A Jackson Hole lotta nothin 28Aug15

A Jackson Hole lotta nothin’

Michael O’Neill

FX Consultant / IFXA Ltd


  • Jackson Hole Symposium may be over-hyped
  • Is the Canadian election campaign providing drama?
  • Month end Monday may be volatile

By Michael O’Neill

This year’s version of the Jackson Hole Symposium, a Davos-lite for Central Bankers, Finance Ministers etc., is being elevated to a level of importance usually reserved for Sermons on the Mount. Pundits are predicting market moving insights from the likes of Bank of England (BoE) governor Mark Carney and Federal Reserve vice chairman, Stanley Fischer.

This may be merely a case of wishful thinking. Someone, somewhere opined that the Symposium would be the ideal vehicle for senior Central Bankers to soothe jittery nerves in the light of this week’s equity market turmoil.

A shiny emperor. But what about his new clothes? Photo: iStock

That thought has appealed to a large number of people especially those caught up in this week’s equity debacle. Many are looking to Mr. Fischer to provide clearer signals as to the timing of a rate hike while Mr. Carney may use the forum to ignite UK rate hike chatter.

Unfortunately, it is more likely to be an Emperor’s new clothes event. People will see (or hear) what they want right up until reality hits them between the eyes. Mr. Fischer will remain vague. The Fed has gone to great lengths to tell markets that rate moves are data dependent. With the key nonfarm payrolls release not until next Friday, it doesn’t make any sense for Mr. Fischer to outline a course of action this weekend.

Canadian election drama

There is drama building in the Canadian election campaign but not the drama that you would expect. It is more of the educational variety, more specifically, a former drama teacher and leader of the Liberal party, Justin Trudeau, has declared he would run a $10 billion deficit for the next 3 years as part of a decade long plan to spend $125 billion in infrastructure spending in order to grow the economy.

This is the same tactic that a succession of Liberal governments have employed and the only economic growth is, according to a Fraser Institute report, a 1,366% rise in taxes since 1961. Today, a Canadian family earning $79,010 spends 42% of income on tax. Brother, can ya spare $10 billion!

Talking of building and running massive deficits would be a spicy batter on the Loonie which is already being deep-fried by low oil prices.

Canadian dollar outlook:

Oil prices continue to be the main driver of USDCAD direction although yesterday’s Liberal Party announcement advocating new and massive budget deficits isn’t helping matters. WTI has had a healthy bounce after hitting a low of $37.85/b on Monday.

However, the rally stalled on the downtrend line from July (at $43.50/b) and oil has retreated. Interestingly, USDCAD has failed to participate in this latest bout of oil strength.

One possible explanation is that month end portfolio rebalancing flows are expected to result in USD demand. In addition, Canadian dollar sentiment is negative. China’s economy appears to be slowing faster than expected and oil prices are expected to remain low for longer.

Some start smiling when looking at the recent soar in oil prices. Photo: iStock

The up-then-down pattern of Canadian employment reports this year, suggests that next Friday’s release will show Canada lost jobs. That will fuel USDCAD buying, doubly so, if the US NFP report beats expectations.

Tuesday’s GDP report may post another negative number which if it does, would be the sixth consecutive month. Technical recession or not, a negative number will crush the Canadian dollar.

USDCAD technical outlook

The USDCAD technicals are bullish, both intraday and short term. This morning’s move back through the intraday downtrend line at 1.3240, has refocused the spotlight on this week’s 1.3350 high while 1.3450 is lurking just behind.

A failure to extend gains above 1.3350 should lead to a retest of support in the 1.3140-60 area. A move below 1.3140 would argue that a short term top is in place and risk further declines to 1.3000

For the week ahead, USDCAD support will be at 1.3190 and 1.3140. Resistance will be at 1.3305, 1.3350 and 1.3450.

Chart: USDCAD with short term uptrend

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

The week that was

This week had everything. Blind “get-me-out” panic selling of equities roiled FX markets, particularly euro and yen, at the beginning of the week which faded to an “Alka-Seltzer” moment by Thursday. (plop, plop, fizz, fizz; Oh, what a relief it is). In between, a lot of money changed hands.

Monday saw China’s equity market woes spread like a plague. The Shanghai Composite Index (SHCOMP) dropped 8.6%, a nasty move that rippled around the globe. S&P futures went limit down, warning of a 5% drop at the New York open. Kiwi got squished; plummeting from 0.6570 to 0.6208. Liquidity didn’t completely evaporate but at times it was harder to find than rain in California.

The panic subsided during Tuesday’s Asian and European sessions, but not the volatility with traders complaining about poor liquidity. G-7 currencies traded in wide bands and oil price sentiment remained negative.

