Monthend flow sink US dollar but losses may be fleeting-30Oct15


Month-end flows sink US dollar but losses may be fleeting

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US dollar selling evident for month-end
  • CMHC warns on Canada housing
  • Loonie and oil range-bound

Location, location, location is all that matters in Canada’s ‘housing bubble’. Pic: iStock

By Michael O’Neill

Reports of US dollar selling for month end portfolio rebalancing appeared to be accurate this month as the G10 and emerging market currencies have rallied into the fix.

USDX points higher but…..

The US dollar index is in a well-defined uptrend from the October 15 low which comes into play in the 96.00-05 area. A move above the 97.50-55 area sets up a test of resistance at 98.50, an area which has capped all rallies since April. In fact, USDX has been trapped in a 93.50-98.50 range since April. A break of 98.50 should extend gains to the 2015 peak in the 100.50-70 zone.

However, the USDX is trading lower and appears likely to test the uptrend line at 96.50, which if broken could extend losses to 95.20 and ensure further range trading ahead.

USDX 1-hour with uptrend noted

Source: Saxo Bank

USDX daily with trading band

Source: Saxo Bank

Canada Housing bubble – depends on where you live

Last year, a popular theme that was used to justify bearish Canadian dollar trades was that Canada was experiencing a housing bubble and it was getting ready to burst. That didn’t happen -yet. The Canada Mortgage and Housing Corporation, the federal housing agency released its Housing Market Assessment for Canada and 15 Markets report on Thursday. The report claims that 11-15 housing markets are problematic but only 4 markets are “strongly problematic”. (CMHC defines problematic as “a combination of price acceleration and overvaluation). At best, this report merely provides additional fodder for Canadian dollar bears but as long as the Bank of Canada is keeping interest rates low, a perception of a housing bubble is not a factor for FX, at the moment.

Canada Housing assessment for 15 markets

Source: CMHC

Is there an oil price rebound in the cards?

If a tarot deck can predict a person’s future, can they predict oil price movements? Probably not, or they would have been used by now. That leaves technicals and coin flips to do the job with a dose of fundamentals tossed in and they haven’t been overly accurate.

There is no denying that WTI crude oil has been in an accelerated decline since last November’s Opec announcement that it wouldn’t cut production to curb oversupply problems. That downtrend line sits at $53.50/barrel nearly $10.00/b above the current price. However, the long-term downtrend line from the June 2014 peak was broken at the beginning of October. Since then WTI prices have hovered around the line extension. In addition, WTI support in the $43.00/b area has survived multiple tests since September. Attempts to extend moves below this level have been quickly rejected.

The fundamental oil market news has not been conducive to an oil rally. In fact, bearish forecasts from Goldman Sachs and reports of rising inventories from the Energy Information Administration have put a firm cap on rallies. Energy companies across the globe are suffering; profits are way down and jobs are being cut. At the same time, these negative reports have not been enough to sustain downside selling.

Geopolitical tensions have been rising. The US and China were testing each other’s resolve in the South China Sea this week. Russia is testing the US resolve in supporting Syrian rebels and air-strikes gave oil prices a short-lived lift when they were first announced. The problem seems to be that oil markets are fatigued by geopolitical issues and are ignoring them.

It appears that the current $43.00-$50.00/b range adequately reflects the existing blend of technicals and fundamentals and should remain intact, at least for the next week.

Oil and USDCAD hourly

Source: Saxo Bank

USDCAD outlook

This morning’s Canadian GDP number was as expected and points to a Q3 rebound although the Canadian dollar did not react to the data. The Loonie survived the reaction to the Federal Open Market Committee’s hawkish statement aided in part by Canadian 10-year bond yields keeping pace with US 10-year bond yield gains. The Loonie has also benefited from oil prices maintaining their $43-$50.00/b range although intraday volatility stemming from price moves has been intense. The Canadian employment report is due next Friday leaving USDCAD direction until then, at the whim of US dollar moves.

USDCAD technical outlook.

The USDCAD uptrend from May remains intact while trading above 1.2940 but that doesn’t mean it won’t get tested. The shorter-term uptrend from the October 15 low of 1.2835 was broken on Thursday with the move below 1.3180-90 area which will now act as resistance. A move below support in the 1.3090-1.3110 area will extend losses to 1.3040 and if that level breaks, target 1.2940 which is guarded by the 100-day moving average at 1.2987. A move above 1.3280 is needed to refocus on the 1.3455 area.

