Strange times for Dr Strangelove 14July15

Strange times for Dr Strangelove

Michael O’Neill

FX Consultant / IFXA Ltd


  • 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.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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