It’s not the end of the world, just the quarter 29Sep15

It’s not the end of the world, just the quarter

Michael O’Neill

FX Consultant / IFXA Ltd


  • US consumer confidence good for dollar
  • Japan half-year end creates liquidity issues
  • The USDCAD trend is higher

Smiling because of that warm cuppa or because she’s got her money in yen?
The Japanese currency often gets a boost at this time of year. Photo: iStock

By Michael O’Neill

The financial world isn’t collapsing despite what the newspapers, TV and online media may lead you to believe. It is merely a quarter-end. And this quarter-end is a tad more significant than the previous two. Why? In Japan, it is a half-year end.

Historically, the Japanese yen has a tendency to strengthen during the last week of September due to repatriation demand and this year is no different. In fact, the yen has gained against all of the G10 currencies this week with the exception of the New Zealand dollar, which is flat.

Another reason for the September quarter-end volatility is the three-business day vacation that Japan enjoys in late September. Last week’s Japanese holidays combined with various religious holidays elsewhere greatly diminished the liquidity pool which exacerbated FX moves. That also exacerbated the equity market rout.

FX markets will return to some degree of normality next week with a series of central bank meetings/interest rate statements and fresh top-tier data which should provide some clarity and trading guidance.

USDJPY weekly with September moves highlighted

Source: Saxo Bank

Tales from the dollar index crypt

The US dollar index (USDX) has been a tad less-than stellar indicator of US dollar direction for the past month. It is no surprise that it has been as rangebound and ragged as the currencies in the index.

However, if you ignore the 24-hour dip/rally around the September Federal Open Market committee meeting, the USDX is in a steady uptrend while trading above 95.70 which suggests further gains and a test of resistance at 96.87-97.15 area.

A move through this level would provide scope for a move to 98.30. A move below 95.70 would indicate additional 94.80-96.80 consolidation

USDX 4-hour chart demonstrates that upward trend

Source: Saxo Bank

It’s not Halloween but loonie dressed up as a pig

Halloween is still a month away yet it seems like the Loonie is in costume, dressed as Porky Pig. The question is why?

Oil prices appear to have stabilised above $43.00/barrel. The September US rate hike failed to materialise as did Mario Draghi’s expected confirmation of additional stimulus by the European Central Bank. And speaking of vanishing acts, the latest polls show that the Federal NDP party (which had been leading polls at the beginning of the month) is back in their usual third-place spot.

Canadian economic data during the past month has also been mostly positive although today’s Industrial Product Price and Raw Material Price Indexes were soft.

The Canadian dollar has been collateral damage. The global equity meltdown in the past week has led to a rise in risk aversion sentiment. The stampede of traders looking to mitigate losses occurred during a period of reduced liquidity stemming from a series of national holidays globally and quarter end. In addition, there appears to be demand for US dollars for month end portfolio rebalancing which has boosted USDCAD.

If all of the above is true, it stands to reason that the Canadian dollar will rally in October on the back of continued strong data, elimination of election uncertainty, return to normal FX volumes and the end of the quarter-end flows.

But it won’t

For the Canadian dollar, October is the cruelest month. Arguably so is November while December sits on the fence. USDCAD tends to rally during the final quarter of the year for a couple of reasons.

October is year-end for all of the major Canadian Banks. The so-called “Big 5” control the lion’s share of Canadian business banking and by default, a large amount of domestic foreign exchange flows.

On the approach to year-end, these banks tend to close their books and greatly reduce trading and risk-taking. (Risk-taking is already greatly reduced thanks to the Volker Rule) FX traders pretty much just “quote and cover”, which negatively impacts Canadian dollar liquidity.

The last quarter of the year tends to see a lot USDCAD demand as the Canadian subsidiaries of US companies repatriate their earnings.

This year, there is the added wrinkle of the Federal election. At this juncture a minority government, led by the Conservatives appears to be the likely outcome. However, there has been some debate as to whether the Liberals and NDP could form a minority government, even if the PCs have the most seats (but not enough for a majority).

That would get real messy and the loonie would likely suffer.

USDCAD technicals are bullish

The short- and long-term USDCAD technicals are bullish. USDCAD is in a short-term uptrend while trading above 1.3180 and a long-term uptrend above 1.2610. The USDCAD rally that started with the July Bank of Canada rate cut remains valid above 1.3230.