USDCAD Daily with 100-day moving average and uptrend shown

Source: Saxo Bank

The week that was

The week of an FOMC meeting used to mean that FX markets were fairly quiet. That wasn’t the case this week. Three central bank meetings took care of that.

Monday was mostly about rehashing the key events of the previous week which were the dovish ECB meeting and the Peoples Bank of China rate cuts. EURUSD was offered throughout the day.

Tuesday, news that a US navy ship was, according to China, illegally in waters near Chinese Islands in the South China Sea unsettled Asian markets and led to a bout of risk aversion trading. FX markets consolidated recent ranges in a lively European session. UK GDP was worse than expected and cable got smacked. Oil was the focus in New York when WTI sank to $42.60 and turned short-term technicals bearish. US Durable Goods data was weak.

Asia had another choppy session on Wednesday. Weak Australian CPI data attracted AUDUSD sellers on increased expectations of a Reserve Bank of Australia rate cut. In Europe, EURUSD was offered as ECB speakers maintained the bias for December stimulus with dovish remarks. The US morning session was subdued. That changed after 1400 GMT when a surprisingly hawkish FOMC statement was released. EURUSD sank and the US dollar gained across the board.

Thursday’s Asian FX market had a similar theme to the post-FOMC New York session. Buy dollars and lots of them. However USDJPY demand was tempered by the pending Bank of Japan policy meeting. The European session was quieter and EURUSD couldn’t break below 1.0900. US GDP data was close enough to forecasts to be a non-event but Pending Home Sales were soft. The New York session ended with traders anticipating US dollar selling for month end portfolio rebalancing.

The week that will be

It’s North America’s turn to be well-rested. Daylight Savings time ends on the weekend so traders can start their week with an extra hour’s sleep. They may need it. The week ahead is chock-full of major data, central bank monetary policy decisions and the always entertaining US employment report on Friday.

The week starts with the PMI reports from China, Europe and the US. The Reserve Bank of Australia interest rate decision is Tuesday and the Bank of England follows on Thursday. Both central bank governors will be making speeches as well as will the bank of Japan governor on Friday. Hot air, policy and data should ensure that the week will be lively and entertaining.

– Edited by Clare MacCarthy

Advertisements

Is EURUSD mooning the FX markets? 27Oct15


Is EURUSD mooning the FX markets?

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Oil springs a leak and USDCAD rides the wave
  • EURUSD downside could be limited
  • FOMC statement needs to provide clear direction

The US economic data are far from decisive, but the Fed needs to take a stand. Photo: iStock

By Michael O’Neill

Today’s US data presented another mixed bag. Consumer confidence missed the forecast but was still at a rather robust level. Not so for Durable Goods, however – that report was weak and have now been down four out of six months.

Is EURUSD near a bottom?

In September 2014, the European Central Bank announced a surprise rate cut and new stimulus plans. EURUSD dropped just over 0.250 points (from 1.3155 to 1.2905) and then began a long, slow decline that bottomed out at 1.0470 in March 2015. The ensuing bounce was substantial, as EURUSD rallied back to 1.1700 before resuming its decline.

By most accounts, last Thursday saw ECB president Mario Draghi give very strong, clear clues that the bank will embark on another round of stimulus in December. Predictably, EURUSD tanked and has shed over 0.0300 points as of today.

What is notable is that the benchmark pair is still well above the March low even with the perception that the ECB will introduce additional stimulus in two months. It seems that EURUSD may be close to a bottom.

A compilation of FX forecasts, if accurate, means that EURUSD may be mooning the markets as its bottom is very clearly visible.

A Bloomberg survey of 14 global banks pegs the mean EURUSD rate at 1.1000.

Source: Bloomberg

Bears run from EURCAD, EURAUD and EURJPY

The EURCAD rally from the April low remains intact. The uptrend has been tested, but so far it has held.

The same is true for EURAUD, although that uptrend is shaky and weak. EURJPY is in a modest decline but it has still failed to break below support in the 132.20-40 zone. As long as these support levels hold it stands to reason that EURUSD downside is limited.

EURCAD daily:

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

Source Saxo Bank

EURAUD daily:

Source: Saxo Bank

EURJPY daily:

Source: Saxo Bank

WTI springs another leak

WTI dropped from $43.90/barrel to $42.81/b where it is currently sitting on anticipation that tomorrow the Energy Information Administration will report another jump in crude oil inventories. It didn’t help that a Goldman Sachs report on October 25 warned that the US was running out of storage.