Once again, the SHCOMP was down, this time 7.6% and official China seemed to have gone into hiding. Later on, official China emerged from their spider holes and took action. The Peoples Bank of China (PBoC) cut the Reserve Requirement and the 1 year benchmark lending rate.

The action was seen as too little, too late. A rally in the S&P in the New York morning turned to a loss by the close. The day ended with markets worried about further losses and speculating about reaction from the Fed.

Rushing to trade stocks? Photo: iStock

Wednesday was an oasis of tranquility, at least compared to Monday and Tuesday. The SHCOMP gained 3% and set the tone for North American markets which also closed with large gains. US Durable Goods delivered a much better-than-expected result, yet G-7 currencies appeared unimpressed.

The end of week/weekend, Jackson Hole Symposium started attracting attention in hopes that the Fed Vice Chair Stanley Fisher would shed some light on how the equity market movements would affect the FOMC rate decision.

Thursday, a degree of normalcy descended over markets. Crude oil rebounded 4% and European equity markets climbed. US data was strong. Jobless claims fell to 271,000 and 2Q GDP handily beat forecasts. For an FOMC that says rate moves are “data dependent”, this GDP data could make a compelling case to hike rates in September.

The week that will be

The week that just ended will be a tough act to follow but the coming week may be up to the challenge. The equity market meltdowns of last week will still be fresh memories which may cause outsized currency reactions if global indices start to decline. More than likely, the week will start and end with a bang.

On Monday, there may be big moves in G-7 currencies due to month end portfolio rebalancing flows, which may be larger than usual due to the equity market declines. On Friday, US and Canadian employment reports should cause some fireworks.

In between, the Reserve Bank of Australia and the European Central Bank rate decisions and statements will be closely monitored to see what, if any affect, the equity market turmoil has on these central banks’ outlooks.

– Edited by Clemens Bomsdorf


Canadian dollar sinking in deep oil pool 25Aug15

Canadian dollar sinking in deep oil pool

Michael O’Neill

FX Consultant / IFXA Ltd



  • China rate cut helps equities
  • Falling oil will undermine Loonie
  • USDX supports correction theory

By Michael O’Neill

The not so surprising rate cut by the Peoples Bank of China (PBoC) spurred a 320 point rally in the Dow at the open when a combination of bottom-feeders, profit takers and maybe new buyers came back to the market. That optimism hasn’t stuck to the WTI oil market where early gains have been pared back and pushed USDCAD back toward yesterdays peak.

Melt-down or temper-tantrum?

For many traders, Monday’s market madness was either a money maker or a money-taker. And for others, it was both. Gains became losses and vice versa. Every breach of a technical level attracted increasingly panicked investors wanting to protect ever-shrinking profits.

A USDCAD bear? Photo: iStock

It was a big day. FX trading and equity share volumes were through the roof as investors tried to avoid the type of losses that occurred on October 13, 2008. Ironically, their actions nearly replicated the 2008 move.

Was it a meltdown or merely a temper-tantrum? Bank on temper-tantrum. October 2008 precipitated a global financial crisis, the effects of which are still being felt (Greece, for one).

Since then, global equity indices have been slowly recovering led by US equity indices which have enjoyed healthy gains. The Dow Jones Industrial Average (DJIA) has rallied from 10,913.38 on Sept.30, 2011 to a peak of $18,351 in Feb. 2013. In that same period, the S&P500 index has gone from a low of 1,099.23 to a peak of 2,133.02.

Yesterday’s price appears to be just a correction. The 2008 financial market meltdown erased 11 years’ worth of gains in the S&P500 and 6 years’ worth of gains in the DJIA. Monday’s declines, while nasty, have merely brushed the 23.6% Fibonacci retracement level of the S&P500 index and 38.2% level on the DJIA.

Chart SPX daily

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

USDX says temper-tantrum as well

The US dollar index (USDX) snapped a two month uptrend with the plunge below support at 95.90 leading to a test of the long term uptrend line at 93.08 and close to Fibonacci support at 92.71. It has since bounced and is in an intraday uptrend above 93.74 with a break of 94.30 targeting 95.60. A break below 92.70 would target 90.24 and suggest meltdown rather than temper-tantrum.

Chart: USDX daily with Fibonacci

Source: Saxo Bank

Oil says meltdown

The short term outlook for oil still looks black. China’s rapidly slowing economy points to less demand for crude, yet Opec and non-Opec producers are pumping like there is no tomorrow. For many US shale producers, there may not be a tomorrow if they don’t maintain or increase production to service heavy debt loads with an ever dwindling cash flow.

Iran, soon to be unshackled from onerous UN sanctions, reportedly said it would increase production and reclaim its lost export share, even if prices remain low. Saudi Arabia would be loath to let Iran’s gains come at their expense. Its a price war – maybe.