Intraday, the break above resistance in the 1.3350-80 area set the stage for additional gains to 1.3460 and then 1.3570. A break below 1.3350 would extend losses to 1.3300-10.

USDCAD daily with uptrends shown

Source: Saxo Bank


Mr Draghi is driving the bus 22Sep15

Mr Draghi is driving the bus

Michael O’Neill

FX Consultant / IFXA Ltd


  • US Home Price Index higher, traders don’t care
  • Mario Draghi’s speech is highly anticipated
  • "It’s China’s fault"

New York is welcoming the Pope, traders are probably as least as interested in hearing what the ECB’s Mario Draghi has to say. Photo: iStock

By Michael O’Neill

The Pope is in New York, traffic is a mess and traders will be on their best behavior, or if not, at least cleaning up their language. EURUSD bears are smiling but equity traders not so much. FX markets are looking for direction and guidance and hoping that is what Mario Draghi delivers tomorrow.

Draghi is the driver

At the beginning of the month, Mario Draghi warned of downside risks to the new European Central Bank (ECB) quarterly projections for inflation and growth, which themselves had been downgraded from the previous quarter.

That set the stage for tomorrow’s speech.

Last week’s FOMC meeting deflected attention from the prospect of a new and improved quantitative easing program from the ECB. But that was then. Today, traders have gone from worrying about a Fed rate hike to focusing on an ECB rate cut and EURUSD has borne the brunt of the shift.

EURUSD has dropped from 1.1460, post-FOMC to 1.1140 today. That move reflects:

a) an unwinding of long EURUSD positions established after the Fed meeting.

b) poor liquidity, exacerbated by the long Japanese holiday.

c) renewed focus on widening EUR/US interest rate differentials.

FX traders have spilled rivers of red ink getting lathered up on expectations of central bank actions and this time is no different. Mr. Draghi may be decisive but he is cautious. It took him a long time from his “whatever it takes speech” to finally kick off the eurozone version of QE He may take just as long to implement QEll.

Yellen’s in the back seat

ECB President Draghi famously said “Whatever it takes” in the speech on July 26, 2012 and solidified his reputation as a Central Banker who gets things done. His words were a soothing balm for financial markets fretting about an imminent breakdown of the euro.

Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, could have had a Draghi moment five days ago.

Global markets were waiting for Janet Yellen via the Federal Open Market Committee (FOMC) to announce the first US rate increase in 7 years.

She didn’t. Instead she had a “deer in the headlights” moment.

She basically outlined a case for hiking rates and then blamed China and other emerging market economies for financial market volatility which effectively caused “tightened overall financial conditions through the appreciation of the dollar and a widening of risk spreads". Yup the Fed didn’t need to hike rates, China did it for them.

Is this Janet Yellen there in the headlights? Or is she in the driver’s seat? Photo: iStock

EURUSD is the vehicle

Despite the fairly chunky move in EURUSD over the past 2-3 days, EURUSD is still within the 1.1000-1.1440 range that has be intact since August 17 which is part of the broader 1.08-1.1440 range seen since May. That is, of course, ignoring the aberration of the “China Equity Crash” drama around August 20th.

The recent volatility should remind traders that what goes down, goes up and vice versa. EURUSD is in a steep downtrend while trading below 1.1200 but bumping against horizontal and moving average support in the 1.1090-1.1110 area

EURUSD hourly with steep downtrend and support noted

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

USDX not much of a directional indicator

The US dollar index has not been much of a directional indicator lately. The long term uptrend from October 2014 was broken in the middle of August with the move below 96.70. The subsequent decline to 93.16 was fast and steep; and short–lived.

The bounce took the index back to 96.30-50, an area that has withstood a number of tests in the past two weeks. A move above this area targets the downtrend line from the March 2015 peak which comes into play at 97.60. Until that level is broken, the risk is for additional 93.20-97.60 consolidation.

USDX daily

Source: Saxo Bank

Blame China

The film, "South Park: Bigger, Longer and Uncut" had an Academy Award nominated song titled “Blame Canada”. The G-10 version of that is “Blame China”.

When a Central Banker (or committee) can’t make a decision, “Blame China”. Commodity prices falling? “Blame China”. Imperialistic tendencies in the South China Sea? Blame China. (Oh, that one might be legit.)