To make matters worse, the US government has announced plans to sell off 58 million barrels of crude from its strategic reserves. It didn’t matter that the sales aren’t scheduled to start until 2018, it angered oil bears nonetheless.

The WTI downtrend from June 2014 remains intact and a break of support in the $39-40/b area opens the door to a decline to $32/b.

WTI weekly:

Source: Saxo Bank

The loonie, oil and the FOMC

USDCAD exploded higher in lockstep with plunging WTI prices. The rally broke resistance in the 1.3190-1.3210 area and has set its sights on the 1.3290-1.3310 resistance zone. If this level breaks it should be a straight shot to 1.3455.

However, it is likely not that easy. Wednesday’s Federal Open Market Committee statement may disappoint those people expecting a clear signal on interest rates. They are hoping that despite the widely differing opinions spouted by a series of Fed speakers since the last meeting, the FOMC members will put their differences aside and release a statement that eliminates any ambiguity.

They expect to read that rates are either going up in December or not. Below are three USDCAD scenarios following the FOMC statement.

Scenario 1: A dovish FOMC – Rates are not going higher in 2015. Under this scenario, it is reasonable to expect widespread US dollar selling as weak long dollar positions get trimmed. The weaker US dollar will, in turn, help boost WTI prices and the Canadian dollar should rally.

Scenario 2: A hawkish FOMC – Rates are going up in December. This is the outcome that 64% of the economists in a recent Bloomberg survey believed will occur. It is also the outcome that FX traders have been looking for since April. The US dollar would rally but the gains may be limited as arguably, the G7 currencies already reflect this outcome.

Scenario 3: A neutral/opaque FOMC – they aren’t sure and neither is the market. This scenario is what FX markets have been living with since September. In this outcome, the current ranges should hold.

Draghi’s ECB press conference may have raised the bar for the FOMC statement. He was clear and decisive and appeared to have a plan. The FOMC has been the exact opposite of that and needs to up its collective game.

It’s time for the Fed to pick a bird. Photo: iStock

— Edited by Michael McKenna

Central bank stimulation arouses traders end of week 23Oct15


Central bank stimulation arouses traders

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Central bank-heavy week ends with USD in demand
  • PBoC makes a surprise rate cut following iffy GDP print
  • Loonie under pressure as WTI wilts on oversupply

Central banks set the tone this week with Thursday’s ECB blockbuster

sparking all sorts of fresh moves in the FX space. Photo: iStock

By Michael O’Neill

Instead of little blue pills, global central banks are providing wads and wads of cash to financial markets. Traders, of course, are aroused and even though the effects will last far longer than four hours, there is no need to see a doctor.

Today saw China cut rates with the People’s Bank of China trimming the deposit and lending rates by 0.25%. The PBoC also chopped the reserve requirement rate for banks by 0.5% in an effort to boost liquidity and jump-start economic growth.

Yesterday, Mario Draghi, president of the European Central Bank all but confirmed another round of stimulus activity for the Eurozone in December. Mr. Draghi’s comments have fueled speculation that the Bank of Japan will use the likelihood of ECB stimulation as an excuse for additional policy action.

With all this stimulus soon to be available, global equity markets are getting plenty of action and the US dollar is in demand. The greenback has managed healthy gains this week, spanning across the G10 currency spectrum. EURUSD is down 3.0% and USDJPY is up 1.75%;
oil prices are soft but rangebound

China’s rate reduction is further evidence that the economy is struggling and therefore unlikely to result in an immediate surge in commodity demand. Opec is another issue as the cartel has lost control of pricing with a variety of producers discounting already discounted contracts and Saudi Arabia production continues at record levels.

The US Energy Information Administration reported crude stockpiles in the US rose by 8.0 billion barrels. China slowdown risks and a higher US dollar have put downward pressure on oil prices today and WTI dropped through minor support at $44.90/barrel which sets up another test of $42.90/b.

Loonies feathers getting plucked

In a game similar to pulling the petals off a daisy (she loves me; he loves me not…) the loonie’s feather are being plucked but with a minor difference in the chant to "they hate me me; they hate me more…"

It hasn’t been a good week for the Canadian dollar. It started Monday with the election of Justin Trudeau and the Liberal party, who were awarded a majority government even though they ran on a platform of raising taxes and expanding budget deficits.

Then along came the Eeyore of the central banking community, Bank of Canada governor Stephen Poloz. Mr. Poloz always finds the clouds in a clear sky and this time was no different as he downgraded economic growth forecasts and said that the effects of the oil price collapse will be felt for longer than previously expected.