The oil technicals are bearish. Long term, the drop below $48.23/b. represented a breach of the 76.4% Fibonacci retracement level of the entire 2001-2008 range, targeting a 100% retracement which would take WTI to $17.90/b. The intraday technicals are bearish while trading below $40.00/b with a break below Monday’s low opening up a steeper drop to $32.00/b.

Chart: USOil Weekly with Fibonacci

Source: Saxo Bank

Loonie looking lost

It is hard to find a USDCAD bear and the bears that you do find are merely skins spread out in front of a fireplace. The domestic economy is slumping and the anticipated export led recovery, championed by the Bank of Canada (BoC) has failed to materialize.

The theory is that the lower Canadian dollar would spur exports. The problem is that financial mismanagement and soaring electricity rates in Ontario have chased away those same manufacturers expected to lead the recovery. The federal election, while still just an annoyance to locals, is another uncertainty to avoid and foreign investors will do just that. Tuesday’s June GDP number may result in “recession” headlines and regardless of the actual definition of a recession, it won’t help the Canadian dollar.

USDCAD technicals.

The short term technicals are bullish while trading above 1.3080 supported by the break of 1.3203, previous 2015 high and targeting a run to 1.3450. USDCAD appears to be trading eerily similar to the first 3 weeks of August where it bounced between 1.2900 and 1.3200. This time it looks like it will be a 1.3100-1.3400 range, in the near term.

Chart: USDCAD 4 hour with uptrend line noted.

Source: Saxo Bank

– Edited by Clemens Bomsdorf

The seven-year itch 21Aug15

The seven-year itch

Michael O’Neill

FX Consultant / IFXA Ltd


  • Markets battening the hatches
  • Canadian data not negative for loonie
  • US data prints could halt USD selling trend

World markets certainly seem to feel that a storm is brewing, but do the fundamentals

support a large-scale correction? Photo: iStock

By Michael O’Neill

The seven-year itch is a term used to describe a perception that marital happiness declines around the seventh year of marriage. That may or may not be true, but recent events suggest that it is certainly applicable to global financial markets.

If so, 2015 is right on target. The proof is not just in the pudding, it is below:

  • 1987: Stock market crash.
  • 1994: "Tequila crisis" (Mexico devalues the peso).
  • 2001: Dot.com bubble burst.
  • 2008: US led Global Financial Crisis.

It is now 2015, seven years after the start of the financial crisis. The jury is still out as to whether this is the oil market crisis, the China crisis or another global equity market meltdown crisis…

Whatever it is, the blades are spinning and the stinky stuff is starting to hit them.

Ten(ge) things that could scratch the itch

1. Currency wars: The devaluation of the Kazakhstani tenge and the Vietnamese dong on Wednesday, following last week’s CNY devaluation continued the streak of emerging market currency devaluations. G7 currencies have also been actively debasing their currencies.

2. China economic meltdown: Last night’s PMI manufacturing index was the weakest since the start of the US-led financial crisis in 2008. The surprise CNY devaluation is another indication that China’s official target of 7% GDP growth may just be wishful thinking.

3. China equity market sell-off contagion: China’s equity indices have dropped substantially since June and remain in a downtrend. The recoveries have been shallow and manufactured by the government. The weakness is spilling into the global equity indices which are all down on the week.

4. Bullets over Korea’s: The figurehead/nutbar/"Supreme Leader" who leads North Korea had a missile fired into South Korea to protest a loudspeaker broadcasting “propaganda”. He is just one temper tantrum away from launching a nuclear attack.

5. Additional oil price collapse: Who can hold out longer; Saudi Arabia and other Middle East nations awash in cheap-to-access oil or highly leveraged US shale oil producers pumping more expensive crude? Production keeps increasing and demand is not keeping pace.

6. Greecing the skids again: Greek prime minister Alexis Tsipras has quit and called an election for September 20. Politics is crazy at the best of times so what happens if another party usurps the mantle of “anti-austerity party” from Syriza? The EU would be quick to put a “stop payment” on any and all bailout funds and we get to relive January-July all over again.

7. Rising risk of global deflation: Wednesday’s lower-than-expected CPI report was another weak G7 inflation report. Rising deflation concerns are making global central bankers nervous.

8. Russia/Ukraine/EU sanctions. The Russia/Ukraine conflict has not gone away, except from the front pages of Western newspapers. At what point does the effect of low oil prices and EU sanctions get Russia to react? And what will Nato’s response be?

9. European immigration crisis: The massive onslaught of economic and war refugees from Africa and the Middle East threaten to overwhelm the dwindling humanitarian capabilities of Italian, Greek and Eastern European economies and raise the risk of widespread social unrest.

