Mr Draghi is driving the bus 22Sep15


Mr Draghi is driving the bus

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • 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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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