The ECB is blaming China for their woes as is the FOMC, the Bank of England, New Zealand and yesterday, it was the Bank of Canada’s turn. Iran’s leaders are sighing with relief as China has shifted attention away from their nuclear weapon aspirations.

Is Poloz talking down the Loonie?

Bank of Canada Governor, Stephen Poloz gave a speech in Calgary yesterday to an audience of oil workers. The speech, entitled "Riding the Commodity Cycle: Resources and the Canadian Economy", was as expected. It contained the usual, rah, rah, blather and stated the obvious that “adjustments can be painful for the people affected and their families”. That part of the speech was more beer commercial than economic insight. He managed to throw in the “risk de jour” and blamed slowing China growth for low commodity prices.

However, he did mention that a floating currency helps smooth the process. Was that a hint that the BoC will encourage Canadian dollar weakness? Would the Bank use the fear of deflation to justify another rate cut if oil prices dropped further? That door is certainly open.

– Edited by Clemens Bomsdorf

Rocky Horror FOMC Show 18Sep15

Rocky Horror FOMC Show

Michael O’Neill

FX Consultant / IFXA Ltd


  • US dollar well down on the week
  • FOMC dithers, traders burn
  • Loonie rally may be short-lived

By Michael O’Neill

Many traders are licking their wounds following the Federal Open Market Committee’s decision to leave interest rates unchanged. Many more are grinning like the proverbial "Cheshire Cat" and managed to cash in on the US dollar’s demise.

I have one thing to say – Dammit Janet!

There are more than a few people (me included) who expected the FOMC to announce an interest rate increase yesterday. And if they were all fans of the cult classic “Rocky Horror Picture show, they would be singing " I have one thing to say and that’s “Dammit, Janet”

The lack of a rate hike wasn’t the biggest issue though. It was the degree of dovishness inherent in both the statement and press conference. Janet Yellen confirmed what numerous central banks had been saying and that is global growth is at risk due to international economic developments. It would have been shorter to say “China” but doing so would have likely annoyed America’s biggest creditor.

There are only two FOMC meetings left in 2015, October 28 and December 16. Janet Yellen is on record for saying that she believed rates would rise in 2015 which should mean a 50/50 chance for lift-off on either of those dates. Incidentally, only the December 16 date has a press conference scheduled.

It would be very unlikely that announcing the end to the Zero Interest Rate Policy wouldn’t merit a full blow press conference, which gives the nod to a December move. However, it can’t be that difficult to just add one in October.

USDCAD outlook

The Canadian dollar is enjoying the post-FOMC gains more due the fact that a rising tide lifts all boats rather than there being any good reasons to buy Canadian dollars. In fact, the Loonie’s gains are more likely due to excessively long USDCAD positions getting trimmed or stopped rather than a change in sentiment.

The three major risks to the Canadian dollar that existed before the FOMC meeting are still in place today. They are the Canadian election, the rising risk of a Bank of Canada rate cut due economic growth concerns and oil prices. To me, the risk/reward suggests that USDCAD is a better buy then a sale at these levels.

USDCAD Technical Outlook

The intraday technicals are clearly bearish while trading below 1.3160 with a move below support in the 1.3000-10 area targeting a move to what should be the ideal short term buy zone in the 1.2910-50 area, as suggested by the short-term technicals.

USDCAD remains in an uptrend while trading above the 1.2900-10 area, a trend that has been intact since May 2015. The long-term uptrend from May 2014, doesn’t even come into play until the 1.2500 area. Furthermore, USDCAD has remained above 1.2900 since the surprise BoC rate cut in July.

Chart: USDCAD with uptrends and trading band highlighted

Source: Saxo Bank

The week that was

There was a “Kind of a Hush” all over FX land at the start of the week and a late Thursday feeding frenzy to usher in the end of the week. In between were bouts of volatility dressed up as direction, from top-tier data and central bank policy meetings.

Monday started quietly. Australia changed prime minister, apparently a yearly deal, which may have given AUDUSD a minor boost. For the rest of the G-7 currencies, trading was a tad less than subdued.

Tuesday saw two central banks refer to the downside risks from international economic developments. The Reserve Bank of Australia’s (RBA) minutes and the Bank of Japan (BoJ) policy statement. Boy, was that ever a hint of things to come this week.