And it gets worse…

Once November rolls in, Canadians are fairly used to

the "it only gets worse" mentality. Photo: iStock

This week’s Canadian economic data were not impressive. Retail Sales looked good, but the headline was deceiving. It was all auto sales which may have been stronger due to year-end discounting.

Today’s inflation data was below forecasts with energy prices to blame. Nevertheless, low inflation suggests that the BoC will be sitting on its hands well after the Fed starts hiking rates.

Next week could be another dodgy week for USDCAD, at least on Friday. That’s when the August GDP (forecast 0.1%) gets released. Furthermore it is also month-end meaning the usual portfolio rebalancing hijinks will occur and this month has an added wrinkle as it is year-end for Canadian Schedule 1 banks, which suggests an additional reduction in liquidity.

USDCAD technical outlook

USDCAD is at a crossroads. The 1.3140-1.3150 area represents almost the exact middle of the 1.2835-1.3455 trading band that has been intact since September 28. Consistent price action above this zone targets 1.3450 although there is plenty of resistance ahead of that level. If USDCAD.

On the flip side of the coin, the failure to sustain the break above the 1.3140-50 area would shift the focus back to 1.2850.

The intraday technicals are bullish while trading above 1.3050 with the break above 1.3250 targeting 1.3220 and then 1.3340.

Only a move below 1.3050 would negate the upside pressure.

USDCAD 4 hour with Fibonacci targets noted:

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

Source: Saxo Bank

The week that was

The ECB meeting was expected to be the highlight of the week and it was. What wasn’t expected to cause much of a stir was the Canadian election: It did. This week had it all, in fact, with central bank surprises and well, more central bank surprises with a side of oil supply concern thrown in for good measure.

Monday started with China announcing that Q3 GDP grew by 6.9%. Traders weren’t sure if it was good news or bad so attention shifted to worrying about what Mario Draghi would say on Thursday. As it turned out, they were right to worry.

Tuesday, the Reserve Bank of Australia minutes created a bit of a ripple as they were a tad less dovish than expected and AUDUSD rallied. Canada and the Canadian dollar, for their part, took a rare turn in the global spotlight on election news and EURUSD was trapped in a 1.1333-1.1380 range while the kiwi got whacked on a lousy GlobalDairyTrade auction.

Wednesday saw a lot reminiscing about Marty McFly and Back to the Future. It was also very quiet in Asia but not so in Europe where an initial risk aversion-type move faded into a risk-neutral move as the day progressed. USDCAD rallied when GDP forecasts were cut by the BoC and WTI sank on news that US crude inventories rose far more than forecast.

We’re drowning in the stuff. Photo: iStock

Thursday was really two days: Pre-ECB and Post-ECB. Pre-ECB FX was a tad choppy in Asia. EURUSD held above 1.1300 and GBPUSD rallied on strong retail sales data. Post-FOMC FX was volatile as EURUSD dropped 2.1% and USDJPY rallied from 119.75 to 120.60. New York ended the day trying to determine the effect of December ECB stimulus on the Fed and the BoJ.

The week ahead

European and UK traders will be feeling a tad more refreshed when they start their day, thanks to an extra hour of sleep. Daylight Savings Time ends and the clocks go forward by an hour, and they may need the extra rest!

The FOMC meeting on Wednesday may provide a bit of clarity about a December rate hike. But then again, maybe it won’t. The Reserve Bank of New Zealand’s interest rate decision and statement is also out that day. The OCR is expected to remain unchanged. The week will end with the usual month-end fireworks.

Michael O’Neill is an FX consultant at IFXA Ltd.

Canada turns Liberal red (ink) 20Oct15


Canada turns Liberal red (ink)

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • USDCAD dips on small oil gains
  • Bank of Canada rate meeting and monetary policy report due Wednesday
  • A light-weight joins the G-7 club

Canada’s new leader, Justin Trudeau, whose Liberal Party won a majority in Monday’s federal election to oust the Conservative PM Stephen Harper. Photo: Liberal Party of Canada

By Michael O’Neill

The longest Canadian election campaign in modern history is over and with it the nine-year reign of Prime Minister Stephen Harper. Justin Trudeau and his Liberal Party sprang from 34 seats in 2011 to a majority of 184 seats last night and will form a new government.

