Loonie ripe for plucking and US dollar is bid 31July15


Loonie ripe for plucking and US dollar is bid

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

Recommend

  • US dollar loses day, wins month
  • Loonie ends the month a lot worse for wear
  • ECI data confuses September rate hike debate

By Michael O’Neill

It was a wild and woolly end to a somewhat wild and woolly week with surprisingly soft US Employment Cost Index (ECI) data playing havoc with month end rebalancing flows. Traders had to be nimble and quick or else they got burned by the candlestick.

The US dollar erased earlier gains and is ending the day down across the board. However, since the beginning of the month, the US dollar has rallied against all the G-10 currencies.

Downbeat US wages data weakened the dollar today,

but it’s been a good month for the greenback. Source: iStock

Canada GDP-recession bound

Canada GDP posted its fifth consecutive monthly decline, falling 0.2% in May and tipping Canada ever so close to a “technical” recession. A poor result wasn’t entirely unexpected although declines in manufacturing, mining, oil and gas and wholesale trade cannot be good things.

Canadian GDP

Source Statistic Canada

Ontario is Canada’s Greece

The weak national data also underscores the precarious financial state of affairs for the province of Ontario, Canada’s manufacturing centre. The Financial Post notes that “with twice the debt of California (and 1/3 the population), Ontario is the most indebted, sub-sovereign borrower in the world.

Ontario has lost almost half of its manufacturing jobs in the past 15 years on aprovincialgovernment policy of extremely high electricity rates to prevent global warming. ( I feel cool already.)

If Greece could nearly take down the Eurozone, imagine the damage that Ontario can do to Canada.

Vote for me, we’ll set you free (of your cash)

A recession is bad news for a government seeking re-election and planning to campaign on their successful efforts to balance the budget, especially if the surplus has disappeared. Stephen Harper and the Conservative party are seeking to avoid that issue. Numerous rumours suggest that the prime minister will dissolve parliament this weekend with an election scheduled for October 19. That means over two and half months of campaigning and polls. The Loonie will be as vulnerable to polls as Sterling was during the UK election.

Canada is flirting with recession. Photo: iStock

USDCAD outlook

Last week’s rate cut left the Loonie in the lurch. In was a none-to-subtle way for the Bank of Canada to jump start a sputtering economy. The BoC were on record forecasting that rising manufacturing exports would propel economic growth. That wasn’t happening so a currency devaluation was the next move. Today’s GDP data validated the move.

There are two key reports next week (Employment and Trade) which will either lead to an extension of gains above 1.3110 or else additional 1.2900-1.3100 consolidation. But that’s it for domestic influences.

There are three other key drivers for USDCAD direction; US data, WTI oil prices and China. The US data needs to be consistently better than forecast to dilute the effects of today’s ECI report. A well-above consensus US NFP print will go a long way in repairing the ECI damage and keep a September rate hike on the table.

Oil prices are the another wild card. This week’s bounce in WTI from $46.75/barrel to $49.45 was in part due to rumours that Opec would cut production quotas. Apparently Opec indicated that wasn’t the case and prices dropped but are well off the week’s low. The intraday charts indicate that as long as WTI is below $50.00/b the trend is still lower.

China’s equity market instability and rising questions about a continued economic slowdown will keep commodity prices soft and weigh on the Canadian dollar.

USDCAD technical outlook

USDCAD technicals are bullish while trading above 1.2900 representing the uptrend line from June 22. At the same time, USDCAD gains have been capped in the 1.3050-1.3100 area. A move above this top could extend to 1.3466, the 61.8% Fibonacci retracement of the 2002-2007 range. A break below 1.2900 would lead to further losses to the 1.2800 which is where USDCAD rallied from when the BoC cut rates.

For the week ahead, expect a 1.2900-1.3100 range with a bias for an upside break.

USDCAD 4-hour with projected trading range highlighted

Source: Saxo Bank

The week that was

It was a typical FOMC trading week. There was a lot of noise ahead of the statement and then even more noise after it was released. At the end of the week, FX markets only think that they know more about the committee’s intentions then they did at the beginning of the week.

Monday started with another plunge in Chinese equity exchanges which only had a minimal impact on currencies. The US dollar was offered and was down across the board when New York walked in. It didn’t get any better. A soft Durable Goods report helped drive EURUSD to 1.1120.

Tuesday, China equity markets behaved themselves helping AUDUSD make some headway. Sterling rallied on strong GDP data. It was a mixed session in New York with all the Queen Elizabeth’s currencies posting gains while the rest of the majors retreated.

Wednesday should have been a typical FOMC day with little pre-statement price movement. It wasn’t. Prior to the statement, kiwi sprouted wings when a speech by the RBNZ governor was less dovish than expected. WTI prices drifted higher putting downward pressure on USDCAD. After the statement, the dollar caught what started out as a reluctant bid. The FOMC changed the wording about the labour market which was good enough for the hawks.

