Loonie pumped on oil, but can it last?
FX Consultant / IFXA Ltd
- 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.
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.
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.