: When doves cry 28Apr15


When doves cry

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

Recommend

  • 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.

USOil Daily

Create your own charts with Saxo Trader click here to learn more.

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”!

USDCAD daily with support noted

Source: Saxo Bank

— Edited by Michael McKenna

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Loonie pumped on oil, but can it last? 24Apr15


Loonie pumped on oil, but can it last?

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

Recommend

  • Loonie’s fate is tied to oil
  • Durable goods data makes dollar less durable
  • Month-end demand highlight of next week

By Michael O’Neill

The US dollar is suffering the effects of the weak durable goods report despite a strong headline number. It was great for airplanes, not so good for everything else. Meanwhile, USDCAD has bounced off of the day’s lows on profit taking and a small dip in oil prices.

Oil technicals are bullish

The short-term WTI oil price downtrend from October was broken last week with the move through the downtrend line at $54.25. The subsequent rally came within an oil-drip of the December peak of $59.37. The current intraday uptrend remains intact while trading above $55.30. It can get really interesting if it blows its top. The March-April pattern on the chart is shaping up as an “inverted triangle” which if broken suggests a jump to about $80.00.

Chart: USOil continuous

Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more.


If oil gushed, USDCAD longs get flushed

WTI oil prices are close to testing major resistance and it is no coincidence that USDCAD is close to probing major support. USDCAD can still drop a long way before the uptrend line from July 2014 gets tested which is also the 50% Fibonacci retracement level of the July 2014-March 2015 range. And that line is being guarded by major support between 1.1990 and 1.2050.

Back when tar sands were fashionable: Canada Post’s 1978 stamp of approval. Photo: iStock

Will it happen?

Eventually, but eventually is a really vague term. Realistically, the surge in oil prices over the past week is a tad dubious. It is a bit of a stretch to believe that in an environment where recent global economic indicators have been soft, the massive glut of oil has dissipated. Not one Opec nation has reduced production (in fact Saudi Arabia is producing a near record daily levels), US inventories remain at elevated levels and shale producers are reportedly pumping away because they need the cash flow to service debt.

The other wild card is the Bank of Canada. USDCAD traders have reacted to what they believe is a shift in policy, from dovish to neutral. The Canadian jobs report was weak and not conducive of a tightening bias. It may be worth considering that Stephen Poloz, the BoC chief who abandoned “forward guidance”, is happy to keep markets guessing. With both Australia and New Zealand contemplating rate cuts, it makes sense that the Bank of Canada will err on the dovish side.
With that in mind, it may make sense to use the 1.2050-1.2100 area as a “buy zone”

USDX bearish but uptrend remains intact

The intraday US dollar index technicals are bearish while trading below 98.30 looking for a break of support at 96.80 to lead to a test of 96.30. A decisive move below the 96.20-30 area could turn ugly as that level also represents the uptrend line of the rally that started last October. A break would target the next major support level at 95.20. In the meantime, a move above 97.75 will lead back to 98.30 which if breached would negate the intraday downtrend.


Chart: 4 hour USDX with support levels noted

Source: Saxo Bank

The week that was

Greece was the word to start the week and Greece is the word that ended the week. In between, various regions had a turn in the spotlight with central bankers contributing to the chaos.

Monday began with news that China had cut the Reserve Requirement Ratio (RRR), much to the surprise of many traders. Aussie and Kiwi liked the action and rallied but those moves were destined to fail. Greece was the main focus in Europe while in New York, a dovish speech by the Reserve Bank of Australia’s governor undermined AUDUSD.

Tuesday saw a slight resurgence in the US dollar. Talk that the European Central Bank (ECB) would re-evaluate the Emergency Liquidity Assistance (ELA) facility that was supporting Greek Banks put EURUSD under pressure.

Wednesday had a lot of trading activity without much rationale for the moves. AUDUSD rallied in Asia on a firm CPI report with a sprinkle of rumours about another Chinese RRR cut tossed in. EURUSD rallied, in part, due to a few conciliatory headlines on Greece while Cable took off on what some believed was a hint of hawkishness in the Bank of England (BoE) minutes.