10. History repeating itself: September and October are notorious months for financial markets – why should this year be any different?.

Equity traders have traversed the summer doldrums and are now preparing

for the autumn panic. Photo: iStock

USDCAD outlook

USDCAD trading has frustrated dollar bulls this week. Every time it looked like it was getting up a head of steam to crack above resistance in the 1.3180-00 area, declining oil prices stopped declining and the US dollar retreated particularly against the euro.

Thin markets and positioning may have worked in the Canadian dollar’s favour. Buying USDCAD was a favourite trade proposed by numerous major bank strategists but the lack of upside, the proximity to long term resistance and general risk aversion nervousness suggests that some positions were quickly cut.

This morning’s CPI and Retail Sales data releases were close to forecasts and failed to provide any additional sentiment to buy USDCAD.

USDCAD technicals

USDCAD continues to spin its wheels within a 1.2950-1.3200 band, however pullbacks from the peak are becoming shallower every day.

The uptrend from July 15 remains intact above the 1.3010-20 area which guards major support at 1.2950. Another move above 1.3130 keeps the focus on 1.3200 and then 1.3450. A move below 1.3010 suggests that a short-term top is in place risking a break of 1.2950 which could extend losses to 1.2800.

For the next week, USDCAD support is at 1.3010, 1.2950 and 1.2900.

Resistance is at 1.3130, 1.3180 and 1.3230.

USDCAD four-hour with trading zone shown:

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

Source: Saxo Bank

The week that was

The Federal Open Market Committee minutes were supposed to be the marquee event of the week but instead they had a Taylor Swift/Kanye West Grammy moment, with China equities and oil prices playing the role of the disgruntled rapper.

Monday started quietly and indecisively. US dollar gains in Asia faded in Europe which set the tone for New York trading. Weak, third-tier data was enough to spark a round of US dollar selling.

On Tuesday, the Reserve Bank of Australia minutes were highly anticipated. What a letdown! The minutes were consistent with the prior statement and therefore a non-event.

Sterling turned bid in Europe following better-than-expected inflation data, but was unable to sustain its gains. In New York, strong housing data added support to the September rate hike camp. Kiwi turned bid on expectations of a recovery in the GlobalDairyAuction which proved to be the case.

Wednesday was the day that Chinese equities and WTI jumped into the FOMC minute’s spotlight. Wild swings in Chinese equity indices distracted FX traders in Asia. European markets traded sideways ahead of the US CPI data. A lower-than-expected print caused a short-lived kerfuffle.

The longer-lived kerfuffle came with the release of the FOMC minutes. First, Bloomberg leaked the minutes 10 minutes early and compounded the error with a misleading headline. FX traders were flummoxed and fresh lows in WTI oil only made things worse.

Thursday’s FX session was chaotic. The prevailing wisdom was that the FOMC minutes were “dovish” (a rather dubious conclusion) and then a surprise devaluation of the Kazakhstani ienge (USDKZT) spooked emerging market currencies.

GBPUSD drifted lower despite solid Retail Sales data, undermined in part by demand for EURGBP. The New York session was nervous. US equity indices were down as was the US dollar against EUR, JPY and CHF. And just to add drama around the September 17, FOMC meeting, Greek prime minister Alexis Tsipras resigned and called an election for September 20.

The US dollar was under pressure at the close in New York and stayed that way into Friday’s New York opening.

The week that will be

This is the last full FX trading week of August. It may also be the week that the US dollar mounts a counter-attack and recoups some of the previous week’s losses. There is a lot of US data on tap, headlined by Wednesday’s Durable Goods report. The headline number is expected to be flat, though, and well off the June 3.4% gain.

An upward surprise would get September rate hike chatter re-started.

If the rest of the US data (GDP, PCE, Michigan Consumer confidence, etc.) consistently beatexpectations, it should help curb the enthusiasm to sell US dollars.

A speech by the RBA governor will entertain AUDUSD traders on Tuesday, while the annual Jackson Hole Symposium starting on August 27 may distract traders.

However, without Fed chair Janet Yellen in attendance, it’s just another conference.

— Edited by Michael McKenna

What to expect when you’re expecting.nothing 18Aug15

What to expect when you’re expecting…nothing

Michael O’Neill

FX Consultant / IFXA Ltd


  • US housing starts number lifts loonie
  • The wait for the FOMC minutes begins
  • Another China equity slide making markets nervous

By Michael O’Neill

China equity indices had another bad night, losing around 6%. In a market devoid of top-tier data this was all the news needed to make jittery traders even jitterier. The US housing starts data was better than expected and provided the US dollar with a bit of a lift.