The Liberals ran on a tax-and-spend platform, promising to spend $20 billion over 20 years to curb greenhouse gas emissions and use another $2.0 billion to fund carbon reduction projects. They plan to run a $10 billion budget deficit for three years to finance $60 billion in new spending on roads, bridges, transit and other projects. The Liberals also pandered to the “middle-class”, a demographic that Trudeau was unable to quantify, by lowering taxes (1.5%) on incomes between $44,000 and $89,000 while raising taxes (4%) on incomes above $200,000.

Justin and the G-7

As the newly elected prime minister of Canada, Trudeau gets a seat at the G-7 table.

The president of the United States is a Harvard Law graduate, Angela Merkel has a doctorate in quantum chemistry, David Cameron graduated from Oxford, Francois Hollande is a graduate of HEC and also has a law degree, Matteo Renzi is a lawyer, and Shinto Abe has a political science degree. Trudeau is a drama teacher.

His acting talents will be on full display in the next few months, with a G-20 summit, an APEC summit and the Trans-Pacific Partnership Agreement all needing his attention and comprehension. Will he be able to convince world leaders that he has a clue?

USDCAD outlook

For the time being, the election outcome will have little to zero impact on the Canadian dollar. Rome wasn’t built in a day, and Canada’s domestic economy won’t be destroyed in a day either. In fact, there is a school of thought that suggests the news of infrastructure spending may provide some support to the loonie due to reduced risk of a Bank of Canada rate cut.

The BoC meets tomorrow on interest rates and will also issue its monetary policy report. No one expects any movement on rates, but there is an expectation that the MPR could be “dovish” if growth forecasts are lowered. That is a likely outcome since oil prices are sharply lower than they were when the last MPR was issued and worries about China’s growth have increased.

Retail sales and CPI data will be released on Friday. Retail sales are expected to be slightly softer and CPI unchanged. Neither data release should have much of an influence on Canadian dollar prices.

The reality is that USDCAD is tracking US dollar sentiment and oil prices. Domestic issues are mostly being ignored.

USDCAD technical outlook

Intraday: The intraday technicals are bearish and in a steep decline while USDCAD trades below 1.2990, looking for a break of the five-day uptrend line, currently at 1.2950 to extend losses to 1.2900. A move above 1.3000 would re-target resistance in the 1.3050-70 zone.

Short term: The near-term technicals are bearish while trading below 1.3050, looking for a break of the minor 23.6% Fibonacci level of the September 29-October 15 range to extend down to the October low of 1.2830. There is support, however, at 1.2923 (100-day moving average) and 1.2900 guarding the low. A break above 1.3080 would negate the downward pressure and target 1.3220.
.
Longer term: The USDCAD uptrend from the May 2015 low remains intact while trading above the 1.2810-30 area. If this level breaks, it would target the 200-day moving average (1.2657). Only a move above 1.3080 negates the downward pressure.

USDCAD daily with moving averages noted

Source: Saxo Bank

O Canada! Jasper Wilderness. Photo: iStock

— Edited by John Acher

Michael O’Neill is an FX consultant at IFXA Ltd

US dollar sliding as Middle East tensions rise-16Oct15


US dollar sliding as Middle East tensions rise

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • EURUSD may have another leg higher
  • Middle East tensions getting "enriched"
  • US dollar sentiment driving Loonie

Rising Middle East tensions have put the greenback on the back foot. At least for now. Pic: iStock

By Michael O’Neill

The Canadian dollar has managed to keep most of this week’s gains along with the balance of the G10 currencies. Monday’s Canadian election is of interest to Canadians but at the moment, no one else. EURUSD has retreated from this week’s peak although not convincingly.

Is opportunity knocking?

FX traders spent the first three months of the year selling EURUSD expecting the US to raise interest rates. They spent the next six months waffling between “will they or won’t they”. EURUSD bounced between 1.0480 and 1.1480 during that time, other than the late August panic spike to 1.1700. Despite this week’s rally, EURUSD is down 6.4% year-to-date.

The question remains; is opportunity knocking or is reloading long dollar positions a road map to the poorhouse?

Euro-area economic growth is still expected to underperform that of the US this year and into next year. Goldman Sachs economists forecast that Eurozone GDP will grow at 1.6% in 2015 and 1.8% in 2016. The US growth rate is pegged at 2.4% and 2.3% respectively. Advantage, US dollar.

There is still a risk that the Federal Open Market Committee raises interest rates in 2015 as Fed chief Janet Yellen and a number of her colleagues maintain will happen. And, the fact remains that the FOMC is committed to putting an end to the zero rate interest policy. US rates are going up, sooner or later. Eurozone rates are not. Advantage, US dollar.

