPC minutes. The sterling volatility was a harbinger of what was to come.

In the early New York afternoon, the FOMC lost “patience” and the FX markets just lost it. FOMC downgrades of GDP forecasts, 2015 inflation estimates and lowering of the 2015 dot-plot forecasts screamed ”doveish” to traders who in turn screamed “YOURS” (figuratively of course-you can’t scream at a button) and sold US dollars across the board. (For the sake of accuracy, if traders were actually on the phone and dealing with their brokers, AUD, NZD, GBP and EUR traders would have screamed “MINE”) The day’s ranges were enormous, with 4 and 5 big figure movements the norm.

Thursday’s Asian session continued the New York afternoon dollar sell-off. But that changed in Europe. In fact, the price action was not unlike a Roman feast of yore. Back then, guests would gorge at a sumptuous buffet, purge themselves and then start all over. The FX market, most notably EURUSD traders acted similarly. EURUSD buyers on Wednesday became EURUSD sellers on Thursday. By the time the dust settled and New York desks headed to the bars, it was like Wednesday afternoon never happened. (Unless you looked at your P and L sheet). For the most part, the US dollar had returned to or was close to the pre-FOMC levels. This Fed dove has a sharp bite.

The week that will be

The FOMC meeting will be a hard act to follow. There isn’t anything on this week’s agenda to unleash the “shock and awe” like Ms. Yellen and her colleagues provided last Wednesday. Still there could be moments for individual currency pairs.

FOMC members hit the “rubber chicken” circuit with gusto this week. There are five speakers on tap beginning with Cleveland Fed President Lorretta Mester and San Francisco Fed President John Williams on Monday.

On Thursday, Bank of Canada Governor, Stephen Poloz delivers a speech in the UK. Rumours that the title of his speech is “Flip-flops from the Waffle House” have been denied.

US releases of GDP, PCE and Michigan Consumer Sentiment wrap up the week on Friday.

— Edited by Clemens Bomsdorf

Who’s afraid of the big, bad Fed? 17Mar15


Who’s afraid of the big, bad Fed?

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

Recommend

  • FX trading rangebound ahead of FOMC
  • EURUSD has a lot further to fall
  • WTI and loonie at odds.

Thank the stars (and the Irish) for St. Patrick’s Day falling on the day before the Federal Open Market Committee meeting. Instead of sitting around at their desks rehashing all the permutations of tomorrow’s statement, traders can do all their rehashing while standing around in a pub, quaffing pints of their favourite Irish grog.

Why worry about FOMC?

There appears to be a lot of hand-wringing and nervousness surrounding tomorrow’s FOMC meeting. Very few people are denying that US rates are going higher – the issue is when? June or September are the two most popular dates, with September being the hands-down favourite.

To quote Alfred E. Neuman, though, “what, me worry?” What difference does a 0.25% increase in rates that are close to zero really mean? It is hard to believe that consumers will stop buying cars, houses and Apple watches because of a ¼ point rate hike. Are global investors really waiting for a ¼ point hike to start a rush to buy US assets?

The real risk from a US rate hike is not just the timing of the next hike, but the introduction of two-way risk. Raising rates by a quarter point gives the Fed room to cut them as well while avoiding the stigma of negative rates. If inflation doesn’t start to climb, a rate cut is a real possibility.

EURUSD: why stop at par?

EURUSD has shed nearly 13% year to date and almost 26% in the past year as the European Central Bank copes with deflation risks and a persistent uneven recovery from the 2008 financial debacle. There is a lot of chatter suggesting that the EURUSD plunge is overdone. A recent report by JPMorgan suggests that the Fed needs to hike rates to 3.5% to justify the current USD valuations.

Undeniably, with short EURUSD positions at record levels, EURUSD is vulnerable to a nasty correction. At the same time, there are many traders waiting (and hoping) for just such a correction to either add to or establish short EURUSD positions, which would limit upside moves.

The long term Fibonacci retracement levels show that the decisive break below 1.1160 at the beginning of the month now targets a 100% retracement of the entire EURUSD range since 2000. That level is 0.8230.