Wednesday’s trading showed signs of life but not during the Asian session. It kicked off in Europe due to a big jump in China’s Shanghai Composite Index in the closing hour, reportedly due to “official” buying. EURUSD headed lower. GBPUSD headed in the opposite direction on better than expected data but couldn’t sustain the gains during the New York session. FX traders apparently liked what they saw in CPI data and sold US dollars across the board. A sharp spike in WTI prices lifted the Canadian dollar.

Thursday was a typical FOMC meeting day. Dull as dishwasher before the statement and rather exciting afterwards. In between, the Swiss National Bank (SNB) left rates unchanged. The day ended with the FOMC deciding to leave interest rates unchanged and issuing a dovish statement. The US dollar dropped across the board and has yet to recover.

The week ahead

The coming week may lack the one-event volatility eruption of the previous week, but it may have its moments.

The Greek elections occur on Sunday which may provide headline entertainment but should not have any impact on EURUSD. San Francisco Fed President Williams and St Louis Fed President Bullard both speak in London on Saturday adding to the headline fodder for Monday’s Asian session. They are followed by the Atlanta Fed President, Lockhart’s three speeches, from Monday to Wednesday.

The marquee Fed speaker will be Janet Yellen on Thursday. She may try to convince the market that the Fed knows what it is doing and is not suffering from cranial-rectum inversion syndrome. Mario Draghi’s speech on Wednesday will be closely watched with traders looking for additional clarity on the prospect of further quantitative easing in the Eurozone.

– Edited by Clare MacCarthy

California Waiting and everyone else too 15Sep15

California Waiting and everyone else too

Michael O’Neill

FX Consultant / IFXA Ltd



  • The Fed is just one worry among many
  • Geopolitics from Syria to Russia to North Korea offer plenty of scope for worry
  • Oil glut to get worse
  • Recovery of Iranian and Libyan oil production creates more worries for oil
  • USDCAD’s long-term trend is higher

The Kings of Leon sang "California Waiting." Now everyone’s waiting. Photo: iStock

By Michael O’Neill

The 2008 financial crisis wasn’t on anyone’s radar in 2003 when the Kings of Leon released “California Waiting”. So it’s a really safe bet that absolutely no one cared about Thursday’s Federal Open Market Committee (FOMC) meeting back then either.

Today, it’s a different story. It’s not just California waiting, but the whole world’s financial markets.

At this juncture, there’s nothing more to be said (or written) about this week’s FOMC, and worrying about the Fed isn’t the only game in town. There are plenty of other things to start worrying about.

Take Syria, for example. Russia is the most important of Syria’s very few allies, and to underscore the point, the BBC reports that Russia is building a “forward air-operating base,” reportedly guarded by Russian-built tanks.

Three years ago President Obama announced that Syrian President Assad crossed a red line when he used chemical weapons. Syrian’s citizens also crossed a red line; they crossed borders, mountains and seas into Europe. US inaction and Russia’s increased involvement may prolong the Syrian civil war and exacerbate the refugee crisis.

Then there’s Russia’s relations with its neighbours. The Russia/Ukraine conflict may have dropped out of the headlines, but it is far from over. Winter is coming and not just in the Game of Thrones. It’s coming to Ukraine which still needs Russia to supply it with enough gas to get through the winter.

The talks are under way even as the European Union extended sanctions against Russia for another six months. That can’t have made Mr Putin happy, and the same goes for the 200 Canadian soldiers that arrived in Ukraine yesterday to train troops fighting separatists. Russia has 3.2 million active and reserve personnel. Remember the Alamo, anyone?

And what about North Korea? It reactivated a nuclear facility that produces enough plutonium to make a bomb per year.

Today, CNN reported that the director of the North Korean Atomic Energy Institute issued this threat to the Unites States: "If the US and other hostile forces persistently seek their reckless hostile policy towards the DPRK and behave mischievously, the DPRK is fully ready to cope with them with nuclear weapons any time."

Fortunately, North Korean missiles have all the flight characteristics of a rock.

Not enough to worry about? A recovery of Iranian and Libyan oil production could

keep oil prices under pressure. Photo: iStock

Iranian and Libyan oil coming down the pipe.

If you thought the oil glut was about to vanish, then here’s some more to think about.

Iran is no longer an international pariah. All it took was a US president desperate for some sort of legacy and “voila.” The UN sanctions from 2006 have disappeared, aside from some housekeeping tasks.

