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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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