Heatwave cools FX markets 21July15

Heatwave cools FX markets

Michael O’Neill

FX Consultant / IFXA Ltd


  • 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.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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