Thursday saw further demand for dollars in Asia but it was more of a moonlight stroll rather than a stampede. The pace picked up after the release of US GDP data. The headline missed the forecast but a big upward revision to Q1 led to renewed dollar demand.

The week that will be

It is shaping up to be a very busy week and for Canadians, a short one, as Monday is a holiday. The FOMC interest rate statement has left the door wide open for a September rate increase which makes this week’s US data that much more important. However, this morning’s ECI report questions the rate hike premise.

Aussie traders will be eagerly awaiting the Reserve Bank of Australia interest rate decision and statement on Tuesday and employment reports on Thursday. Also on Thursday, the Bank of England releases its interest rate decision and quarterly inflation report.

US and Canadian employment reports on Friday will ensure a volatile end to a busy week.

– Edited by Oliver Morrison

Michael O’Neill is an FX consultant at IFXA Ltd.

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We’re all living for the Yellen submarine 28July15


We’re all living for the Yellen submarine

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US data hits and misses
  • China equity market woes are a red flag
  • Loonie suffering from low oil prices

By Michael O’Neill

China’s equity market weakness may be a red flag and a warning that traders may shift into risk aversion trades. Overnight, Chinese authorities reiterated promises to shore up equity markets and managed to turn a big down day into just a little down day. This morning’s US data hit and missed. Markit Services PMI met expectations while the Case-Shiller House price index was well below forecasts. FX markets didn’t seem to care, content to bask in the heatwave (at least New York and Toronto) and wait for the Federal Open Market Committee (FOMC) news tomorrow.

Yellen submarine

In a little more than 24 hours, the FOMC will release its interest rate decision and statement. Will it raise the periscope and signal an interest rate hike in September or will it fire a torpedo and blow a September rate move right into December?

Whatever it does, this statement is sure to make some noise. A September rate hike is a long way from a done deal. In fact, various polls suggest that there is only a 50% chance of a rate increase.

Fed chief Janet Yellen and her colleagues have been setting the stage for a rate hike since they dropped the term “patience” in February. Since then, the US economy appears to have achieved the criteria that the FOMC watches to determine an interest rate increase. US unemployment is at 5.4% – the lowest level since 2008.

Don’t count your chickens before they’re hatched –

a September hike is no done deal. Photo: iStock

Big Deal or no biggie?

Is a mere ¼ point hike in US interest rates, from a ridiculously low 0%–0.25% to a still ridiculously low 0.25–0.50% a big enough increase to warrant a massive rally in the US dollar? Probably not.

However, the fact that barely half of the market believes in a September rate hike should create a flurry of demand for dollars initially and then lead to a slow and steady climb in the US dollar against the majors until the September meeting. A rate bump in September would be anti-climactic and could trigger US dollar selling.

Loonie being boiled in oil

The entrée of the week is Boiled Loonie served with a side of Yellen. The Loonie looks doomed if the Fed chairman hints at a September rate cut while Opec and company continue to pump crude like there is no tomorrow.

The short-term and intraday WTI oil technicals are bearish while trading below $48.35/barrel with a break of $46–75 area targeting further losses to the March low of $42.03. A break of this support would extend losses to the December 2008 low of $32.20.

Chart USDCAD and WTI

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

The oil fundamentals are negative. There is no shortage of crude and Opec and friends continue to pump like there is no tomorrow. Meanwhile, the Chinese equity market meltdown risks exacerbating the already slowing economy and is putting additional downward pressure on commodity prices including oil.

The FOMC is on the cusp of raising interest rates while the Bank of Canada just cut rates for the second time this year. The US economy is showing signs of a sustained recovery while Canada is in sick-bay.

The combination of widening CAD/US interest rate differentials and falling oil prices will continue to put downward pressure on the Canadian dollar.

USDCAD technical outlook

The short-term USDCAD technicals are bullish. The break of strong resistance in the 1.2830-60 area will revert to strong support and should contain any short term USDCAD losses. The uptrend from the end of June remains intact while trading above 1.2970. Fibonacci retracement analysis following the break of the 50% retracement level of the 2002-2007 range projects further gains to the 61.8% Fibonacci level at 1.3466.

The intraday technicals are bearish USDCAD while trading below 1.3030 looking for a break of 1.2990 to extend losses to 1.2970 and then 1.2900.

