When doves cry
FX Consultant / IFXA Ltd
- Dovish FOMC expectations weigh on US dollar
- Rising oil prices boosting CAD
- Canadian fundamentals remain patchy
By Michael O’Neill
The Federal Open Market Committee statement is at hand, the US economic recovery can’t find its footing and the US dollar has been knocked for a loop. What is a body to do? To start with, step back from the herd.
The FX market has set the bar quite low for tomorrow’s FOMC statement. The anticipation of a more benign outlook for growth (following a series of soft economic data reports and the Fed’s insistence that rate hikes will be data-dependent) implies that the statement will err on the side of caution. Traders have reacted and EURUSD has rallied to a high of 1.0945. That reaction may be overdone.
There isn’t a post-FOMC press conference scheduled which arguably means that the statement won’t contain any game-changing information. If the statement reads more or less the same as April’s, it will not be viewed as “more dovish”, which would be a bit of surprise to many traders.
The soft Q1 data were anticipated and the committee, as well as most Fed economists, expect the US economy to rebound in the second half of 2015. A sustainable recovery was the stated prerequisite for a rate hike.
Remember, the US dollar rallied strongly ahead of the March FOMC meeting on anticipation of a hawkish statement and then tumbled on disappointment. The reverse may be true for the April statement – a weak US dollar pre-FOMC and a strong one afterwards.
Are USD doves in for a hard landing? Photo: iStock
More of the same from Mr. Poloz
Bank of Canada governor Stephen Poloz spoke before the House of Commons Standing Committee on Finance for the first of his twice-yearly meetings. His statement didn’t deviate much from the original Monetary Policy Report statement of April 15.
The Canadian dollar rallied following the April 15 report, in part due to forward-looking statements forecasting above-trend growth in the second half of the year. The recovery in oil prices (to $58.75/barrel from a March low of $42.25/b for WTI) added more fuel to the soaring loonie.
As of this morning, USDCAD has retraced all of its gains following the January 21 rate cut. Can it last?
Warning flags are fluttering
WTI oil prices have risen sharply but remain below major resistance in the $59-$60/b area. Saudi Arabia’s insistence on protecting market share while leaving production quotas unchanged triggered the oil price plunge in November, and it has not changed its stance.
The oil glut that is taxing storage capacity in Cushing, Oklahoma has spread to the Permian Basin in West Texas. Until WTI blows its top of $60/b, the risk is for another price drop.
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Source: Saxo Bank
Majors at major support/resistance
The major currency pairs are probing but not penetrating major resistance/support levels, which until broken suggest that the USD selloff is merely corrective and not a trend change.
EURUSD has rallied but is below major resistance in the 1.1030 area, which represents a triple top since February. The same holds true for GBPUSD. That pair needs to break above 1.5500. AUDUSD needs to reclaim .8000 while NZDUSD must get above 0.7850.
As is often the case, the US dollar is moving during a period devoid of major data and due to nervousness ahead of the central bank meeting, which provides an opportunity for nimble traders.
To buy or not to buy, that is the question
The USDCAD uptrend since September 2014 remains intact while trading above the 1.1980-1.2010 area. That area also represents the 38.2% Fibonacci retracement level of the July 2014-March 2015 range.
The Canadian fundamental outlook is patchy. Last month’s employment report was weak – no doubt about it. The federal government’s finances have taken a big hit from the oil price drop and the “balanced budget” story is Enron accounting. If US fundamentals are bad enough to delay Fed action, where will the Bank of Canada’s second-half growth come from?
If Shakespeare had asked the question, he would probably say “buy”!
Source: Saxo Bank
— Edited by Michael McKenna