EURUSD weekly

Source: Saxo Bank

The loonie is not a Cinderella story

Perhaps USDCAD traders all took their young children to see Disney’s Cinderella this weekend or perhaps they started celebrating St. Patrick’s Day early. Whatever the reason, they are either in a fantasy world or have been over-served.

A select group of high-level USDCAD traders convene at an important

international summit in Dublin. Photo: iStock

WTI oil is punching through levels not seen since 2009 and the loonie is not reacting. In fact, even as WTI leaked below previous support in the $44.20- $43.60/barrel area, USDCAD drifted lower. Something is out of whack here. It is a safe bet to assume that WTI will not rally because USDCAD is weakening, but the reverse holds true as well.

The outlook for WTI is bearish. The International Energy Association seemingly changed their views about the state of US oil production in their March report:

“Behind the façade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly. Steep drops in the US rig count have been a key driver of the price rebound. Yet US supply so far shows precious little sign of slowing down. Quite to the contrary, it continues to defy expectations. Output estimates for Q4’14 North American supply have been revised upwards by a steep 300,000 b/d. The projection of Q1’15 supply has also been raised”.

At the same time a Wall Street Journal story today predicts another flood of oil supplies if the West eases sanctions on Iran on the back of a nuclear deal. Goldman Sachs is also looking for lower oil prices (in the $32.00/b range) as US inventories continue to build. The following weekly chart clearly shows the source of the $32.00/b forecasts. It is the next level of support below the $42.60-$43.00/b area

Chart WTI Weekly

Source: Saxo Bank

USDCAD and oil: modest de-coupling doomed to failure

The following charts shows that the USDCAD rally has not kept pace with WTI oil price declines. Oil prices are making new lows while USDCAD is modestly off its recent peak of 1.2820. The rising risks of another Bank of Canada rate cut on falling oil prices combined with contrasting economic growth prospects between Canada and the US point to further USDCAD gains.

Hourly USDCAD and WTI oil

Source: Saxo Bank

— Edited by Michael McKenna

Voodoo science and a Loonie scenario 13Mar15


Voodoo science and a Loonie scenario

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

  • US dollar remains in demand ahead of FOMC
  • Canada employment data weak
  • Beware the Ides of March (just because)

By Michael O’Neill

Friday the 13th has proven to be bad news for USDCAD bears as even a better-than-expected Canadian employment report wasn’t able to offset the drag from the steroid pumped US dollar.

Admittedly, the Canadian employment data was far from stellar, it was just not as ugly as expected and gave no reason to buy the Loonie.

The looming shadow of the Federal Open Market Committee statement on Wednesday may confine trading in the majors to existing ranges as it should be difficult to find anyone who doesn’t believe that the loss of "patience" isn’t already priced in.

The tea leaf analysis – a USDCAD scenario

There is no denying that USDCAD is in an uptrend. The reasons for the rally are well known but a quick recap is in order.
1) Sharp plunge in oil prices with an ongoing bearish bias.
2) Widening of Canada and US interest rate differentials. Canada cut rates by 0.25% on January 21 and although the Bank of Canada professes to be “neutral”, the market is leery of another cut in April.
3) US interest rates are headed higher with the FOMC expected to signal a June or September hike with the removal of the word “patience” in the March 18 statement.
4) Ongoing US dollar strength against the majors on diverging economic growth prospects and interest rate trajectories.

Voodoo Science (but food for thought)

The following chart shows that USDCAD has declined beginning around the end of March until the July-August period, in eight of the past 10 years with 2008 and 2012 being the exceptions. The same sort of move could happen this year.

USDCAD 10-year daily with March declines shown
usdcad
Source: Saxo Bank

Mind the gap

The USDCAD (and the rest of the G-10) rally that began in January has been relentless and steep. Short- and medium-term trend lines are well below current spot levels, suggesting corrections could be sharp and just as steep, while keeping the dominant US dollar uptrend in place. The following chart highlights that even a minor correction could see USDCAD fall from its current price (1.2725) to 1.2250 while a major correction could see a plunge to 1.1750.

USDCAD daily with correction levels shown
usdcad
Source: Saxo Bank

Correction catalysts

In my opinion, the most obvious catalyst for a US dollar sell-off is the market’s reaction to the FOMC statement on March 18. The omission of “patience” from the statement (which is widely anticipated) is seen by many as the harbinger of a June rate hike. FX markets are notorious for “selling the rumor, buying the fact” or vice versa.