Chart: USDCAD daily with long term uptrend and support

Source: Saxo Bank

– Edited by Clare MacCarthy

Loonie circling the drain 24July15


Loonie circling the drain ahead of FOMC

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US dollar back in demand
  • Loonie losses likely to grow
  • China upsets noodle cart

By Michael O’Neill

China kicked off a case of commodity price jitters by posting a worse-than-expected manufacturing PMI report coupled with headlines suggesting that the Peoples’ Bank of China may expand the CNY band. That set the tone for the balance of Friday and gave the US dollar a bid. A disappointing US new home sales report provided the excuse for traders to book some profits ahead of the weekend resulting in a minor retracement of today’s US dollar gains.

Loonie’s 19th nervous breakdown

“Here it comes, here it comes here it comes, Here comes your 19th nervous breakdown”

The Rolling Stones probably weren’t singing about the Loonie back in 1966 because at that time the Canadian dollar had a fixed exchange rate. It was capped at 0.92 ½ US cents to prevent Canadian dollar appreciation. That changed on May 31 1970, when the government opted to float the currency which was “Nervous Breakdown #1” in modern times.

Today, the Loonie, is having its 19th nervous breakdown. Stress piled upon stress and piled upon more stress has put the Loonie in the looney bin.

The origins of today’s push to 1.3103 can be traced back to last October when Bank of Canada governor Stephen Poloz removed the word “neutral” from the interest rate statement. It’s been downhill ever since.

The embattled Canadian dollar must be feeling like a rolling stone today. Photo iStock

7 reasons for further USDCAD strength

1. A drop in WTI prices through $42.00/barrel. That move would set up a return to the 2001 low of $16.50/b, which is made more likely by the return of Iran production to an already over-supplied market.
2. A faster pace of US interest rate increases than what is currently expected. It is not the favoured scenario, but there is a risk that the long awaited US economic rebound in the second half of the year could return with a vengeance, which could force the Fed to hike rates twice in 2015.
3. Continued deterioration in domestic economic growth with a corresponding decline in inflation – a scenario may prompt another BoC rate cut.
4. A messy Canadian election campaign in the run-up to the October 19 vote. It is still early days but a recent poll had Tom Mulcair and the NDP leading. The perception of tax and spend socialists running the country would be a huge Canadian dollar negative. You don’t have to have a very good memory to recall the effect of polling on GBPUSD during the UK election in April/May of this year. However, the very latest poll shows the incumbent conservatives with a comfortable majority.
5. Another meltdown in the China equity markets. The recent plunge in Chinese equity indices would raise additional questions about the health of the Chinese economy and spark a rush into risk aversion trades. The health of the Chinese economy is already being questioned again thanks to last night’s weak PMI data and reports that the PBoC may be expanding the CNY trading band.
6. Ongoing geopolitical risks could flare up at any time. Russia/Ukraine and NATO are all trading insults. Continued ISIS destabilisation throughout the Middle East. Saudi Arabia and Israel are very unhappy with the US brokered nuclear deal with Iran. Anyone of these flashpoints could trigger a rush to risk aversion.
7. Bullish USDCAD technicals targeting further gains to the 1.3400 area.

5 Reasons for USDCAD weakness

1. A recovery in oil prices above $55.00/b would negate some of the short-term downward pressure on the Canadian dollar while a move above $62.00/b would ignite a Canadian dollar rally back to 1.2300.
2. A wholesale recovery in commodity prices, in addition to oil, would support the Loonie.
3. A second half, export led recovery in Canada. This was the preferred outlook by the BoC earlier this year. If domestic data turns around and starts to surprise to the upside, the BoC would quickly reverse last week’s rate cut.

4. Another Conservative majority in the Federal election would negate any ill effects from adverse moves from pre-election polling. It may not halt the Canadian dollar slide but the news would not fuel additional selling, either.
5. Fatigue. USDCAD has risen 11.8%, year-to-date which is an impressive gain which may lead to a period of consolidation.

USDCAD technical outlook

The intraday and short-term technicals are bullish. The steep uptrend from the 1.2130 low in June, remains intact while USDCAD is trading above 1.2880 supported by the prior break above 1.2550 which will now be major support. In addition, the break of strong resistance in the 1.2770-1.2850 area should contain any short term corrections. Fibonacci retracement projections target 1.3466 representing the 61.8% level of the 2002-2007 range.

For the week ahead. USDCAD support is at 1.3040, 1.3010 and 1.2960. Resistance is at 1.3110, 1.3160 and 1.3250.

USDCAD daily – July-August 2004 cut-out with trading range

Source: Saxo Bank

The week that was

The previous week was a feast, filled with potentially volatile risk events which most delivered on cue. This week was not quite a famine, but the pickings were slim. Nevertheless, there was enough volatility to entertain and frustrate FX traders.

