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


  • 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
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
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
Source: Saxo Bank

– Edited by Oliver Morrison

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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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