Iran has stored a lot of oil — or so goes the rumour. The problem is no one (outside Iran) knows how much, but the point is the Iranians have oil and are eager to sell it. The Iran oil minister predicts production of about 3.8 to 3.9 million barrels per day within four or five months, according to a Bloomberg story last week.

And, if that isn’t enough to keep crude oil markets over-supplied, Libya appears to have got its act together and will form a government by September 20. "Libya’s rival governments have reached a ‘consensus’ on the main elements of a political agreement," Aljazeera reported on Sunday. How long will it take the new government to ramp up oil production from the current 365,000 barrels per day to its former glory of 1.65 million b/d

With China struggling to manage its economic slowdown, the prospect of lower oil prices looms large.

USDCAD factors include Fed, oil, elections

USDCAD has bounced around in a 1.2960-1.3350 range seemingly forever, though it’s only been a month and a half. The consolidation has been due to a number of fundamental factors, with FOMC expectations and oil prices being the key drivers. That may change somewhat on Thursday.

Either the Fed hikes rates and traders start to worry about the next increase, or the Fed does nothing and traders continue to worry about the next increase.

The bigger wild card is oil and the prospect of sharply lower prices stemming from increased production from Iran and Libya.

The result of the Canadian federal election is another potential bomb. An NDP-led government may not be quite financial Armageddon, but it would be close.

Lastly, the long-term USDCAD charts don’t do the Loonie any favours. There are short, intermediate and long-term uptrends that remain intact. A move above the 1.3450 area would target 1.4455, representing the 76.4% retracement level of the entire 2002-2008 range.

Check out the following two charts. The first is a daily chart showing the three current uptrend lines. The second is a weekly chart with the long-term Fibonacci retracement levels noted.

USDCAD daily chart shows three uptrend lines

Source: Saxo Bank

USDCAD weekly chart shows long-term Fibonacci retracement levels

Source: Saxo Bank

— Edited by John Acher

Egos and elbow room and the FOMC 11Sept15

Egos and elbow room and the FOMC

Michael O’Neill

FX Consultant / IFXA Ltd


  • Goldman Sachs tips over oil barrel
  • USDCAD may have found a floor
  • FOMC to overshadow data next week

Steely determination got Janet Yellen where she is. Remember that. This lady’s not for turning.

Photo: iStock

By Michael O’Neill

Justin Bieber is asking “What do you mean?” – the number 1 song on the Billboard Hot 100 chart. “What do you mean?” will also be the number one question on Thursday after the Federal Open Market Committee statement is released.

The pros and cons of a rate hike on Thursday have been diced, sliced, chopped and puréed and all we have is a gooey mess. There is still nothing close to a consensus.

In my opinion, it boils down to egos and elbow room. Janet Yellen is the first woman to head the Federal Reserve and she didn’t get there by being wishy-washy. She has made it clear that US rates were going up in 2015. US rates haven’t budged since December 16, 2008 so a rate hike is a big deal. And a big ego stroke for the governor who pulls the trigger.

A rate hike also gives the Federal Open Market committee (FOMC) elbow room. If the Chinese economy continues to struggle and jeopardise the fragile American recovery, the Fed needs room to cut rates, fostering the perception of economic stimulus. If they leave rates unchanged, the rate cut option becomes extremely difficult. It’s hard to believe that Americans would tolerate negative rates.

Oil makes Canadian dollar Loonie

The erratic and choppy trading patterns seen in USDCAD since the beginning of September can be mostly explained with one word – oil. USDCAD has been chaotic within a 1.3120-1.3320 trading band while WTI oil has careened within a range of $43.30 to $48.30/barrel. Something has to give. And it might be oil.

If the wunderkinds at Goldman Sach’s are to be believed, oil prices are expected to be lower for even longer. Rising Opec production, higher production outside of the US and lower global growth were cited as key factors. Goldman lowered their 1, 3 and 6-month forecasts to $38.00/b, $42.00/b and $40.00/b.

However, what got all the headlines was Goldman suggesting the risk of a $20.00/b price, even though it was clearly described as not their base case.

If the oil outlook suggests a short-term cap in WTI prices, than it also suggests a short-term floor in USDCAD. The floor is reinforced by the prospect of a minority government led by the NDP, a sneakily dovish Bank of Canada that is not averse to a weaker Canadian dollar and the prospect of higher US rates, as early as next week.