If the Fed delivers on expectations while hinting that a rate hike may not be as imminent as predicted, the USD could retreat. From a global perspective, the fact that all the G-7 countries have eased rates this year in addition to China and India, is in effect a defacto US rate hike. Maybe the FOMC members see it that way as well.

A US dollar drop may also boost oil prices, fueling additional demand for Canadian dollars. The sheer size of outstanding speculative positions in the majors could turn a minor profit taking rally into a rout.

The point is that USDCAD is approaching significant resistance in the 1.3000-50 area. That zone has represented strong resistance on rallies and support on reversals over the past 15 years and there is no reason to expect a different outcome this time around.

v There could be a rout after the FOMC statement next week. Photo: iStock.

The week that was

This week’s lack of quality risk and US data events didn’t deter the volatility gremlins which made for another entertaining thrill ride on the FX

The US dollar was bid from the get-go on Monday. There wasn’t any particular reason offered other than “more buyers than sellers”. Chatter about the size of the ECB bond purchases and numerous headlines about Greece ahead of a Eurogroup meeting provided distractions but had little real FX impact.

Tuesday, EURUSD traders in Asia were singing

by The Who as the single currency rallied from (at the time) an 11-year low of 1.0785 to 1.0820. European traders drove it back through the overnight low to 1.0693 by the end of the New York day. Dallas Federal Reserve President Richard Fisher’s call for a rate hike (nothing new from him) supported the US dollar rally as did Wall Street Journal stories that the FOMC would lose “patience” on March 18. USDCHF climbed back above parity erasing all of the January 15 losses.

Wednesday, the bottom fell out of EURUSD, sparking a widespread US dollar rally across the G-10 and Emerging Markets and once again, there wasn’t any specific catalyst for the move. A spate of weak economic reports opened the door for additional easing in China. Mario Draghi spoke at the Eurogroup conference but didn’t add anything new.

Greece debt renegotiation demands were reportedly not well received. The New York day ended with news that the Reserve Bank of New Zealand left rates unchanged. The ensuing Kiwi rally may have also set the tone for Thursday’s session.

As is becoming the norm of late, Thursday was turbulent. It started in Asia. The NZDUSD rally was infectious, spreading to AUDUSD and USDJPY. The USDX, which had a peak above 100 was swatted down to 99.00. EURUSD clawed back Wednesday’s losses in an orderly rally from 1.0495 to 1.0642 before drifting lower. As was the case for most of the week, the moves were more a function of herd mentality and profit preservation rather than specific drivers.

The week that will be

It is said that there is no rest for the wicked but if next week’s events live up to expectations, you could replace wicked with FX traders.

Monday may get off to a slow start due to a lack of top tier data, but Tuesday should more than make up for it. The Reserve Bank of Australia minutes and the Bank of Japan interest rate statement and press conference may cause a stir during the Asian session while Eurozone CPI and the German ZEW survey makes life interesting in Europe. That is, of course, if St Patrick’s Day parties don’t get in the way.

Wednesday will be as dull as dishwater until the late New York afternoon when the FOMC statement is released. Patience may be a virtue but losing patience may be vicious. The fall-out from this statement will dictate FX trading for the rest of the week.

– Edited by Oliver Morrison

Dollar bulls’ ticket to ride may get punched 10Mar15


Dollar bulls’ ticket to ride may get punched

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

Recommend

  • Has all the ‘easy money’ been made in EURUSD?
  • USDX may be suggesting a short-term pause in dollar rally
  • Loonie soft, but range intact

By Michael O’Neill

The US dollar is on a tear and the euro has borne the brunt of the damage in the G-7 currency world. But it’s not news. It started 10 months ago, in May 2014, and unlike the 2006-2008 rally (from 1.1630-1.6050), where minor corrections occurred, this move has been a one-way street.

The reasons for the rally are well known. US interest rates are going up while EUR rates are negative and going nowhere, fast.

