Full moon madness (and FOMC lunacy) 16June15


Full moon madness (and FOMC lunacy)

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • FOMC meeting has markets on edge
  • Retail sales could boost recovery narrative, CAD
  • USDCAD flirting with 1.2310-20 support

The FOMC meeting is hovering above trading floors, with investors jumpy

at the prospect of US policy normalisation. Photo: iStock

By Michael O’Neill

There is a well-documented link to a rise in madness during a full moon. Doctor visits rise, admissions to psychiatric hospitals increase and old metal gods "Bark at the Moon". A similar phenomenon occurs during the time of a FOMC meeting: madness rules on the run-up to the statement and sanity returns a few days later.

Consider some of the market-moving events during the week of the April FOMC meeting. You may recall that this meeting didn’t come with a press conference, which many understood to mean that it would deliver a benign result. It did, and then flat-lined soon after.

EURUSD was climbing as extreme short EUR positions got pared back. News of a revamped Greek negotiating team fueled EURUSD buying as it was thought to pave the way to a successful resolution to the debt crisis. How naive.

EURUSD activity around April/15 FOMC

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

Source: Saxo Bank

Madness was evident in the run-up to the March FOMC meeting with traders and analysts, strategists and talking heads all preoccupied with “patient” and whether the Fed would remove the term from the statement.

Position adjustment was evident and falling oil prices were causing alarm. When the statement was released, “patient” was missing but so was a lot of hawkish rhetoric and the US dollar tanked. By the end of the next day, all was forgiven and EURUSD was back to where it was before the statement.

EURUSD activity around March/15 FOMC

Source: Saxo Bank

The week of the January FOMC meeting saw markets concerned about Greece, positioning, cheap oil, and a raging debate on whether the FOMC statement would be hawkish or dovish with many traders/analysts still believing in a June rate hike.

Boy, would they be disappointed.

And EURUSD gains were soon erased.

EURUSD activity around January/15 FOMC

Source: Saxo Bank

Wednesday’s FOMC meeting is likely to follow the same pattern as the previous three meetings-intense pre-meeting scrutiny and then “what now?”

Canadian retail sales and CPI ahead

Tomorrow’s FOMC statement may be the marquee event of the week for many FX players but USDCAD traders will be eagerly awaiting the Canadian retail sales and CPI reports on Friday. These reports will reinforce the Bank of Canada’s assertion that the domestic economy will rebound in Q2.

May CPI (forecast 0.5%, month-over-month, core 0.3%)

The Bank of Canada governor’s concern surrounding low inflation was well documented last fall and that, combined with the oil price collapse, led to the surprise rate cut.

Since then the debate is, according to the April Monetary Policy Report, “whether the temporary effects of sector specific factors and pass-through of the lower Canadian dollar have offset the disinflationary forces from slack in the economy”.

Economists from TD Bank and CIBC both expect a slightly softer report but not soft enough to have much of an impact on USDCAD trading.

Canada CPI as of April 2015

Source: Statistics Canada

April’s retail sales (forecast 1.0%, ex-autos 0.4%)

A gain in retail sales will just fall into the category of “more good news” but will not likely be a big enough deal to make USDCAD traders care.

That said, when improving retail sales data is combined with other recent strong data releases such as Monday’s large jump in existing home sales, Ivey PMI and the employment report, an argument can be made that the domestic economy is improving steadily.

Canada Retail Sales-March

Source: Statistics Canada

USDCAD technical outlook

The USDCAD downtrend from the March peak of 1.2820 has survived three attempts to break through the line. The May-June rally from 1.1930 halted at 1.2560 and the subsequent retreat has stalled above the 38.2% Fibonacci retracement level (1.2204) of the November/14-March/15 range. A break of this level would extend losses to 1.1930.

The intraday technicals are flirting with support in the 1.2310-20 level, which if decisively broken, should lead to a drop to 1.2240 and then 1.2204. The March downtrend line (currently 1.2550 is guarded by resistance at 1.2390, 1.2440 and 1.2480.

USDCAD daily chart with Fibonacci retracement levels

Source: Saxo Bank

— Edited by Michael McKenna

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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