The Loon, oil and the FOMC
FX Consultant / IFXA Ltd
- Michigan sentiment lifts USDCAD
- Loonie treading oily water
- Reading the RBA and RBNZ tea leaves
A long time ago, in a galaxy far away, we imagined June would see a US rate hike. Pic: iStock
By Michael O’Neill
The US dollar is ending the week mostly down against the majors with the exception of Kiwi and that move was orchestrated by the Reserve Bank of New Zealand. Today’s US PPI and Michigan Consumer Confidence data were much like previous data releases – mixed. And mixed is probably the message that’ll be delivered by the Federal Open Market Committee (FOMC) on Wednesday. We’ll know fairly soon.
US dollar index lacks direction
The USDX isn’t providing traders with much in the way of direction. A series of intraday lower highs is making minor uptrend support in the 94.20-25 area vulnerable to a breech and exposing 93.10-20 to a test. A topside break of the 95.75-85 area would lead back to 96.90, but only a decisive break above this level would negate the downtrend from mid-April.
Chart: USDX 4-hour with downtrends
Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more
Where oil goes, Loonie follows
The WTI crude oil market has showed some signs of stability in the past three weeks, trading within a $57.00-$61.00 band and it is no coincidence that USDCAD has enjoyed a fairly stable 1.2200-1.2550 band as well.
Oil prices are holding firm just above $60.00/bbl in spite of fresh news out of Saudi Arabia about production. The Saudis are ready to raise output beyond the already record highs with a new deal to supply Indian traders with crude. That news supports the Energy Information Administration (EIA) analysts who raised their forecasts for 2015 global oil demand.
Despite the EIA warning that there was “exceptionally high” growth in global supplies, evidence of the much ballyhooed slowdown in US shale production hasn’t really materialised, even with a reduction in rigs.
Apparently, the start of the US “summer driving season” is expected to put a huge dent in oil supplies. This sounds a tad dubious. If other cities in North America are similar to Toronto, road construction and repairs make it impossible to drive anywhere!
USDCAD is unlikely to move beyond either side of the 1.2200-1.2550 range while oil prices remain range bound.
Source: Saxo Bank
The US dollar is likely to drift higher ahead of Wednesday afternoon’s Federal Open Market committee (FOMC) interest rate statement. A long, long time ago, in a galaxy far, far away…. wait it was only January, Obi-wan Kenobi and other seers were convinced that the FOMC would raise interest rates in 2015 and June was the likely lift-off date. A spate of weak to mixed data and an ugly Q1 resulted in lift-off being scrubbed until September at the earliest. Wednesday’s FOMC meeting is expected to confirm this view.
The Canadian dollar doesn’t have any data of note until next Friday’s inflation report leaving it at the mercy of US dollar direction against the majors.
However, was the surprise rate cut by the Reserve Bank of New Zealand (RBNZ) a sign of things to come for the Canada? The RBNZ cut rates by 0.25%, citing concern over mixed economic activity in China and the US, falling commodity prices and an “overvalued” currency.
On the other side of the Tasman Sea, the governor of the Reserve Bank of Australia (RBA), Glenn Stevens, opened the door to further easing and made noises about the “high value” of the Australian dollar.
When the Bank of Canada cut rates six months ago, it was in response to weak oil prices and the impact on inflation. Since then oil prices have bounced but the rally has stalled and Canada’s headline inflation rate is still near the bottom of the BoC’s control range. In addition, for the first time in a long time, the BoC statement made reference to the strengthening Canadian dollar.
There doesn’t appear to be much likelihood that the BoC would cut Canadian rates any time soon. However, the fact that the Antipodean’s are easing could encourage Governor Poloz and company to unleash a bit of verbal intervention to level the commodity bloc playing field.
USDCAD technical outlook
Today’s break above 1.2305 negated the intraday downtrend from June 5 with a minor uptrend in place while trading above 1.2305. A break of 1.2355-65 (an hourly triple top) is needed to extend gains to 1.2420.
Longer term, USDCAD is in an uptrend from the May low which comes into play at 1.2210-30. It is competing with the downtrend line from March that currently sits at 1.2550-60. The intraday 50% Fibonacci retracement level of the March May range is at 1.2360, which has held rallies all week.
USDCAD support is at 1.2305, 1.2260 and 1.2205. Resistance is at 1.2365, 1.2390 and 1.2420
Source: Saxo Bank
The week that was
It was a week that lived up to its advance billing-sort of. The Aussies and Kiwis delivered on the excitement and US shoppers were buying, just not enough to impress.
Monday, a French official reported that US President Obama said “strong dollar no problem”, and for the rest of the day it wasn’t strong anymore. Even the White House’s clarification of the comments failed to stem the selling. The dollar ended the New York session down across the board.
Tuesday saw the US recoup some of Monday’s losses early and then had a mixed day. The Canadian dollar had a good day probably on the WTI rise of about 3.4%. News that Greece submitted two proposals to the European Commission was met with a yawn by traders and a roll of the eyes by negotiators.
Wednesday was lively in Australia when the Reserve Bank of Australia (RBA) governor Glenn Stevens told a luncheon crowd that “We remain open to the possibility of further easing”. AUDUSD eased immediately but the impact was short circuited by the Bank of Japan (BoJ) governor. The BoJ governor sent USDJPY plummeting when he said that “it was hard to see the yen dropping more” adding that “the yen is unlikely to weaken further in real effective terms…” The dollar ended up under pressure against the majors until the New York close.
On Thursday, (late Wednesday in New York) Kiwi was the star of the show in early trading in Asia. The Reserve Bank of New Zealand (RBNZ) snuck in a 0.25% cut in the Official Cash Rate (OCR) and followed up with a dovish statement. Kiwi was crushed and hasn’t recovered. A little later AUDUSD rallied on the back of a surprisingly strong employment report. The US dollar drifted higher during the European session ahead of the US Retail Sales Report. Retail Sales didn’t disappoint, until it did. The data was strong, it beat the forecasts but it didn’t beat them enough and after initial strength, the US dollar drifted lower for the rest of the day.
The week ahead
The week ahead will be divided equally between pre-FOMC and post-FOMC. The pre-FOMC activity will mostly be noise and forgotten by Wednesday at 18:00 GMT. Afterwards, it will be all about trying to find hidden meaning within the statement.
– Edited by Clare MacCarthy
Michael O’Neill is an FX consultant at IFXA Ltd.