Monday started with the New Zealand prime minister commenting how surprised he was at the speed of the Kiwi fall. Those remarks got traders thinking that perhaps the NZDUSD plunge over the past few weeks was a tad overdone and Kiwi caught a bid. EURUSD climbed in early European trading as news trickled in about Greece debt repayment plans. The New York session was devoted to finding reasons to buy the dollar and EURUSD retreated.

Tuesday was Australia’s turn in the spotlight on the release of the Reserve Bank of Australia

minutes. They proved to be a non-event. The US dollar was under pressure during the European session, for no particular reason and that sentiment prevailed throughout the New York day.

Wednesday was mostly uneventful in Asia and Europe. In North America is was a different story. USDCAD rallied to 1.3055 on nothing, and then WTI started to slide. Kiwi stole the show in the late New York afternoon when the Reserve Bank of New Zealand cut rates by 25 bps, as expected. What wasn’t entirely expected was the ensuing NZDUSD rally. The US dollar still hasn’t recovered.

Thursday was a down day for the dollar across the globe. UK retail sales missed forecasts and cable declined. EURUSD rallied on a short squeeze and the dollar’s woes continued during the New York session. Declining US fixed income yields got most of the blame for the move although thin markets helped.

The week ahead

The only thing that matters is the Federal Open Market Committee interest rate decision and statement. And even that may not be as big a deal as many hope it will be. There isn’t a press conference, yet some analysts are expecting the Fed to kind of pre-announce a rate move for September. If that thinking continues to prevail on Monday and Tuesday, the US dollar should grind higher against the majors.

Tuesday offers up a smorgasbord of US data including durable goods, a number that can be counted on to stir up some excitement. US GDP is released on Thursday. The week will end with a Friday “funday” thanks to the usual month end portfolio rebalancing hijinks.

– Edited by Oliver Morrison

Michael O’Neill is an FX consultant at IFXA Ltd.

Heatwave cools FX markets 21July15


Heatwave cools FX markets

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • USD Index nearing topside break
  • Crude oil outlook still negative
  • Regional risks will take spotlight

By Michael O’Neill

It may just be an interesting paradox that the sweltering heatwave that has cooked the Northern hemisphere since the weekend has cooled FX market activity. The sometimes frantic, erratic and occasionally spasmodic price action in the G7 currency space in the first couple of weeks of this month has now faded to ennui.

Welcome to the dog days of July.

It’s somehow just not FX-trading weather. Photo: iStock

The US dollar is paring back some of its recent gains this morning in what appears to be just a squeeze of weak long dollar positions and not from any shift in overall market sentiment. The evidence is in the NOK and CAD moves: a fairly sharp rally in both "oil" currencies represents a rather outsized move in response to a mere 0.70 cent bounce in WTI prices, especially considering the magnitude of the recent drop and the fact that there isn’t any catalyst for the move.

Where did all the worry go?

FX markets often have the attention span of a gnat. A collective sigh of relief sounded across the Eurozone with news of another Greek bailout deal, forcing traders to lookout for the next big worry. Ultimately, it might not be hard to find.

Most assessments of the EU/Greece deal suggest that it is merely triage, moving the patient from the nearly-dead pile to the close-to-dead pile with the grave diggers still hard at work.

Oil traders are starting to feel smug about the fact that the Iran nuclear deal didn’t hurt oil prices too badly despite repeated reports of an ongoing oversupply. The shallow dip in WTI has also limited USDCAD gains. However, the rising risk of an economic slowdown in China (while Iran ramps up oil production) doesn’t bode well for oil price gains.

There are still a lot of worries around the globe, from the Russian buildup on the Ukraine border to the timing of the US rate hike and the health of the Chinese equity markets. The worry hasn’t departed, but like the rest of us is just biding its time in an air-conditioned retreat.

Dollar index getting ready to blow its top

The US Dollar index (USDX) failed to break lower in May but the subsequent rally couldn’t break resistance in the 97.85-95 zone. Another retreat failed again at the May low. The ensuing bounce finally broke the May resistance area and the topside prospects are looking good. A decisive break above 98.55-65 opens the door to a retest of the 2015 peak of 100.65.

The USD index could be primed for further gains:

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

Source: Saxo Bank

Bad news for WTI bulls

The oil news hasn’t been good news for bulls in the past few weeks, and oil prices reflect that. WTI prices are now hovering near the middle of their 2015 range, currently trading at $50.36/barrel. The oil story, of course, is well known: ongoing overproduction in a slowing demand environment exacerbated by the re-introduction of Iranian crude.

The short term technicals are bearish with the downtrend from the mid-June peak still intact while trading below the $51.40-50/b zone. There is good support, however, in the $49.75-85/b area which has contained the selloff.

A break below this level implies further losses to $44.65-75/b and then back to the March low of $42.0010/b.

