Where the mob rules, fools rush in
FX Consultant / IFXA Ltd
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.
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).
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
Source: Saxo Bank
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.
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.
Source: Saxo Bank
— Edited by Michael McKenna