Stock, bond and dollar bears (oh, my!) 12May15


Stock, bond and dollar bears (oh, my!)

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Loonie rising on dollar retreat
  • Data drought driving markets
  • The bear is back, and not just in bonds

By Michael O’Neill

FX traders are perplexed. Yesterday’s US dollar strength has given way to weakness. The initial optimism from Sunday’s People’s Bank of China rate cut, which was seen as a step to stimulate the Chinese economy and boost global growth, has been forgotten.

Today, of course, it is pessimism fueled by a global bond plunge. One school of thought holds that diminished deflation risks in the Eurozone due to the European Central Bank’s quantitative easing programme, is driving bond sales. If so, why today? Whatever the reason, the bond selling has been infectious, spreading to European and US equity markets as well as the US dollar.

Coincidentally, the heightened anxiety in the bond market is occurring in a week with a distinct lack of top-tier US data releases. Last Friday’s nonfarm payrolls report failed to live up to the hype and there wasn’t any fresh insight to provide ammunition to either rate bulls or bears.

Expectations for tomorrow’s retail sales report is likely to suffer the same fate. Auto sales are forecasted to be sharply lower, dragging the headline number down (April forecast 0.2% versus March actual 0.9%; April forecast ex-autos 0.5% versus March 0.4%).

Will the US auto industry beat the forecasts? Photo: iStock

The lack of major US data (other than retail sales) will ensure that skittish FX markets will be the norm for this week. Greek debt renegotiation headlines will keep EUR traders on their toes while ongoing fallout from the surprise UK Conservative party election win may fuel GBP demand against the US and CAD.

Dollar index looking for support

The USDX has been declining steadily since mid-April. Corrective rallies have been shallow and short-lived with a test of major support in the 92.60-70 area looking likely, although that level is being guarded by another layer of support in the 93.50-70 zone.

A sustained move above 95.30 would negate the downtrend and target 96.10.

Four-hour USDX with downtrend

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

Source: Saxo Bank

The Russian bear is out of hibernation

The Russia/Ukraine hostilities have slipped below the radar for many FX traders. They haven’t gone away, though – they have just left the front pages of the business press. NATO accused Russia of building up forces on the Ukraine border and shipping additional hardware to rebels including tanks, artillery and ammunition.

US secretary of state John Kerry is in Sochi to meet with his Russian counterpart and then Vladimir Putin. It is hard to believe that any progress will be made. The Russian foreign ministry said: “We continue to underline that we are ready for cooperation with the US on the basis of equality, non-interference in internal affairs, and that Russian interests are taken into account without attempting to exert pressure on us.”

(The US, on the other hand, believes that it has the right to meddle in the affairs of nations anywhere in the world.)

As long as the Russia/Ukraine issue threatens the stability of Eastern Europe and threatens to suck the Western world into a quagmire similar to 1914, it is hard to see the sustainability of EURUSD gains

Oil rally springs a leak

Oil prices gushed higher overnight, taking out resistance at $59.90/barrel and touched $60.50/b before retreating. The rally may have been due to the widespread US dollar selling seen overnight.

The fact that it has retreated this morning (currently $59.74/b) and is currently below the $60/b pivot combined with the series of lower highs on the hourly chart suggests a test of the uptrend line from April 15 is likely. A break of the uptrend line would suggest further losses to $55.70/b.

Goldman Sachs released a report on Monday suggesting that the oil rally is unsustainable due to still elevated inventories and only a minimal decline in production which may have helped to cap today’s rally

USOil hourly

Source: Saxo Bank

Loonie flying in circles

USDCAD is likely going to attempt a test of support in the 1.1940-60 level in the next day or so having tried and failed to break higher on Friday and Monday. Broad-based US dollar weakness returned overnight as bond selling and retreating equity markets weighed on the greenback.

Tomorrow’s US retail sales data will provide some much needed but short-term direction. An upside surprise would test 1.2140 again while a poor report would put 1.1940 in play.

The intraday technicals are bearish while trading below 1.2060 with a break of 1.2000-05 pointed to 1.1940. The short term outlook is also bearish while trading below 1.2140. A break below 1.1940 leads to 1.1740, the 50% Fibonacci retracement level of the July 2014-March 2015 range.

USDCAD daily with Fibonacci levels

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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