Chart: USOil and USDCAD hourly

Source: Saxo Bank

USDCAD technical outlook

The short-term USDCAD rally following July’s Bank of Canada rate cut remains intact while trading above the 1.3150-80 area which is merely a shorter-term uptrend line guarding a much longer uptrend that began in September 2014. The break above the 1.2850 area in July was significant as that level hadn’t been seen since 2008. More importantly, the break above 1.3050 took out the post Financial Crisis high, which has now reverted to support.

The following chart from 2003-2004 highlights the previous support and resistance levels. It is easy to see how a move above 1.3450 will lead to 1.4000 in a hurry

Chart: USDCAD daily 2003-2004 (note support and resistance (blue lines)

Source: Saxo Bank

The week that was

It was a short week for the US and Canada. For everyone else it was just another week filled with central bank drama, China choppiness and economic data surprises.

Monday saw China return from a 4-day holiday and the SHCOMP drift higher. The G-20 communique promised to refrain from competitive devaluations which was akin to closing the barn door after the horse had fled. G-7 currencies kept to narrow ranges, except for sterling which gained a big figure in a thin market.

Tuesday’s traders were able to ignore mixed trade data from China and concentrate on a rally in Chinese equities which set the tone for Europe and the US. Europe’s better-than-expected GDP report was ignored. However, traders didn’t ignore sharply higher WTI prices which underpinned the equity rally and the Canadian dollar.

Wednesday started out in high spirits as another Asian equity market rally spilled into Europe and fed risk appetite. It kicked off on a vague statement of additional stimulus from China. That followed a late Tuesday speech by San Francisco Fed President, Williams suggesting a delay in a US rate hike. Before you could say "risk on", it was “risk on” until it wasn’t, which was shortly after the US equity markets opened for the day.

By the end of the day, US equities were in the red, EURUSD was higher and a September rate hike was still a viable option for September. Elsewhere, the Bank of Canada was considered neutral while the Reserve Bank of New Zealand was more dovish than anticipated. Kiwi tanked.

Thursday could a have been called “Opposite Day”. Asian and European equities gave back most of Wednesday’s gains while US equities recouped their losses. China likely intervened to buy CNY which left traders scratching their heads, looking for a meaning. USDJPY soared on comments from a politician suggesting that October 30the was a good day for easing. The gains were not sustained. The Bank of England meeting was a non-event.

The week that will be

It will be all about the FOMC; will they, won’t they and then why did or didn’t they? The meeting also gives US data a heightened sense of importance, particularly Retail Sales on Tuesday and CPI on Wednesday.

Although the FOMC meeting is the headliner, there is a stellar supporting cast. Tuesday brings a Bank of Japan interest rate decision and press conference which will be bookended by the minutes from the Reserve Bank of Australia (RBA) meeting and CPI data from the UK.

Eurozone CPI may attract additional scrutiny on Wednesday in light of ECB chief Mario Draghi’s recent dovish EU outlook.

Thursday will likely be a write-off in terms of volatility unless the Bank of Japan governor talks stimulus or if the Swiss National Bank press conference holds any surprises. The week will end with all markets digesting the statements and data from the FOMC.

– Edited by Clare MacCarthy

BoC is sneakily doveish 9Sep15

BoC is sneakily dovish

Michael O’Neill

FX Consultant / IFXA Ltd


  • BoC leaves rates unchanged
  • USDX suggests further range trading ahead
  • "A rate hike would cause a panic and turmoil" – really?

The denizens of the BoC’s landmark HQ are more dovish than hawkish. Photo: BoC

By Michael O’Neill

The Bank of Canada surprised no one when it left rates unchanged this morning.

The initial reaction to the statement led to USDCAD plunging from 1.3260 to 1.3160 immediately. Obviously, the statement was a tad on the hawkish side. It wasn’t!

The BoC appears to have made a concerted effort to attribute stability in inflation and reduced fall-out from lower commodity prices to the Canadian dollar. The statement also noted that the domestic economic recovery continues to be underpinned by firm recovery in the US, with particular emphasis on Canadian exports.

All of the above implies that not only is the BoC happy with the current level of the Canadian dollar, they wouldn’t shed any tears if it weakened further.