Four-hour USOil with support levels shown:

Source: Saxo Bank

Move along, nothing to see here

The outlook for FX markets for the rest of this week is not encouraging. The next major event is the Federal Reserve Open Market committee meeting and the statement won’t be released until July 29.

The US dollar may get a bit of a bid heading into the meeting on anticipation/speculation that the statement may reveal hints as to the timing of a rate hike, which has been the pattern for the past few meetings. Unfortunately, that move, if it occurs, will be next week’s story.

Having said that, Bank of England governor Mark Carney put the rate hike bug in the ear of GBPUSD traders last week which may mean that Wednesday’s BoE minutes provide fuel for GBPUSD trades.

There have been reports of hawk sightings close to the City of London

in recent days. Photo: iStock

Kiwi traders will have their hands full with the Wednesday/Thursday Reserve Bank of New Zealand interest rate decision and statement. The latest CFTC Commitment of Traders Report (COT) showed short NZDUSD positions as very stretched, which could lead to a big bounce if the RBNZ is not as dovish as expected.

Loonie in sick bay

The loonie is succumbing to the “Antipodean disease”, an affliction caused by collapsing commodity prices. In CAD’s case, the prospect of lower oil prices due to oversupply is just another negative added to the Canadian dollar’s overall outlook.

The other negatives include sluggish economic growth, the rising risk of a recession and widening CAD/US interest rate differentials.

USDCAD technical outlook

The intraday USDCAD technicals are bearish with the move below 1.2970 targeting a retest of support in the 1.2880-1.2910 zone which represents the uptrend line from mid-June. That level is guarding additional support in the 1.2830-60 area which represented by a triple-top on the daily chart.

For the balance of the week, USDCAD support will be at 1.2910, 1.2880 and 1.2850. Resistance is at 1.2990, 1.3010 and 1.3050.

USDCAD hourly with support shown:

Source: Saxo Bank

— Edited by Michael McKenna

Michael O’Neill is an FX consultant at IFXA Ltd.

Bank of Canada cutting its way to prosperity 17July15


Bank of Canada cutting its way to prosperity

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Carney tripping over his tongue
  • Loonie rings the bell at 1.3000
  • Week ahead fraught full of mostly nothing

By Michael O’Neill

Mark Carney, the Bank of England governor, was once hailed a "rock star" when he took the throne at the UK central bank. As time has passed, he is proving to be more of the "Milli Vanilli" variety then Sir Mick Jagger.

This week he startled cable traders when he talked about rate increases. Yesterday he added fuel to the fire by adding the possible timing of a move to the equation. And today, he is back-pedalling, trying to unsay what he said earlier. Chalk up a win for the colonies.

It was rather slow in coming but USDCAD finally rang the 1.3000 bell, following the Bank of Canada rate cut, albeit with a little help from Janet Yellen, US housing starts and wobbly WTI prices.

USDCAD outlook

The Bank of Canada tossed in the towel, cut interest rates and admitted that their forecasts for a rebound in the second half may have been a tad optimistic. They had been expecting real GDP growth and a rebound in the domestic economy and now see real GDP contraction.

The BoC has “significantly downgraded” their outlook for growth in 2015 citing the following reasons in the governor’s opening statement at the press conference for the Monetary Policy Report:

• "Canadian oil producers have lowered their long-term outlook for global oil prices, and have cut their plans for investment spending significantly more than previously announced".

• "China’s economy is undergoing a structural transition to slower, domestic-driven growth, which is reducing Canadian exports of a range of other commodities".

• "Canada’s non-resource exports have also faltered in recent months."

At the same time as the BoC is chopping rates, the US is still on course to raise rates, with a September rate hike still favourite. Janet Yellen’s remarks last Friday and again on Wednesday and Thursday of this week reinforced this view. US rate hikes may be data dependent, they may be slow in coming, but they are going up and they are going up in 2015.

The Loonie won’t get any relief from its woes from next week’s data either. The key release is Retail Sales but since the BoC just cut rates, an upside surprise won’t have any effect while a poor number will reinforce the negative outlook.

The short term outlook for oil prices isn’t doing the Loonie any favours. WTI is under pressure and flirting with support at $50.00/bbl which if broken will lead to a test of $46.75/bbl. Ongoing Opec and US over production plus expectations that Iran oil will soon it the market have put a cap on short term gains.

It is fairly safe to guess that a lot of traders missed the move in USDCAD this week. Sure, there were plenty of predictions that the BoC would cut rates but many lacked conviction especially after last Friday’s Canadian employment report. If so, there will be plenty of USDCAD buyers on dips which will limit USDCAD downside next week.

