April ends with the running of the bears 1May15


April ends with the running of the bears

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • original post on TradingFloor.com
  • Loonie likely to consolidate into Friday
  • USDX vulnerable to more downside
  • RBA, NFP and UK election highlights of week ahead

By Michael O’Neill

The Canadian dollar has given back about 70% of this week’s impressive gains and it still ended April with a 4.5% rise. That’s not a bad performance.

USDCAD was already in a downtrend prior to what was viewed as a surprisingly upbeat Bank of Canada (BoC) Monetary Policy Report on April 15. The increase in inflation and GDP forecasts and the dismissal of the weak Q1 oil shock as front-loaded gave rise to the conclusion that the central bank was no longer dovish.

At the same time, a series of weak US economic reports in the face of very stretched and stale long US dollar speculative positions (as reported by the IMM) fuelled widespread US dollar selling.

WTI oil prices were climbing on the back of numerous (and somewhat dubious) conclusions that rising demand from global growth and the rising risk of supply disruption in the Middle East would sop up the global glut and eliminate the US storage capacity constraints.

All of the above combined to drive USDCAD dollar lower on the week, in concert with dollar weakness almost right across the board in G-10 currencies. The exceptions are JPY (more Bank of Japan easing ahead?) and Kiwi (RBNZ turned dovish).

Go bear, go – you’ve had a mighty April. Photo: iStock

But can it last?

The quarterly Employment Cost Index (ECI) attracted far more attention than it is usually given. The Q1 rise to 0.7% from 0.6%, was seen by more than a few as long awaited evidence of rising labour costs. The big drop in jobless claims was icing on the cake sparking another reevaluation of the Federal Open Market committee’s (FOMC) intentions. Perhaps, the FOMC statement on Wednesday wasn’t really dovish. Maybe, transitory meant just that-temporary. If so, Thursday’s data may mean that the “data dependent” FOMC was getting rate hike ammunition.

If US rate hikes are still on the table for September while Canada’s economic performance continues to lag that of the US, additional Canada gains below this week’s low of 1.1950 may be hard to come. That being said, if WTI breaks decisively above $60.00/bbl, all bets are off. The "floor" in USDCAD would just become a memory.(Attic?)

USDCAD technical outlook

USDCAD is expected to trade within a 1.1950-1.2340 band next week

The intraday USDCAD technicals are bullish while trading above 1.2060 with a break of 1.2160 extending gains to 1.2220. A move back through 1.2060 would result in another test of 1.1950
Longer term, the break of major support in the 1.2340-60 area last week has reverted to major resistance and will guard the downtrend that is intact from the March peak.

USDCAD daily with support, resistance and trading range

Source: Saxo Bank

USDX peering into the void

The outlook for the USDX doesn’t bode well for US dollar bulls. The drop through 96.58 on Tuesday negated the uptrend line intact from October. The subsequent plunge has held the 38.2% Fibonacci retracement level of 94.61. However, the intraday downtrend suggests further losses to 92.75 are likely while trading below 96.70.

USDX Daily with Fibonacci

Source: Saxo Bank

Sabre rattling noise getting louder

Geopolitical risks stemming from the escalating threat posed by the Islamic State of Iraq and Syria (ISIS) and the open hostilities between Ukraine and the “pro-Russian rebels” were often cited as providing underlying support to the US dollar last year. These issues haven’t gone away.

ISIS is still running amok throughout the Middle East. Iran, fresh from being Obama’s new “BFF” is now threatening shipping in the Strait of Hormuz. Iranian gunboats ordered a Marshal Islands flagged ship into Iranian waters and then “confiscated” it for “legal “reasons. Now the US Navy will be escorting American ships through the Strait of Hormuz. What could possibly go wrong?

China’s answer to critics complaining about its territorial claims to most of the South China Sea is to build islands on a number of reefs including what has been described as a “military grade” runway on one of them. The Chinese are more than a little miffed at the recent US/Japan military alliance which gives Japan a larger role in aiding the US around the globe.

The world is only a few gunshots away from another stampede into risk aversion.

Don’t neglect geopolitics. A tinderbox can erupt anytime. Photo: iStock

The week that was

It was another frantic and short week FX land bracketed by Anzac holidays at the beginning and May Day holidays at the end. In between, RBNZ, BoJ and FOMC meetings were scheduled. The Bangles sang about “Manic Monday” over 30 years ago but today’s FX traders may have updated the lyrics to “Thumping Thursday”, as that seems to be the busiest trading day each week.

Monday was quiet in Asia due to Anzac holidays, content to let Europe get the ball rolling. Europe did and promptly sold EURUSD. That move was reversed during the New York session. News that long dollar speculative positions on the IMM were being trimmed plus a report that Greece reshuffled its debt renegotiation team put a happy face on EURUSD. At the same time, USDCAD was collapsing on the break of major support at 1.2340. The Fitch downgrade of long-term Japanese debt was largely ignored.

Tuesday was a relatively calm day although weak UK GDP data caused a flurry of action in GBPUSD and EURGBP. The bias towards Thursday’s FOMC statement was that it would be dovish which kept US dollar bulls on the defensive the whole day.

Wednesday was “cooking with meatballs” day. Sweden’s Riksbank left rates unchanged, caught a few people by surprise and contributed to broad-based EUR demand. A weaker than expected US Q1 GDP report fuelled a bout of dollar selling which was exacerbated when the FOMC delivered what many believe to be a dovish statement. The US dollar got whacked.

Thursday was truly a “Thumping Thursday”. In Asia, the RBNZ had markets rocking with a suggestion that rate cuts were a possibility. Not to be outdone, Europe bought EURUSD and it gained 0.0150 points, with month-end demand and improving Eurozone data contributing to the rise. In New York, traders wanted both EUR and USD and bought them aggressively on the back of better than expected US data reports. (Falling jobless claims, higher Chicago PMI, higher ECI.)

The week ahead

Major data, central bank policy and UK election risks will compete for attention in what should be an explosive start to May. The Reserve Bank of Australia (RBA) stirs the pot on Tuesday amid rising belief that rates will be lowered. Thursday’s UK election is the focus for GBP traders. A minority government appears to be a foregone conclusion so the make-up of that minority will be a major factor for GBPUSD direction. Friday’s US payrolls report may be more important than usual as it could provide further support to the FOMC’s assertion that the Q1 slowdown was due to “transitory” factors, and put the rate hike back in focus.

– Edited by Clare MacCarthy

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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