FOMC minutes will be tradable

The bar is set low for this week’s Federal Open Market Committee meeting minutes to provide fresh trading fodder. The FOMC statement didn’t provide any information to encourage or dissuade those expecting a rate hike in September, so it is unlikely that the minutes will tell a different story.

That said, remember the words of Uncle Ben in Spiderman (2002 version) “with great power comes great responsibility”. If Peter Parker was an FX trader he would have heard “with low expectations and low liquidity comes great volatility”.

Summer markets are characterised by lighter than normal volumes for a host of reasons, chief among them being holidays and this month isn’t any different. Thinner volumes tend to exaggerate price moves on news or data surprises. Such was the case on July 23, with the release of the Employment Cost Index and again yesterday, with the release of the Empire State Manufacturing Index. Both releases are bottom-tier data but they still caused outsized moves. Thin markets are largely to blame.

Wednesday’s FOMC minutes are billed as “top-tier” information although this week’s version is more of the bottom-feeder ilk. These minutes are basking in the glory of previous FOMC minutes that may have provided some sort of inside information which won’t be found tomorrow. If so, the move, in any direction, will be wrong, leaving the current trading ranges intact.

Those ranges are: EURUSD 1.0900-1.1200, GBPUSD 1.5420-1.5820, USDJPY 124.00-1.2525, AUDUSD 0.7200-0.7450 and USDCAD 1.30-1.3200.

The official record of the latest chat between Janet Yellen and her colleagues on the

FOMC is unlikely to reveal much of their intentions. Photo: Federal Reserve

USDCAD outlook

In 1972, Stealers Wheel sang “Clowns to the left of me, Jokers to the right. Here I am, stuck in the middle with you”. That songs sums up the USDCAD market today.

USDCAD has been stuck in a 1.2950-1.3200 range since July 30 and the current price of 1.3083 is almost smack-dab in the middle of that range. This morning’s US housing data was pretty much as expected and good for the Canadian dollar as well. A strong US economy will provide a much needed lift to the Canadian economy.

In the past month, the Canadian dollar has been the laggard of the commodity bloc currencies, having lost 6.1% against the Aussie dollar and 1.90% against Kiwi. Oil prices are the common denominator. The plunge in WTI from $49.30/barrel to $41.70/b, at the time of writing, have helped make the Canadian dollar one of the favourite shorts among currency strategists. As long as WTI remains below the $43.50/b area, Canadian dollar upside is limited.

At the same time, oil has managed to stay above the psychologically important $40.00/b threshold. That has made long USDCAD traders leery of getting caught in a correction and quick to take profits. Until $40.00/b level breaks, USDCAD will be hard pressed to extend gains above 1.3200.

Chart: US oil hourly – expect no respite for the loonie while the $40 handle holds

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

USDCAD technical outlook

USDCAD is in an intraday downtrend while trading below 1.3130 looking for a break of 1.3070 to extend losses below 1.3050 to 1.2995-1.3010.

The short-term uptrend from June 15 comes into play at 1.3020 which if broken could lead to a drop to 1.2802, representing a 38.2% Fibonacci retracement of the 1.2150-1.3203 range for the past month.

Chart: USDCAD 4-hour with trading range and Fibonacci levels

Source: Saxo Bank

– Edited by Clare MacCarthy

Weekly wrap-China supplants Greece in the trader worry file

China supplants Greece in the trader worry file

Michael O’Neill

FX Consultant / IFXA Ltd


  • US data supports greenback
  • Loonie tracking oil price moves
  • Greece worries put to rest

By Michael O’Neill

Today, the Greece parliament passed the latest bail-out agreement putting "Grexit" in the trash bin and ended the risk of a debt default, for now. China fears and overproduction helped WTI to drop to prices not seen since 2009 which combined with worse-than-expected (but low level) Canadian data is putting downward pressure on the loonie.

The tempest in a China tea pot

The surprise currency devaluation by China poured scalding hot tea right into the lap of the global FX market, injecting a huge dose of China economic uncertainty into the picture.

China maintains the move was merely an adjustment to address an imbalance between the CNY reference rate and the market rate which was affecting the reference rate’s role as a benchmark.

Maybe so, but the move increased the number of skeptics who believe the devaluation was necessary to jump start an economy that is performing well below the “official” measures of growth.

China is the new Greece

Just as one crisis gets resolved another bigger and better one comes out of the woodwork. The Greek parliament just passed the latest bail-out agreement which ends the risk of a Greek debt default and “Grexit”. At least until next time.

The People’s Bank of China currency move this week has radically altered the FX landscape. For the most part, the risk of a Greek default or exit from the Eurozone was really a regional problem. Whether Greece stayed, left or defaulted would have had a minimal FX impact in the rest of the G-7 currencies.