The struggling Loonie can’t do right for doing wrong,

with next week’s retail sales unlikely to stop its decent. Photo: iStock

USDCAD technical outlook

The USDCAD rally above strong resistance in the 1.2780-1.2835 area was significant as it broke the top of the range that had survived numerous attempts since January. The currency pair is now returning to territory unseen since late 2008/early 2009. It also sets up a fairly unencumbered run to the 61.8% Fibonacci retracement level of the entire 2002-2007 range which is 1.3450.

The intraday technicals are bullish while trading above 1.2950 but will run into resistance in the 1.3000 and 1.3050 zone. A break of 1.3050 will extend gains toward 1.3400. A move below 1.2950 will lead to 1.2900-10 which if broken should see additional weakness to 1.2850.

USDCAD daily with projected trading range for next three months

Source: Saxo Bank


USDX muscle flex gives USD a bid

The US dollar index (USDX) broke above the downtrend line from early April at the beginning of July, after being thwarted on numerous prior attempts. That set the stage for further, choppy gains. The long-term uptrend from last June remains intact while trading above 95.30. A break of the 98.00 area argues for further gains and a retest of the March peak of 100.70.

Shorter term, the intraday technicals are bullish above 97.60 with a break below extending losses to 97.20 and then 96.50.

USDX daily

Source: Saxo Bank

The week that was

This week was not unlike a game of Piñata. FX traders played the role of a festively coloured basket and central bankers, politicians, auctioneers and sundry statisticians wielded the sticks.

Monday started with markets in a tizzy on news that Greece and the EU had reached a deal. It ended in New York on the same note. In between, EURUSD started a slide that lasted all week.

Tuesday was nuclear. News that the US and partners had reached an agreement to curtail Iran’s nuclear ambitions undermined oil prices and the Canadian dollar. Cable traders were rocked when Mark Carney felt the need for attention and started nattering about interest rate increases. GBPUSD soared. The US dollar shrugged off a weaker than expected Retail Sales report as traders waited for Janet Yellen’s testimony before Congress.

Wednesday, the Loonie took a turn as a piñata. The rate cut appeared to have caught FX traders under positioned and the Loonie was beaten every which way but loose. Janet Yellen even took a stick to the bird when she reiterated her opinion that US rates were going up in 2015. USDCAD soared from 1.2735 to 1.2955. US dollar buyers came out of the woodwork across the G-7 spectrum. A terrible GlobalDairyTrade auction curdled Kiwi and NZDUSD shed over 1.5%.

Thursday started with news that Greece’s parliament passed the bail-out proposals. The EU is giving Greece money to pay the EU. News video showed Greek citizens singing torch songs in the streets or maybe they just torched the streets; it was hard to tell through the smoke and riot police.

Central bankers, Yellen, Draghi and Carney were all talking. The first two sounded like an echo. Mr. Carney fined tuned Tuesday’s interest rate comments by throwing out the “turn of the year” as a possible rate hike time. GBPUSD barely reacted as the BoE governor has a history of talking out of both sides of his mouth.

The week that will be

After the tension, drama and volatility of the previous week, the week coming up will have all the thrills and excitement of a mime performing a one act play in a darkened theater.

Traders will remain alert to new Greece developments but for now, the timer on the ticking time bomb has been reset. Oil prices will be a wild card as a newly “reformed” Iran is eager to swap oil for access to Western ATMs.

Kiwi traders will eagerly await the Reserve Bank of New Zealand interest rate decision on Wednesday/Thursday Cable traders will be keenly interest in the Bank of England minutes as well as UK CPI.

US data is mostly second rate and Canadian Retail Sales data on Thursday is kind of irrelevant so soon after the BoC cut rates.

– Edited by Oliver Morrison

Michael O’Neill is an FX consultant at IFXA Ltd.

Strange times for Dr Strangelove 14July15


Strange times for Dr Strangelove

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US shoppers aren’t shopping
  • USDCAD bullish, trading choppy
  • History shouldn’t be ignored

So Iran won’t flood the market soon? What about those 40 million

barrels’ worth reported to be stored at sea? Photo: iStock

By Michael O’Neill

This morning’s worse than expected US Retail Sales data appears to have deflated expectations that Fed chairwoman Janet Yellen’s Congressional testimony tomorrow may have a hawkish bite to it. It wasn’t so evident in EURUSD trading, but certainly noticeable in JPY and Loonie trading. Does the Iran nuclear deal mean that Dr Strangelove has left the building or is he merely behind a sand dune, kicking up a little dust.

Loonie goes nuclear

News that Iran, the US, UK, France, Germany China and Russia signed a deal to limit Iran’s uranium enrichment to “peaceful” purposes in exchange for the lifting of sanctions propelled oil prices lower and USDCAD higher. The Great Satan and the Axis of Evil has been demoted to the Little Devil and the Axle of Wicked.