There is nothing in today’s statement that would suggest that further rate cuts are unlikely. In fact the door is wide open for another cut due to the uncertainty from China and its impact on the pace of the global recovery.

Panic and turmoil, oh my

Sound the alarm. Emerging market economies will suffer “panic and turmoil” if the US Federal Reserve raises rates in September, at least that is what the World Bank’s chief economist, Kaushik Basu, claims in a Financial Times story today.

Larry Summers, a former US Treasury Secretary and Barack Obama advisor, is also urging the Federal Reserve to leave rates unchanged, not out of concern for “shocking” emerging market economies, but because it would be a “serious mistake”.

The “hike or not to hike” debate has been raging since December 17, 2014 when the Federal Open Market Committee (FOMC) dropped the phrase “considerable time” and replaced it with “patience”. In March, 2015, the FOMC lost “patience” from the statement and global financial markets have been in a state of high anxiety, ever since.

If emerging market economies would truly be “shocked” and suffer “panic and turmoil”, as the World Bank economist claims, they deserve their fate. The possibility of a US rate hike in 2015 should not be a surprise to anyone, at least anyone not in a coma since last Christmas.

In fact, Larry Summers, in his column in today’s Financial Times, made the best case for a rate hike even though he was arguing for rates to be left as is. Summers noted that “markets have already done the work of tightening”. If he is to be believed, then a 0.25% rate increase would be a non-event. Get on with it, Ms. Yellen and let markets turn their attention to more important matters, like the next US rate hike.

US dollar index indecisive

The US dollar index has been a poor guide of general US dollar direction since the beginning of May. In fact, it has be trading rather raggedly within a 93.15–98.80 range which goes a long way in explaining the broad range trading seen in many currency pairs, particularly EURUSD. (which is 57.6% of the index)

Chart: USDX currency weightings

Source: ICE Futures

The bounce off the August 24 spike low of 92.52 hit a ceiling at 96.65 on September 3 and since then USDX has fluctuated within a 1.00 point range. A break above 96.65 targets 98.40 which if broken argues for a retest of the 2015 peak. A move below 95.00 would open the door for a deeper correction to the 92.00-92.25 area.

USDX 1 hour with short-term range highlighted

Source: Saxo Bank

Canada election polls another Loonie negative

The Canadian federal election is still forty days away which is apparently a very long time in an election campaign. However, to paraphrase the words of world famous rabbit hunter, Elmer Fudd, “Be ve-w-wy, ve w-wy worried”.

The latest polls show the socialist NDP party led by Thomas Mulcair in the lead with 122 seats (169 seats is a majority) while the incumbent PC (Progressive Conservative) have a mere 104 seats. (which may be because voters can smell that the Prime Minister, Stephen Harper, is well past his best-before date.) The third place Liberal Party with 111 seats is ideologically similar to the NDP and those parties are already talking about a coalition.

An NDP/Liberal coalition government have never seen a taxpayer’s dollar that they couldn’t spend better. The result would be a ballooning budget deficit and higher taxes across the board.

Latest seat projections from various polls (September)

Source: Election Almanac

– Edited by Clare MacCarthy

NFP trumps Canadian jobs report 4Sep15

NFP trumps Canadian jobs report

Michael O’Neill

FX Consultant / IFXA Ltd


  • The tale of the tape – Canada employment beats, NFP misses
  • Alaska cruise a Chinese favourite
  • Central Bank meetings ahead

By Michael O’Neill

The Canadian dollar scraped out a modest gain following the release of better-than-expected employment data but that gain evaporated within minutes. Canada gained 12,000 new jobs vs. expectations for a loss of 4,500. The wrinkle in the report is that the unemployment rate rose 0.2% to 7% which StatsCanada says is because more people searched for work.

At issue is the US nonfarm payrolls (NFP) data. The headline number was well below expectations (actual 185,000 gain vs. forecast 225,000) but the weakness is being explained away as “usual August discrepancies from seasonal/technical effects”. It was noted that the July data was revised upwards by 44,000, exactly the same amount as today’s actual number vs. forecast.

Canadian employment report details

Source: Statistics Canada

Loonie sideswiped by NFP

The US report was supposed to provide the definitive evidence that the Fed had all the data it needed to hike rates in September.