Thursday had a bit of volatility. Kiwi got its feathers plucked after a deputy governor of the Reserve Bank of New Zealand (RBNZ) opined about cutting interest rates and moaned about the high value of the currency. European headlines implied that the Greek PM and Angela Merkel were making nice sparked EURUSD demand. Later on, another round of soft US data (jobless claims) fueled further US dollar selling. USDCAD dropped with the rise in oil prices.

The week that will be

This will be an interesting week for data and a short week for traders. New Zealand gets Monday off for Anzac Day and many European traders are away on Friday, celebrating Labour Day. In between, the RBNZ interest rate decision and statement will be closely watched, especially after the deputy governor’s comments this week. The Federal Reserve Open Market Committee (FOMC) interest rate decision won’t surprise anyone although there is scope for action from the statement. The lack of a press conference is widely viewed as an indication that this meeting will hold no surprises. Thursday is likely to be the busiest day of the week with major European data competing with month-end portfolio rebalancing flows.

– Edited by Clare MacCarthy

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

Loonie in the cross-hairs 21April15


Loonie in the cross-hairs

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • FX markets are choppy due to lack of data
  • Greece headlines providing distraction
  • USDCAD consolidates recent gains

By Michael O’Neill

Today’s FX market can be best characterised by an old FX broker term: "empty and looking". The data cupboards are empty and traders are looking for something to trade off of. So far, the search has been fruitless.

Mortal Kombat: Loonie bulls vs. bears

The conflict between good and evil is as old as time itself. The earliest recorded case of a conflict between bulls and bears in FX markets can be traced back to the moneychangers being turfed from the temple in A.D. "early". It was due to intervention, divine intervention, not the central bank kind.

Fast forward to April 2015. Mortal Kombat X has just been released and in the FX area, Loonie bulls and bears have ordered to “Chose your destiny”.

USDCAD had traded erratically within a 1.2340-1.2820 range since January 21. The underlying bias was for US dollar gains to break above 1.2820 and extend to the 1.3425-50 area which represented the 61.8% Fibonacci retracement of the 2002-2007 range. Supporting that view were expectations of oil prices declining to $30/bbl and additional Bank of Canada rate cuts which led to the accumulation of a very large speculative short CAD position on the IMM.

The game changed last week. A rather upbeat, forward looking assessment of the Canadian economy by the Bank of Canada combined with better-than-expected domestic data releases and greatly diminished near-term US rate hike expectations drove USDCAD through major support in the 1.2330-60 area.

A rosier outlook for the Canadian economy supports the bulls,

but the CAD bears aren’t convinced. Source: iStock

Kombat Begins

The no-holds barred, drag down, kicking and gouging battle has begun. The CAD bulls are supported by bearish technicals, still stretched short CAD positioning, firm oil prices, an aggressively neutral BoC, and fading hope for a US rate hike in the next six months.

CAD bears are not convinced with any of the above. They see the dip to 1.2090 as back-fill, filling in the gap created with the January 21 rate cut. They note that the long-term uptrend from September remains intact above 1.2020. They are not convinced of the sustainability of the oil price rise, especially since the US is still awash in oil.

They believe that Federal Open Market Committee is committed to raising interest rates and that the forecast for a 2nd-half recovery will provide enough strong economic reports to keep the window open for a September move. Fight!.

Tag teaming bullish CAD crosses

The Canada bulls are not alone in their fight for domination. They will receive support from CAD demand against EUR, GBP, AUD and JPY.

EURCAD- outlook bearish. The break below the 1.3545-60 area has put EURCAD in another downtrend while trading below 1.3160-80 looking for further losses to 1.3000

EURCAD 4-hour

Source: Saxo Bank. Create your own charts on SaxoTrader, click here to learn more

GBPCAD- outlook bearish. The GBPCAD downtrend has been intact since February and despite being steep, it has survived numerous tests of the downtrend line. It remains intact while trading below 1.8470 with a move below 1.8170 targeting the January 2015 low of 1.7980-1.8000. However, this could all change after the UK election with a GBPCAD, relief rally, a real possibility.