A Bloomberg story quoted someone named Ellie Geranmayeh from the European Council of Foreign Relations saying “This is probably going to go down in history as one of the biggest diplomatic successes of the century”. The late UK prime minister, Neville Chamberlain, is spinning in his grave, having once made an even sillier proclamation after a meeting with Adolf Hitler in 1938he’s asking "Does anyone ever learn?”

This deal isn’t necessary a sure thing, either. The US Congress has 90 days to ratify the agreement. What happens if Congress says “No” while the UK, Germany, France, China and Russia all say “Yes”? It is hard to believe that the politicians in these countries will subordinate themselves to Uncle Sam. Does the US go it alone and keep the sanctions in place?

Loonie, nuclear deal and oil

The drop in oil prices following the announcement of the deal was short lived. WTI has since bounced from support at $50.85 to $52.15, currently, on the back of both profit-taking and sentiment that it will take Iran a quite a few months to ramp up production. Perhaps they are forgetting the reports that Iran has 40 million barrels stored in oil tankers at sea, just waiting for this announcement.

There are numerous forecasts for WTI oil prices in the coming months. Some are calling for a retest of the March low while others predict a return to $61.50/ bbl. Strong arguments can be made for prices at both ends of the spectrum. WTI oil is hovering just above the exact middle of the March-June range leaving lots of room for a move in either direction. However, if the weak oil price scenario is based on high inventories and high production, the addition of substantial supplies of Iranian crude has to favour those looking for $40.00/bbl.

The drop in oil prices also led to a drop in the Loonie with WTI and USDCAD moving hand in hand.

Chart: WTI oil highlighting March-June range

Source: Saxo Bank

The Loonie and China

China demand fuelled the commodity price rally and the China slowdown is behind the drop in commodity prices in the past month. The Thomson Reuters /Core Commodity CRB Commodity Index is well off its peak since the end of June, undermined by the recent equity market collapse. The drop in Chinese equity prices has raised concerns that the local economy is tumbling further than what was anticipated by senior Chinese officials. The jury is still out as to whether Chinese intervention to provide liquidity and support to the equity exchanges is working. Last night’s drop in 7 of 11 listed exchanges suggests, perhaps not.

USDCAD is often regarded as a commodity bloc currency and is in demand as commodity prices fall

Chart CRY:IND 1 month

Source Bloomberg

Germany forgetting lessons of history

Angela Merkel and Germany are feeling pretty smug after pummelling Alexis Tsipras and his aspirations for Greece debt relief. And so they should be. Germany apparently got its lederhosen in a knot after Greece walked away from debt negotiations, skipped an IMF payment and called a referendum. For that sin, Greece was made to swallow a new and more onerous debt package than what was originally being discussed.

But was it fair or even wise? A negotiation implies that the involved parties exchange wants and needs to arrive at a mutually agreeable result. Germany held all the cards. Greece’s only option was a catastrophic financial implosion which would have decimated the country.

The Treaty of Versailles should have taught Angela Merkel, Germany and the Eurozone a few lessons on the dangerous implications of implementing onerous, unilateral financial terms on a country.

– Edited by Clare MacCarthy

Michael O’Neill is an FX consultant at IFXA Ltd.

Greece deal and BoC will drive Loonie lower


Greece deal and BoC will drive Loonie lower

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Commodity bloc currencies sink
  • Greece proposes what they rejected
  • BoC primed to cut rates

By Michael O’Neill

It has been a lively session to end an even livelier week that had more than its share of drama. Greece has ended the week kind of proposing to accept what they rejected in a referendum a mere 5 days ago causing EURUSD to whip-saw.

China has been in the spotlight all week with the crash and then rebound of the their equity markets. The question remains; would the equity sell-off have been even nastier if all the listed equities were actually traded? The same question goes for the rebound.

A Janet Yellen speech today will give traders something to chew on while they await the pronouncements from the EU meetings this weekend.

BoC rate cut ahead

The probability of the Bank of Canada (BoC) cutting rates on Wednesday July 15 increased dramatically with the release of the Merchandise Trade report on Tuesday putting a serious dent in the prospects for an export led recovery in the 2nd half of the year.

Today’s Canadian employment picture managed to muddy the waters. Canada lost 6,400 jobs which was very close to the forecast (down 10,000) and the previous month’s data was revised upward to 63,000. All in all, it was an ‘Ok” report but will dissuade the BoC from a decision to cut interest rates? The prospect of ongoing domestic economic weakness, uncertainty in China, downward trending oil prices and a looming Federal election may force their hand.

Many Canadian bank economists have changed their forecasts and penciled in a BoC rate cut next week giving rise to arguments that a cut is reflected in the current exchange rate. I don’t agree.

