Change is in the air 2Apr15

Change is in the air, but not so much in FX

Michael O’Neill

FX Consultant / IFXA Ltd


  • US dollar retreats ahead of long weekend
  • NFP releases plays to an empty house
  • Long term Loonie outlook appears grim

By Michael O’Neill

FX markets are jockeying for position ahead of tomorrow’s US employment data and holidays across the globe. AUDUSD has touched 6-year lows on rate cut fears, oil prices are sloshing about and USDCAD is chopping around in a fairly narrow range. EURUSD has moved higher and is back where it was at the start of the week. The more things change, the more they stay the same.

It’s the same old song and dance

Spring has sprung, the temperature is rising and a sense of change is in the air. At least in the outside world. In the FX world, not so much.

The first quarter of 2015 started with EURUSD skidding on Greece election worries, fears of a further collapse in oil prices and market angst about the Federal Open Market Committee’s (FOMC) patience towards low interest rates.

In what may be just a bad “April Fool’s" joke, the second quarter of 2015 has started with an echo of January reverberating throughout FX markets. Will Greece pay its bills or stiff its creditors? Will a repeal of sanctions against Iran on a nuclear agreement lead to another plunge in oil prices? When is “lift-off” for US rates? The FOMC has shifted from stating that it is patient to being tacitly patient while it evaluates progress “towards its objectives of maximum employment and 2 percent inflation”.

The US economic growth story which was so promising in January is now looking a tad worse for wear. US economic data has been mixed at best, with recent releases like Durable Goods, Retail Sales and Consumer Spending all on the soft side. That has led to a number of bank economists lowering their Q1 growth forecasts but optimistically penciling in a second-half rebound. Hey, Aerosmith said it best in 1974; It’s the same old song and dance

Payrolls to perform in front of empty house

Friday’s US nonfarm payrolls (NFP) release will have all the drama associated with this volatile data series except an audience. Good Friday and Passover observations across the UK, Europe and Canada will shutter FX markets leaving American traders to pick up the slack. The evaporation of that large pool of liquidity may lead to outsized moves on a nasty surprise, in either direction.

Managing NFP expectations

Wednesday’s ADP March employment report came in with a gain of 189,000 jobs which was below both the forecast (220,000) and February’s result. On the plus side, this report has a hit and miss track record for predicting the NFP report. Nevertheless, ADP’s poor showing has led to some analysts downgrading their predictions for Friday’s number. The consensus forecast is for a gain of 244,000 jobs, down from February’s gain of 290,000.

NFP scenarios or roll the bones

The FX market is still well long of US dollars, in part due to expectations that rising US employment and hourly wages will force the FOMC to raise interest rates, with most targeting a move in the second half of the year.

If NFP is 300,000 or higher, the US dollar will rally on the belief that a rate hike could be as early as June. EURUSD will test 1.0500.

If NFP is 250,000-300,000, the US rally will be more subdued, essentially just squeezing the intraday short dollar positions entered on anticipation of a weak number.

If NFP is between 200,000 and 250,000, traders may start their Easter egg hunt early, as gains above 200,000 are usually considered as a strong report.

If NFP is below 200,000, it could get nasty. This would be another weak piece of data to add to the mounting pile of weak data and call into question the viability of the US economic recovery. The combination of extreme long dollar positions and poor liquidity would crush US dollar bulls. EURUSD could crack 1.1050.

USDX sees limited US dollar gains in short term

US dollar bulls will not find much consolation from the intraday USDX chart. The mid-March rally failed to breach the downtrend line from the beginning of the month. The move below 98.60 snapped the uptrend and suggests further losses to 97.05, a level which is guarding the 2015 uptrend line which is currently at 96.40. Below 96.40 would lead to a test of support in the 93.60-80 area. A move above 99.05 will extend gains to 100.70.

Chart: USDX 4-hour with short term trendline

Source: Saxo Bank

USDCAD outlook

How high can USDCAD go in 2015? It is currently up 8.3% this year after being up over 10.5% on March 17th. The entire 2014 gain was 9.4% meaning that the Canadian dollar has weakened as much in 3 months as it had in all of 2014. But that doesn’t mean that there isn’t more upside and 1.3430 is a nice target.

The catalysts for the USDCAD gain last year are still in place. Oil prices have yet to bottom (that point is debatable), the interest rate divergence between the US and the G-20 is on-going fueling US dollar demand, Canadian economic performance is lagging that of the US and the Bank of Canada isn’t just talking doveish, it’s acting that way as well. Last year’s geopolitical issues may have faded from the headlines but they haven’t disappeared. Russian backed rebels are still slowly eroding Ukraine territory, ISIS is wreaking havoc in Iraq, the Syrian civil war is raging and the Saudi’s are bombing Yemen.

USDCAD technical outlook

The short term USDCAD technicals are mixed within the context of the 1.2360-1.2820 trading range that has captured trading since mid-January. For today, move below 1.2570 will extend losses to 1.2440 while a break above 1.2680 opens up a move to 1.2800.

The long term USDCAD outlook is bullish. A sustained break above 1.2600 on a weekly chart, which represents the 50% retracement of the entire 2002-2007 range, targets the 61.8% retracement level of 1.3430. That move is far from a sure thing. USDCAD failed to extend gains much above 1.3000 despite many attempts in Q4 2008 and Q1 2009. The weekly chart is shaping up in an eerily similar pattern.

Chart: USDCAD weekly with Fibonacci retracement

Source: Saxo Bank

– Edited by Clare MacCarthy

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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