GBPCAD 4-hour

Source: Saxo Bank

AUDCAD-outlook bearish. AUDCAD has been trending lower since the middle of March and the trend may be poised to accelerate following the divergent central bank outlooks. The Reserve Bank of Australia minutes which were released yesterday were viewed as doveish and opening the door to another rate cut, perhaps as early as next month.

The doveish minutes were preceded by the governor, Glenn Stevens, actively talking down the currency (again). At the same time, the Bank of Canada is seen to be neutral, providing a rosier economic outlook for H2. The AUDCAD downtrend remains intact while trading below 0.9560-70 looking for another probe of the 2015 lows.

AUDCAD 4-hour

Source: Saxo Bank

CADJPY-outlook bullish. CADJPY broke above the 96.50-75 resistance area last week, (coinciding with the USDCAD break below 1.2350) a level which contained rallies since February. The intraday technicals are bullish while trading above 97.20 with a move through minor resistance in the 98.00-40 area targeting further gains to 99.75.

CADJPY 4-hour

Source: Saxo Bank

– Edited by Oliver Morrison

Shroud of gloom lifts, Loonie shines-17Apr15


Shroud of gloom lifts, Loonie shines

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • End of week profit-taking lifts US dollar
  • USDCAD heading lower
  • Greenback bearish on data void next week

The surprise that Poloz sprung – a shiny, prosperous Canada. Photo: iStock

By Michael O’Neill

Poloz powers Loonie higher

The Loonie is back in favour this week, big time! It has gained against all of the G-10 currencies including a rise of 3.9% against the US dollar. It all started on Tuesday with the Bank of Canada (BoC) interest rate decision and Monetary Policy Report (MPR). The FX market and the market in general were expecting a gloomier assessment of the domestic economy based on slowing US economic momentum and concern over the impact of lower oil prices on the Canadian economy. Poloz’s March 30 comments reported in the Financial Times warning of “atrocious” first quarter growth supported the pessimistic view.

Boy, were they surprised. The BoC downplayed the effects of the Q1 oil shock and forecast that real GDP would rebound in Q2 and average 2 ½% growth on a quarterly basis until 2016. The inflation outlook was upgraded as well. For those keeping score; Poloz Surprises, 2 Market 0.

EURUSD is heavy – could start to free-fall

At the same time as USDCAD traders were questioning the wisdom of being long dollars, traders in other G-10 currencies began asking themselves that very same question. A big miss on the forecast for US retail Sales (Actual 0.4% vs. 0.7% expected) combined with a series of prior disappointing US economic reports since the middle of March led to a wholesale re-evaluation of US rate hike expectations. The conclusion was that they may be too hawkish.

US dollar selling has been widespread and the sheer size of outstanding speculative long US dollar positions ahead of a US data void next week suggests further EURUSD gains are likely.

However, the Greece debt renegotiations are just noise at the moment but that noise can become deafening if Greece defaults on the IMF.

The intraday EURUSD technicals are bullish while trading above 1.0670 but needing a break of the 1.0840-60 area to extend gains to 1.1090 which represent the 38.2% Fibonacci retracement level of the 2015 range. A move back below 1.0670 argues for a return to the lows.

Chart: EURUSD daily with Fibonacci retracement levels

Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more.


USDCAD outlook

The black cloud that hung over the Canadian dollar like the shroud of gloom over Mordor has been lifted. The one ring has been destroyed and Poloz is now Gandalf the White. The dire outlook for the Canadian economy on the oil price plunge has been replaced by a rosier view predicated on oil price stability, rising exports and hopes of a US second half recovery. It hasn’t hurt that expectations for a June or September US rate hike have receded.

Today’s news that Canadian March Core CPI accelerated to 2.4% y/y combined with a robust rebound in Retail Sales appears to have validated the less dovish BoC MPR and provided support to the Canadian dollar.

The break of the mid-October downtrend in WTI and resistance in the 53.00-60 area points to further gains which should also benefit the Loonie.

