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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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