China is different. China is the 800lb gorilla in mist and the mist is the global economy. The evidence is clear in the reaction of the commodity bloc currencies to speculation of a larger-than-anticipated slowdown in China.

FX markets remain fixated on the timing of a US rate hike but with the FOMC meeting over a month away, traders will make mountains out of mole hills with any large deviations in upcoming Chinese data, exacerbated by August being holiday month for many people.

This scenario should play out until the September 16-17 FOMC meeting statement and press conference.

As Greece risk fades, China enters the picture. Photo: iStock

Loonie and oil – not mixing well

The fall-out from the perception of a rising risk of a slowing Chinese economy splattered commodity prices including oil. The prospect of reduced demand for oil by China coupled with an increasing glut of crude has weighed on oil prices. WTI reached a six-and-half-year low this morning and although it has bounced the downtrend persists.

The prospect of lower oil prices is not sitting well with the Loonie, already under pressure from sluggish economic growth, weak exports and the expectations for a US interest rate increase in September.

USDCAD technical outlook

USDCAD is in a short-term uptrend while trading above 1.29600 but unless 1.3200 breaks decisively there is a risk of choppy trading within a 1.2900-1.3200 trading band. USD support is at 1.3030, 1.2990 and 1.2950. Resistance is at 1.3080, 1.3130 and 1.3180.

USDCAD daily with trading band highlighted

Source: Saxo Bank

The week that was

This was the final week in the time of the year known as the “dog days of summer” and this week the dogs were barking mad.

The week wasn’t expected to be anything special. The only top tier US data release was retail sales and that wasn’t scheduled until Thursday.

Monday started with Asia traders still digesting Friday’s US nonfarm payrolls report and then having to deal with weak Chinese data. It was a sign of things to come. Fed speakers got into the act in New York, with vice chair Stanley Fischer, a noted hawk, cooing like a dove and another hawk, Atlanta Fed president Dennis Lockhart, sounding less hawkish. Twitchy traders didn’t like the sounds and they sold US dollars.

China was the show on Tuesday. The PBoC devalued the yuan by a mere 2% and markets world-wide reacted like the Four Horseman of the Apocalypse had arrived. The US dollar rallied across the board with Aussie and Kiwi being hardest hit.

Wednesday was a replay of Tuesday although less extreme. USDCNH fixed another 1.6% higher than Tuesday and the PBoC had another press conference to reiterate that the yuan devaluation was merely a way off addressing an imbalance between the reference rate and the market rate. Traders appeared to have accepted the PBoC explanation because the US dollar was down across the board by the end of the New York day.

By Thursday, a degree of calm had come over FX markets, in a large part due to the stabilisation in the Chinese currency. However, questions about the true health of the Chinese economy continued to pressure commodity prices. Oil prices remained under pressure due to rising supplies and increased production. The highly anticipated US retail sales data release beat expectations and helped the US dollar recover.

The week ahead

There isn’t a whole lot of anything to inspire traders at the beginning of the week which suggests that the China USDCNY fix will be on everyone’s radar screens. Tuesday will be all about the Reserve Bank of Australia minutes and a slew of data releases from the UK. The week gets more interesting on Wednesday, in the New York afternoon with the release of the FOMC minutes especially in light of this week’s speeches from Lockhart and Fischer. The Jackson Hole Symposium starts on Friday but Janet Yellen is reportedly skipping the party which should diminish its importance to traders.

Fed-speak, China tweak leaves commodity bloc weak 11Aug15

Fed-speak, China tweak leaves commodity bloc weak

Michael O’Neill

FX Consultant / IFXA Ltd


  • China devaluation rather understated
  • Oil is key to USDCAD
  • Fed speakers confuse traders

China’s devaluation might hamper the people’s love of travel but the relatively minor weakening of the currency should have little more than minimal impact on USDCAD. Photo: iStock

By Michael O’Neill

The commodity bloc got rocked overnight on news that China devalued its currency. AUDUSD led Kiwi and the Loonie lower as traders concluded that the devaluation was evidence that the Chinese economy was faltering more than expected.

The People’s Bank of China maintains that it was a one-off move to align the fix with market rates.

That may be true because as devaluations go, a 2% currency decline is often an intraday move in G10 trading. In addition, against the US dollar, CNY is only down 1.63%, year-to-date while NZD has dropped 17.3%, Aussie is down 10.9% and the Canadian dollar is down 11.7%.

So as devaluations go, the Chinese move is pretty lame.

The big question for traders is whether the CNY devaluation is truly a one-off event or a signal that the slowdown in Chinese economic growth may be worsening and additional devaluations may be in the cards.