The unwinding of stale and stretched speculative long USDCAD positions, renewed US dollar selling pressure from diminished rate hike concerns, improving Canadian domestic data and rising oil prices points to further Canada gains next week, aided by a lack of Tier 1 US data.

Chart: Canada CPI

Source: Statistics Canada

USDCAD technical outlook

The intraday and short-term USDCAD technicals are bearish. The series of lower highs from the March peak combined with the break of major support at 1.2330 point to further losses to the 1.1990-1.2050 area which is guarding the long term uptrend line. That comes into play at 1.1860-70. A breach of 1.1870 would extend losses to 1.1500. Failure to break below 1.1990-1.2050 argues for 1.2000-1.2300 consolidation.

Chart: USDCAD daily with Fibonacci

Source: Saxo Bank

The week that was

The US dollar was in demand to start the week. Traders were eagerly anticipating the marquee events like the US Retail Sales report on Tuesday and to a much lesser extent, the European Central Bank meeting and press conference on Wednesday. The Retail Sales report lived up to the hype but the ECB meeting was a bit of a dud. Instead, it was the sideshows like the Aussie employment data, an obscure Japanese adviser and the BoC Monetary Policy report that stole the show.

On Monday, a rash of weak data from China slammed the antipodeans with Australian Treasurer Hockey’s comments on writing down iron ore revenues adding to the woes. The bid tone to the US dollar continued throughout the European session but changed in New York on rising oil prices and remarks by Koichi Hamada, an adviser to the Japanese prime minister, suggesting that 105.00 was an appropriate level for the currency.

Tuesday started with USDJPY recouping some losses, helped by a “clarification” from Hamada. US Retail Sales disappointed and the dollar got trashed. EURUSD jumped to 1.0705 from 1.0560 and the other majors making similar moves.

Wednesday was fairly quiet in Asia. Europe saw a resurgence in US dollar demand in part due to Greek default concerns and perhaps a teensy bit of unease into the ECB meeting. The dollar demand faded during the New York session. A volatile mix of soft US data, rising oil prices and to the surprise of many, a less dovish Bank of Canada, precipitated a stampede out of US dollars. USDCAD dropped from 1.2570 to 1.2280. The USDCAD bulls are now steers.

On Thursday, the soft dollar tone continued during the Asian session with both Aussie and Kiwi hanging on to their gains. Traders were speculating that stretched and stale long dollar positions were becoming increasingly vulnerable. Another bout of weak US data set the cat among the pigeons or more accurately, the bears onto the bulls and the bulls were devoured. Not only have June rate hike hopes faded but a September move is becoming iffier with every new piece of economic data.

The week ahead

The FX markets are likely to be as fickle as an alliance in the Seven Kingdoms. Next week’s global data cupboard is barer than Old Mother Hubbard’s cupboard until Friday’s US Durable Goods number. A shortage of quality US economic reports will leave traders rudderless and reacting to headlines and rumours. The Reserve Bank of Australia releases the minutes from the April 7th meeting which may provide additional support to AUDUSD. Unfortunately the Bank of England Monetary Policy meeting won’t do anything for cable, as it will be a non-event due to the pending election.

– Edited by Clare MacCarthy

Special Report Loonieviews 15Apr15


The Bank of Canada upset the apple cart again and this time USDCAD is under pressure, likely heading back to the lows seen prior to the January rate cut. See attached for details.

Regards

Mike

Special Report Loonieviews 15Apr15.pdf

Loonie in demand ahead of BoC April 14, 2015


Loonie in demand ahead of BoC

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Disappointing retail sales puts US dollar on sale
  • Loonie feeling the love
  • Oil is a slippery call

By Michael O’Neill

Retail Sales rise still disappoints

Today’s release of US Retail Sales data handily beat last month’s results and still disappointed FX markets. (Actual March: 0.9% vs. Actual Feb negative 0.5%, m/m.) The disappointment stems from the failure to meet or exceed the forecasts. The US dollar was promptly sold. EURUSD popped to 1.0638 from 1.0562.

