California Waiting and everyone else too 15Sep15


California Waiting and everyone else too

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

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  • 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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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