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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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