It is probably a mistake to read too much into today’s data. It wasn’t bad – it just wasn’t terrific. The current best guess for when the Federal Open Market Committee (FOMC) raises interest rates is September and today’s retail sales number will have been long forgotten by then.

USDX contracting but uptrend intact

The USDX rally failed to crack through the March peak of 100.38 and the subsequent retreat through the steep uptrend line at 99.60 risks a steeper drop to 98.25. A break above 100.38 would hang a target on 102.60. However, the uptrend from October 2014 remains intact while trading above 95.00.

Chart USDX 4-hour showing broken intraday uptrend

Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more.

Conundrum in an oil drum

Oil prices are either going up or down. Everyone says so. One day, oil prices are on the verge of collapse from a glut of US Shale oil and renewed supply from Iran. The next day, a prediction by the US Energy Information Administration (EIA) of a decline in US shale production by 45,000 bbls per day is cause for celebration. That’s a bit of a stretch since the daily US output is 4.9 million barrels per day.

Saudi Arabia, the key architect of the November oil price collapse, expects oil demand to start rising. A story in the Wall Street Journal today supports that assertion citing renewed Chinese demand as that country builds emergency stockpiles.

The short term WTI technicals are bullish while trading above $51.06/bbl but need to break through resistance at $54.400/bbl to extend the rally toward $60.00/bbl. A move below $51.06 would lead to another test of $47.60

Chart: WTI oil daily

Source Saxo Bank

Bank of Canada bides its time

The risk arising from tomorrow’s Bank of Canada (BoC) meeting is not the threat of a rate cut, but from the Monetary Policy Report (MPR) and possible reductions in economic forecasts. The tone of the MPR is expected to be negative after Governor Stephen Poloz, in an interview with the Financial Times, on March 30, described the effects of the slump in oil prices on the Canadian economy as “atrocious”.

A Bank of Canada spokeswoman, Mary Poppins reportedly said that Poloz was misquoted. What he really said was; "Super,CanadasFragileEconomicsAreAtrocious”

Go ask Mary Poppins. She’ll give you the real deal on Canada’s economy. Photo: Disney

USDCAD outlook

The Canadian dollar is benefiting from a lack of bad news. Friday’s employment report was ugly as all the job gains were part-time. No one cares. The fact that the unemployment rate remained unchanged and the headline number was positive was a good enough reason to buy Canadian dollars. A rather downbeat Business Outlook Survey was ignored because it was expected to be downbeat. The BoC is widely expected to leave rates unchanged as they will take more time to assess the incoming data.

There is a risk that the all the bad news for Canada is out and more than reflected in the current exchange rate. Speculative short CAD positions are still stretched at around $3.2 billion on the IMM and it could get real messy if they all head for the exits at the same time. A rosier outlook in the Monetary Policy Report, could prompt such a move.

USDCAD technicals

The intraday USDCAD technicals are bearish while trading below 1.2570 with the move below 1.2510 reverting to resistance. A break below 1.2410 will extend losses to the 1.2330-60 area. A break here will be lights out-at least until 1.2050. A recovery above 1.2510 would argue for more 1.2410-1.2550 consolidation.

Chart: USDCAD daily

Source: Saxo Bank

– Edited by Clare MacCarthy

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

USD firms, Loonie churns and Cable in knots 10Apr15


USD firms, Loonie churns and Cable in knots

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

Original story posted on TradingFloor.com

  • jobs report both pretty and ugly
  • Cable in knots
  • FOMC minutes support US dollar

By Michael O’Neill

The US dollar is ending the week with substantial gains against the EUR and higher across the board against the rest with the exception of Aussie and Kiwi. That may be because both those currencies had led the dollar move higher, earlier and the rest of the G-10 are just catching up. The Federal Open Market Committee (FOMC) minutes caught traders off guard with the debate around a June rate increase. Many believed that the focus was on a September move and they scrambled to reload long dollar positions.

Canada creates jobs-with fries

Today’s Canadian employment report was both pretty and ugly. The data surprised to the upside, (pretty) posting a gain of 29,000 jobs in March. (The forecast was zero.) Unfortunately, these jobs were all part-time, which puts this report into the “ugly” camp. Full-time jobs actually declined 28,200.