The key question is “how much further will EURUSD fall? Fibonacci retracement projections of the 2002-2008 range now target the 76.4% retracement level of 1.0330. The year-end EURUSD forecasts from the major banks get adjusted lower almost daily to keep pace with the EURUSD declines. At the moment, forecast of 1.0000 to 1.0500 are quite popular.

At what point is the EURUSD plunge overdone? Speculative EURUSD short positions reported by the Commitment of Traders report, as of March 3 are at EUR 18.1 billion. The news out of the Eurozone is not all negative.

The jump in German Retail Sales supports forecasts for GDP growth. In fact the European Central Bank is calling for 2% GDP growth by mid-year. Inflation is also forecast to be at the ECB’s objective by 2017.

Having said that, the European Union, is still a ‘dog’s breakfast’ of potential sovereign risks, led by Greece, which has also weighed on the currency pair.

Still, the near-25% drop in EURUSD since last March and the 11.9% decline year-to-date does suggest that the easy money has been made. Picking bottoms in any currency pair is a nasty business, but that’s what FX options were invented for.

EURUSD weekly with Fibonacci

Source: Saxo Bank

Practice safe FX

Buying a three-month 1.0900 EURUSD Call and selling a three-month 1.0575 EURUSD Put is a prudent way for traders, already short EURUSD, to protect profits while participating in additional EURUSD weakness if it occurs.

The old adage, bulls make money, bears make money and pigs get slaughtered, was coined for a reason.

vEurope – a ‘dog’s breakfast’ of potential sovereign risks,
with Greece at the front of the pack. Photo: iStock

Dollar index rally accelerates

The US dollar index (USDX) had drifted within a 93.82-95.85 range since January and was unable to break through the top. That changed after the nonfarm payrolls release on Friday. The USDX soared and hasn’t looked back.

We have seen this move before. A big gain and then a period of consolidation prior to the next move higher. That appears to be the case this time as well, providing that the 99.55-99.80 area contains the upmove.

A break above 99.80 will lead to a test of 102.40. Corrective dips should be contained by support at the break out level of 95.60.

USDX weekly with resistance
usdx
Source: Saxo Bank

WTI – a Loonie friend or foe?

The steep plunge in West Texas Intermediate (WTI) prices knocked the stuffing out of the Loonie, precipitating a steep USDCAD rally. Since bottoming out in January, WTI has bounced around within a $47.50-$54.10/bbl range.

The range trading has only had a minimal impact on recent USDCAD price movements but that would change in a hurry on the break either side of the band.

Although there have been good arguments for both higher or lower prices, the bias favours another bout of weakness although with shrinking conviction. (See Brent/WTI spread narrows).

The gurus at Goldman Sachs expect lower prices due to ongoing oversupply while the Secretary General of Opec predicts supply normalisation in the second half.

A break of the WTI floor while USDCAD is at current levels would lead to a test of 1.3000, while a rally above $54.15/barrel would drive USDCAD back towards 1.2340.

WTI weekly highlighting current trading band
wti
Source: Saxo Bank

USDCAD pushing the envelope

Stable oil prices and a neutral Bank of Canada policy stance were not enough to protect the Loonie from the wind shear created by the US dollar. The post-NFP surge in the US dollar has seen EUR and JPY achieve multi-year lows, yet despite all the action the Canadian dollar is still the best performing currency against the US dollar in the past week.

Part of the reason can be explained by ongoing demand for Canadian dollars against EUR and GBP, perhaps as a proxy to buying even more US dollars. Since 80% of Canada’s trade is with the Americans, improving US growth prospects has benefits to Canada as well.

However, although the pace of Canadian dollar weakness may be slower than the other G7 currencies, it is not immune to the charms of US dollar bulls.

The intraday USDCAD technicals are bullish following the break of resistance at 1.2580 and again at 1.2620. However, it appears that resistance in the 1.2660-80 has contained the rally and until 1.2800 is decisively broken the current USDCAD 1.2360-1.2680 range remains intact.