Channelling Alan Greenspan

“I know you think you understand what you thought I said but I’m not sure you realise that what you heard is not what I meant” (quote attributed to Alan Greenspan)

FX traders are complaining about the mixed messages coming from Federal Open Market Committee members in recent days. (Atlanta Fed President Lockhart, FOMC Vice Chair Fisher).

Traders believe that Fischer and Lockhart are deliberately misleading. One day, Lockhart is implying that the Fed could hike rates as early as September. The next day, September isn’t even mentioned.

Fischer, usually portrayed on the hawkish side of the FOMC membership, gave a speech on Monday that analysts determined was neutral.

The aftermath of both speeches was a US dollar selloff on the assumption that a September rate hike was less likely than previously thought.

I think these reactions are exaggerated and more a factor of poor liquidity rather than a wholesale change in the September view.

Both Fed speakers maintain that any move is data dependent which is a stance that hasn’t changed since the FOMC ended forward guidance back in March. In fact, the end of forward guidance probably harkened a return to Alan Green style guidance (see quote).

September – cool evenings and the lingering possibility of a Fed rate hike. Photo: iStock

Chipping the commodity bloc

The PBoC actions overnight may have been the straw that broke the camel’s back in terms of commodity prices. China’s ability to engineer a soft landing is in question on speculation that CNY devaluation overnight could just be the first in a series.

China may be following the footsteps of the G10 currencies that have engineered a weaker currency against the US dollar this year.

It could also be exactly what the PBoC says it is – merely a one-off correction to narrow the gap between the old and new fixing.

AUDUSD and NZDUSD have been the hardest hit due to their close economic ties with China. The China news also hurt the loonie mainly on oil moves. USDCAD has rallied as oil prices have dropped but until the WTI low of $41.80-42.00/barrel seen in March is taken out, USDCAD will struggle to climb back above 1.3200.

Arguably, the Canadian dollar is in a better position to withstand additional Chinese economic slowing than either AUD or kiwi due to Canada’s close ties to America.

In fact, although it may be a stretch to say so, the most recent domestic data (Merchandise Trade, Employment, and Housing Starts) implies that strengthening US economic recovery is starting to spill over into Canada.

USDCAD outlook

The Canadian dollar is imitating Stretch Armstrong (a fad toy popular in the late seventies). Stretch Armstrong was around 15 inches tall but could be stretched to around 4 feet. That is how the loonie feels today.

USDCAD bulls are watching oil prices slowly leak lower as on-going over production and fears of an accelerated slowdown in China, weigh on prices. The bulls are also expecting higher US rates in the near term although with dwindling confidence.

The Canadian election is another negative although it is having minimal impact at the moment.

USDCAD bears are heartened by signs that the Canadian economy may be rebounding. They also believe that the long USDCAD trade has gotten stale and is ripe for a cleansing flush.

US dollar weakness against EUR is seen as evidence that perhaps a September rate hike is less than a sure thing.

The reality is that for the short term, oil prices are the key to USDCAD direction.

A break below the March WTI lows would send USDCAD toward 1.3450. A rally above the short-term downtrend line (currently $46.00/b) could lead back to 1.28750.

USOil daily with downtrend and support

Source: Saxo Bank

USDCAD technical outlook

The short term USDCAD technicals are bullish while trading above the 1.2990-1.3000 level looking for a break above 1.3160 to extend gains above 1.3210, opening up a move to 1.3450. Only a move below 1.2990 will negate the upward pressure.

USDCAD daily with support and resistance shown

Source: Saxo Bank

Mission Impossible-Range Nation 7Aug15

Mission Impossible-Range Nation

Michael O’Neill

FX Consultant / IFXA Ltd


  • US NFP print falls just short of expectations
  • EURUSD still trapped in a long term range
  • USDCAD remains at the mercy of oil prices

Home on the range: EURUSD is still enjoying its quiet night by the fire. Photo: iStock

By Michael O’Neill

Ethan Hunt, master operations agent for the International Monetary Fund and someone adept at successfully completing impossible missions will have met his match if he is tasked with breaking EURUSD out of its recent range next week. It likely won’t happen.

Today’s US nonfarm payrolls report was OK, but it didn’t provide a “Rowdy Rhonda Rousey”-style beatdown on the interest rate dove camp. In fact, it changed nothing. EURUSD didn’t even get a peek at support near the 1.0790-1.0800 and appears happier above 1.0900.

EURUSD has been nothing but resilient. It has survived sub-zero Eurozone interest rates and a near collapse of Greece, so a mere ¼ point hike in US rates shouldn’t even matter. There isn’t a whole lot on the agenda next week, at least until Thursday, which suggests that the existing 1.0800-1.1000 range will be intact next week.

EURUSD daily chart showing its commitment to the recent range:

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

Source Saxo Bank

Why so eager?