The USDCAD sell-off from 1.2660 to 1.2595 on the back of the data is misleading. Prior to the data, USDCAD squeezed higher from 1.2620 at 7:30 am to 1.2660 just ahead of the release. The subsequent plunge is more a factor of opportunistic pre-number long dollar positions getting cut.

Chart: Labour Force Survey March

Source: StatsCanada.

USDCAD technical outlook

The intraday USDCAD technicals are bullish while trading above 1.2580 which represents both the break of a minor downtrend and the bottom of the uptrend line from April 8. A move below 1.2580 will result in a test of 1.2510.

Longer term, the 1.2360-1.2820 band from mid-January remains in place with 1.2590 acting as a pivot. Above 1.2590 risks 1.2820 while below 1.2590 points to 1.2360.

Chart USDCAD 4-hour with Support, Resistance and Pivot shown

Source: Saxo Bank. Create your own charts, click here to learn more

Cable twisting on hung parliament fears

This morning, GBPUSD finally broke below the 2015 low of 1.4625 last seen in March on the back of election jitters, general US dollar strength against the majors and recent mixed to soft UK data. Today’s Industrial Production data missed the forecast, adding to cable’s woes. More than likely, the data was merely camouflage to cover sterling selling on fraying nerves over the election outcome.

A BBC poll today has Conservatives and Labour in a dead heat, each with 33% of the vote. A hung parliament is looking more and more like a reality. The Brits are nervous and cable is being sold.

Why all the fuss? Canada has experienced many “hung parliaments”. The world doesn’t end, the country doesn’t implode. Arguably, a hung parliament is beneficial as by necessity it increases inter-party cooperation because MPs focus on feathering their own nests rather than formulating policy. The civil service really runs the government and as long as they keep getting paid, the wheels of bureaucracy will turn.

When the results of the election are known, beware of a “sell the rumour, buy the fact” GBPUSD rally, especially if a large part of the GBPUSD drop was truly because of hung parliament fears.

Mighty pretty. But the outlook to a hung parliament isn’t. Photo: iStock

The week that was

Despite being a short week for Australia, New Zealand, a large part of Europe and the UK, FX markets were hopping like Peter Rabbit on the bunny trail. EURUSD made a habit of testing and bouncing from minor support levels, only to blow through them on the next attempt. Comparing the commodity currency bloc moves to a roller coaster is both trite and accurate.

Monday, being Easter Monday, didn’t attract a lot of volatility while the effects of Friday’s weak US employment report were dissipating. News that Saudi Arabia bumped the price of oil to Asia provided a lift for WTI.

Tuesday wasn’t as quiet as Monday, but it wasn’t a whole bunch livelier, either. The US dollar eked out some gains against the majors as traders looked ahead to Wednesday’s release of the Federal Open Market Committee minutes.

Wednesday’s trading prior to the FOMC minutes can best be described as skittish. The Asian session saw the Bank of Japan leave policy unchanged and by the time that New York got to their desks, the US dollar was down across the board. That didn’t last. The dollar turned bid during the NY morning and really took off after the FOMC minutes came out. Much to the surprise of many, there was a lot of discussion about a June rate hike which was three months earlier than previously thought.

Thursday saw what may have been some profit taking in Asia as the US dollar was offered. That changed. Europe came in and promptly bought dollars. Cable was all twisted with fears that the May 7 election would result in a hung parliament. The US dollar ended the New York session on a firm footing

The week ahead

There are a few distractions in store for FX traders next week, The key one being US retail sales. An above consensus report will be another piece of the sustainability of the economic recovery puzzle and keep the June rate hike fires burning. Wednesday’s European Central Bank (ECB) interest rate statement and press conference shouldn’t change the EURUSD outlook at all. The ECB has already fired its big guns and is in wait and see mode. It is rate decision time for the Bank of Canada (BoC) as well, which will keep USDCAD traders on edge.

– Edited by Clare MacCarthy