USDCAD 4-hour with trading range noted
usdcad
Source: Saxo Bank

– Edited by Oliver Morrison

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

BoC rate decision keeps traders on their toes 3Mar15


BoC rate decision keeps traders on their toes

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

Recommend

  • USDCAD crumbling under weight of long dollar positions
  • BoC decision is anyone’s guess
  • USDX rally will limit Canadian dollar gains

By Michael O’Neill

Bank of Canada rate decision ahead

The Bank of Canada (BoC) rate decision tomorrow has many traders and market participants on their toes. The BoC caught markets by surprise in January when rates were chopped by 0.25 bps. The statement implied that another cut was likely and that view was reinforced by other BoC officials afterwards. And just as consensus got comfortable with another rate reduction, Governor Stephen Poloz suggested that the BoC would bide its time assessing the impact of the move. What? No rate cut?

Poloz is to central bankers what Ron Burgundy is to anchormen. You never know what he will say next. Recent speeches by Poloz and other BoC staff on monetary policy resemble a back-alley shell game. You know a rate move is there but finding it is the problem.

Therefore, the USDCAD floor in the 1.2380-1.2420 area should remain firmly in place until after the decision.


Canada GDP breathes life into Loonie

Today’s Canadian GDP data handily beat the forecasts and the Canadian dollar rallied. The annualised Q4 GDP rose 2.4% (Forecast 2.0%, Q3 3.2%) while the month over month data showed a 0.3% rise (Forecast 0.2%, previous negative 0.2%).

The USDCAD plunge was likely more a factor of positioning rather than a wholesale shift in the outlook for the Canadian dollar. In fact, part of the Q4 growth was due to a buildup in inventories while exports of goods and services declined.

The report was probably more positive than negative but will be quickly forgotten as traders await the Bank of Canada (BoC) interest decision and statement tomorrow.

Chart: Canada GDP
GDP

Source: Statistics Canada

USDX –Thwarting USDCAD losses

Attempt to drive USDCAD lower have been thwarted by developments in the US dollar index. The intraday downtrend in USDX from the January 95.87 peak ended with the move above 94.80 last Wednesday but the follow-through has lacked conviction. Until the January peak is history, the risk is for further 94.20-95.85 consolidation. If Friday’s US nonfarm payroll’s report doesn’t ignite a US dollar rally, the USDX top may hold until the March 17-18 Federal Reserve Open Market Committee meeting.

Chart USDX daily
usdx
Source: Saxo Bank

Oil in driver’s seat of Loonie sedan

The short-term chart suggests that the oil price downtrend from the end of September is under assault and a decisive move in WTI above $51.20 may signal the start of a new rally and a test of 2015 resistance in the $54.20-40 area. A break of this area would point to further gains toward $60.00/bbl. USDCAD moves would mirror those of oil. A break of WTI at $54.20 appears to coincide with USDCAD breaking below support in the 1.2340-60 area, which would target 1.2050.

The technicals seem fairly clear cut, but as usual the fundamentals are murky. Part of the recent jump in prices is due to rival Libyan forces targeting oil terminals but that is more likely a knee jerk, opportunistic move rather than a shift in long term supply fundamentals.

There has been significant reductions in US shale producers’ capital expenditures which will do a lot in reducing the oil glut, but that is a long term effect and shouldn’t be effecting the short term price.

Bank of America is forecasting a drop to $32.00/bbl in WTI due to the fading effects of the heating oil season combined with US storage capacity close to maxing out. Crude stockpiles rose 8.43 million barrels to 434.1 million through February 20.

The Loonie may be tied to oil but oil is not tied to the Loonie. USDCAD losses below 1.2340-60 will be difficult to sustain without a corresponding rally in WTI. On the other hand, USDCAD rallies can and will occur even if WTI drifts around within the current $4450-$51.20 band, driven by diverging US and Canada economic fundamentals and interest rate differentials.

Chart USDCAD and WTI: Mirror images
wti

Source: Saxo Bank

USDCAD technical outlook

A picture is worth a thousand words and the following chart tells the USDCAD story very succinctly. It’s a buy in the 1.2350 area, a sell near 1.2800 and a coin toss in-between. The width of that trading band provides significant intraday trading opportunities, but until either side is broken, decisively, this currency pair is directionless. However, the uptrend from November remains intact while trading above 1.2110.

Chart: USDCAD 4 hours with trading band
usdcad

Source: Saxo Bank

cad Trying to second-guess the Bank of Canada is a mug’s game. Pic: www.bankofcanada.ca

– Edited by Clare MacCarthy