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: 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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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