Maybe so, maybe not. However Richmond Fed President, Jeffrey Lacker, in a speech just prior to the release of NFP outlined a case for a September hike, suggesting a weak report in August would just be a blip.

USDCAD reacted like September was a go. The loss from 1.3230 to 1.3170 after the Canadian data was released was erased just as quickly when USDCAD spiked back to 1.3230. The conclusion is that a degree of stability in WTI prices and improving economic performance should offset the effects of the well telegraphed U.S. rate hike and leave the existing range intact, at least until the Bank of Canada interest rate decision on Wednesday.

USDCAD technical outlook

USDCAD has been locked in a 1.3100-1.3350 range for the best two weeks and the current price (at the time of writing) of 1.3220 is almost in the exact middle of that range, indicating a fairly indecisive market.

However, the underlying uptrend from the end of June remains firmly entrenched and maintains the bullish USD bias. A break of 1.3100 suggests further losses to the 1.2950-1.3100 support zone while a break above 1.3350 targets resistance at 1.3450.

USDCAD hourly highlighting trading band

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

“Oh say can you see…” What’s that?

An Alaska cruise is a popular trip for thousands of tourists who want to get a glimpse of the pristine wilds of the most northern state in America. In fact, even Barak Obama visited the state this week.

Alaska is also is becoming popular with Chinese tourists as well. In fact, 5 Chinese navy ships came within 12 nautical miles of the U.S. coast, according to the Wall Street Journal.

China has already laid claim to vast swaths of the South China Sea, much to the dismay of Viet Nam, Philippines, Taiwan Malaysia and Brunei.

The US Navy has made forays into these waters in an attempt to chastise China for their expansionary moves. Perhaps, the Chinese move into US territorial waters was China’s rebuttal. You mind your business and we will mind ours, especially since the American military is spread thin.

The US has already annoyed Russia by being the head cheer leader for imposing sanctions because of Ukraine. Do they really want two belligerent, quasi-dictatorships nipping at their back door?

The week that was

The previous week was supposed to be a tough act to follow. It wasn’t. Markets started off a tad nervously due to central banker’s comments from the Jackson Hole Symposium, dealt with a steep but short lived rally in oil prices and then got blindsided by Mario Draghi and the European Central Bank. All in all, a pretty good week for trading.

Monday was both the start of the week and the end of the month. This month’s portfolio rebalancing flows led to some hefty US buying for the fix but a sharp rally in WTI from around $44.00/barrel to $49.00/b stole the show. Apparently Opec was willing to talk about establishing a “fair” price for crude.

Tuesday was a day of turmoil. It started in Asia with worse-than expected China PMI data and new FX regulations implemented by the Peoples Bank of China (PBoC). Chinese equities sank and the fear of Financial Crisis, part 2, took the rest of the global indices down with it. It wasn’t quite panic mode but the declines were sharp and left a mark.

The world didn’t end on Tuesday. Wednesday was much calmer and equity markets rebounded. G-10 currencies traded, sometimes erratically within recent ranges. Oil prices gains became losses on news of still rising inventories and production and the fact that Saudi Arabia remained committed to maintaining market share. There was a lot of discussion about the pending European Central Bank meeting on Thursday. Analysts were suggesting that Mr. Draghi would be dovish.

Doves in Italy are flying high. Photo: iStock

On Thursday, they found out that Mr. Draghi was extremely dovish and concerned enough to allude to an increased or extended quantitative easing program. That was a surprise and EURUSD tanked taking EURCrosses with it. While the ECB had the lion’s share of the limelight, better US trade data and a good ISM non-manufacturing report shifted some of the focus to Friday’s nonfarm payrolls report.

Friday’s NFP report was below forecasts but the details were fairly strong.

The week ahead

Monday is a short week for the US and Canada as the Labour Day holiday signals the home stretch turn to year end. There isn’t a whole lot in the way of top tier data from the US, but there is a lot of regional data and events to keep traders interested.

Eurozone GDP data is due on Tuesday an in light of Mr. Draghi’s comments on economic growth concerns, a weak report could have a detrimental effect on the euro.

Wednesday has two central banks on tap, the Bank of Canada and the Reserve Bank of New Zealand. Both will be key events for their respective currencies.

Australian employment data will be a big deal to Aussie traders on Thursday while the Bank of England meeting will keep cable traders on their toes.

Friday should be uneventful.

— Edited by Clemens Bomsdorf