August rolled in and those traders who have not taken a summer holiday are determined to buy US dollars. It started last Friday with the release of the US Employment Cost Index (ECI), a report aptly described by TradingFloor contributor Ken Veksler as “hipster economics”. It was viewed as a bigger omen than Damien, implying that the data confirmed a September rate hike.

The Atlanta Federal Reserve’s Dennis Lockhart was seen as validating the ECI conclusion when he implied that the “bar was pretty high” not to raise rates in September and more buyers emerged.

This morning’s NFP report was actually below the consensus forecast (actual 215,000, consensus 223,000) but the spin doctors were out in full force explaining why it is a bullish report and traders bought dollars.

Why so eager? The FOMC would only be moving rates from a target range of 0.00%-0.25% to 0.25-0.50%. Fed chair Janet Yellen has repeatedly stressed ”economic conditions may, for some time, warrant keeping the target Federal Funds rate below levels the committee views as normal in the longer run”. The US dollar index (USDX) is pressing against resistance, but hasn’t broken yet

Dollar index still capped

The USDX has been in rally mode since October 2014 but gains have been capped since March 2015 by a series of declining highs which come into play in the 98.40-70 area. A break above this area would target the 100.20-70 zone. However, a retreat below 97.70 would lead to 97.00 and keep the range intact.

USDX daily chart showing capped gains:

Source Saxo Bank

USDCAD outlook

USDCAD survived an initial US dollar rally following the release of the US payrolls report. The spike to 1.3180 from 1.3055 was rapid and short lived mainly because the US data weren’t anything earth-shattering.

The Canadian data was also a tad less than stellar. Canada added 6,600 jobs but that gain was due to part-time employment. Traders didn’t seem to care. The positive number was enough of a reason to trim long USDCAD positions.

The domestic fundamentals have improved marginally. The employment report was positive and that came on the heels of a very strong Merchandise Trade report which together have given the loonie a bit of support.

Oil price movements will continue to mess with USDCAD trading and the intraday trend for WTI remains down which will limit any USDCAD weakness.

USDCAD technical outlook

The intraday USDCAD technicals are bearish following this morning’s spike to 1.3180 and subsequent retreat below 1.3090 which sets up further weakness to 1.3050. A break of 1.3050 would extend losses to the 1.2910-30 area. A break above the 1.3210 area will argue for additional gains to 1.3450.

For the week ahead, USD support is at 1.3050, 1.3010 and 1.2960 and resistance is at 1.3160, 13190 and 1.3220.

USDCAD four-hour chart showing bearish technicals:

Source: Saxo Bank

The week that was

This week started off slow. For Canadians, it was because Monday was a holiday; for the rest of the world it was because it was Monday, or at least the Monday of an NFP week.

The European day was spent digesting China and Eurozone PMI’s and news of the Canadian Federal election. New York watched commodity prices fall, the ISM Manufacturing Index fall and the dollar see-saw.

Tuesday was Reserve Bank of Australia day. Rates were left unchanged as expected but not whining about the high Australian dollar was not. That omission led traders to conclude that the RBA had turned hawkish and AUDUSD rallied.

The rest of the day was rather subdued until late in the New York afternoon. A Wall Street Journal interview with Atlanta Fed President Lockhart, a non-voting FOMC member suggested that a September rate hike was almost a given and the US dollar soared.

Wednesday’s Asian session was a continuation of New York’s Tuesday afternoon market when the dollar was bid and Lockhart was to blame. However, European traders didn’t see the Lockhart comments in the same light and the dollar rally stalled.

The New York session was lively as the Canadian dollar soared on a surprisingly strong Merchandise Trade report (and was aided by a soft US ADP employment report). WTI oil prices halted the USDCAD slide when they slowly dripped lower, however.

Thursday’s Asia session was dominated by the Australian employment report which was both good and bad: more jobs but with a higher unemployment rate. The European session was all about the UK where a highly anticipated shift to a hawkish voting pattern (expected 7-2) had boosted GBPUSD ahead of the release.

Disappointment in the result (8-1) crushed GBPUSD afterwards. New Yorkers, however, were busy with position adjusting ahead of Friday’s NFP report

The week ahead

As usual, the beginning of the week will be dominated by the fallout from the NFP report. Today’s release was mostly as expected and did nothing to dissuade September rate hike bulls. There will be a lot of Chinese data available to start the week in Asia which if poor would be bad for the commodity currency bloc.

Traders will also be looking at next week’s data, particularly US Retail Sales on Thursday for collaborating evidence to support a rate increase at the next FOMC meeting.

With every new data release being treated as a proxy for a September hike,

Fed hawks had better hope US shoppers are heeding the sign. Photo: iStock