Mission Impossible-Range Nation 7Aug15


Mission Impossible-Range Nation

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • 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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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