When the BoC cut rates in January, USDCAD gained 0.0450 points that day and shed another 0.0400 points over the next seven days. Expectations for a July rate cut only started to really take hold after the soft GDP report and sentiment increased with the merchandise trade data.

However USDCAD only climbed 0.350 points and most of that was because of lower oil prices. If the BoC cuts rates, I believe 1.3000 will print.

The Loonie and Oil. Together again

The Loonie and oil’s love-hate relationship is back in love mode. The break of $55.11/bbl support in WTI at the beginning of July precipitated a USDCAD rally through resistance in the 1.2490-1.2505 area. WTI, which had been relatively stable for the previous two months came under renewed selling pressure on rising inventories, over-production and the prospect of additional supply from Iran.

US President Obama appears very motivated to seal a nuclear deal with Iran, in part to create a legacy as a “statesman”. (lots of work, there)

The International Energy Agency (IEA) maintains that the world is “massively oversupplied”. In a report released today, the IEA noted that global oil supply surged by 550,000 barrels per day (Kb/d) in June with Opec supply reaching a three year high in June.

The intraday and short term WTI technicals are bearish following the break of the uptrend line from March and the subsequent breach of support in the $54.20-54.50 area. The bounce in prices over the past two days is more a factor of US dollar sentiment and positioning rather than a change in trend. A break of minor support at $50.10 will lead to $47.50 and then the March low. A recovery above $55.60 would negate the downward pressure.

The outlook for sharply lower oil prices will put a cap on short term Canadian dollar upside.

USDCAD technical outlook

USDCAD is in an uptrend from the June 15 low which remains intact above 1.2540. There is strong support in the 1.2660-70 area. A break of intraday resistance in the 1.2730-40 area should extend gains to 1.2770 and then the 1.2820-50 area. A break above 1.2850 suggests a move to 1.3050. A move below 1.2610 would argue that a short term top is in place1.2740 and point to further 1.2530-1.2680 consolidation.

Chart: USDCAD 4 hour with uptrend

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

The week that was

It started with “όχι” and ended with moxie. At the beginning of the week Greek voters rejected the proposal by creditors in a referendum and by Thursday had submitted their rebuttal and a request for 53.5 billion euros. In between, there were bouts of turbulence in various regions across the globe.

Monday was also the day the oil market sprung a leak and WTI dropped 7% to touch $52.50/bbl, giving USDCAD a lift. The rest of the day was spent digesting the implications of the Greek “no” vote.

Wow! The WTI is giving USDCAD a lift! Photo: iStock

Tuesday’s Asian session was fairly subdued after the Reserve Bank of Australia’s interest rate decision and statement proved to be a nonevent however the commodity currency bloc remained under pressure. In Europe, a series of negative headlines pertaining to Greece drove EURUSD sharply lower. The “risk aversion” sentiment permeated the New York day, driving the US dollar higher across the board, except against JPY which enjoyed a strong rally.

China knocked Greece off the front pages on Wednesday with a 7% plunge in equity markets to start the day, prompting the Chinese government to act to shore up markets. The equity market decline could have been worse but reportedly, 43% of listed companies had halted trading in their stocks.

An erratic dollar sell-off, perhaps on profit taking, started to take hold in London and by the end of the NY day 4 out of 7 G-7 currencies were higher including NZDUSD. Kiwi, which had been beaten up in the previous few days, staged an impressive rally, gaining over 1.3% despite ongoing concerns for additional rate cuts. It may have helped that the FOMC minutes were rather benign, although some tried to make a “doveish” case because of references to Greek and China risks.

Thursday was fairly choppy across the globe. Aussie enjoyed a brief rally on a strong employment report which was quickly erased when the Chinese equity markets opened down 2%. That changed again and by the time Asia markets had closed the Shcomp was up 5.7%.

The Bank of England surprised no one when they left rates unchanged EURUSD gains in early Europe trading became EURUSD losses by the time New York got to work. New York traders were content to stick close to home awaiting developments from Greece. Those developments came at the end of the day with Greece officials offering pension reform, spending cuts and higher taxes, oh and by the way, a cash injection of €53 billion, if you please.

The week ahead

The week will kick off with traders reacting to the headlines and decisions made by the 28 heads of state that make up the Eurogroup. That event will set the tone for the balance of the week although there is still lots of room for a surprise. And if that meeting doesn’t fulfill the “nasty surprise” quota, perhaps really poor Chinese data on Monday and Wednesday will fill the bill.

There isn’t much in the way of top tier US data until Friday, leaving Janet Yellen’s Semiannual Monetary Policy Report to Congress on Wednesday, to provide US dollar direction. Wednesday is also the day the BoC releases its interest rate decision and statement. A 0.25 point rate cut is in the cards.

– Edited by Clemens Bomsdorf

Michael O’Neill is an FX consultant at IFXA Ltd.