Another barrier to EURUSD downside may have been the sizeable short positions that had accumulated over the past year. All those who wanted to be short, were. They still are, according to the latest IMM Commitment of Traders report (October 9). Any data or speeches that support a delay in a US rate hike could lead to additional long dollar trade capitulation. Advantage, EUR.

Opportunity may be knocking, but the sound is rather hushed. If you believe the theory that a currency will move in the direction of least resistance, a stop loss spike above 1.1500 may be needed before a new EURUSD decline can begin in earnest.

Chart: EURUSD daily with Fibonacci retracement levels

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

Loonie tracking US dollar sentiment

The long US dollar trade was one of the most popular trades this year. That started to change with a series of weaker-than-expected US economic reports and signs that the Federal Open Market Committee members were squabbling. That led to some US dollar selling. The dollar selling intensified with the Chinese equity market meltdown in late August leading to increasing nervousness over the scope of the Chinese economic slowdown.

The selling has intensified over the past week as various FOMC members chimed in with a variety of conflicting and contradictory opinions. This morning’s August manufacturing shipments data beat forecasts but it is well below the July number. It is another indication that although the Canadian recovery looks shaky, FX traders are ignoring domestic data.

In addition, US Treasury yields have collapsed; 10-year Government bonds are currently at 2.01%, down 49 basis points since June, a clear indication that markets do not believe the US rate hike story any more. At the same time, 2-year Canadian bond yields have risen, coinciding with the latest Canadian dollar rally.

As long as US dollar sentiment remains negative, USDCAD gains will be limited, regardless of any election outcome.

USDCAD technical outlook

USDCAD is in a steep downtrend from the end of September peak of 1.3455 which comes into play at 1.2930 today. The break below 1.3310 at the beginning of October combined with the move below 1.3030 suggests that a short-term top is in place while the move below 1.2950 argues for an extension of the losses towards 1.2760 and perhaps 1.2600 according to Fibonacci retracements. A move above 1.2960 would negate the short-term downside and point to 1.2840-1.3000 consolidation.

Chart: USDCAD daily with Fibonacci

Source: Saxo Bank

Global tensions on the rise

Is there another bout of global risk aversion trading lurking in the Middle East? Turkey’s armed forces announced today that they shot down an aircraft that violated its airspace, sometime this week. The story was in the news six days ago, but this is the first official confirmation. The speculation is that the aircraft belongs to Russia as it is unlikely that the Taliban, ISIS or Al-Qaeda have an air force.

Furthermore, the US is unhappy (embarrassed) that Russia has usurped its role in Syria by actively going after ISIS forces in Syria. Russia maintains that it is hard to distinguish between ISIS forces and US backed rebels which is a collateral benefit to the Assad regime. France, UK and US are all opposed to Russia’s involvement in Syria while Iran and Afghanistan support the initiative.

And that isn’t all. Israel and Palestine have escalated tensions in the past week continuing their never–ending feud. Iran is upping the ante as well. The foe of the Great Satan has just test-fired a new generation of long range ballistic missiles and also released pictures of an underground missile facility. It is not clear if the missiles contain the new, Obama sanctioned, peacefully enriched uranium.

The nuclear arms race in the Middle East is off and running. Al-Jazeera reported today that the United Arab Emirates told the US that it may seek to enrich uranium. The UAE is unhappy with the Iran nuclear deal.

The week that was

The week is ending and the dollar has been taken off life support, at least for now.

Monday started a tad quieter than usual due to the Columbus Day holiday in New York. A lack of price action gave traders time to read stories and comments from the IMF conference in Peru. That made them nervous. In hindsight, Federal Reserve vice chairman Stanley Fischer may have set the tone for FX markets for the rest of the week when he commented that “overseas developments and concerns about emerging markets" were criteria for the Fed raising rates. Three additional Fed speakers tossed their comments into the mix, painting a picture of a befuddled central bank.

Tuesday, a soft trade report from China kicked off a spate of risk aversion trades with Aussie and Kiwi trading down. Sterling was livelier than usual in Europe. News of the AB Inbev/SAB Miller deal gave GBPUSD a lift which was short lived and cable tanked ahead of the UK CPI report. New York saw a continuation of the Asia move and more Fed speakers stirring the pot.

Wednesday, misleading headlines from a speech by the governor of the Reserve Bank of New Zealand whacked Kiwi but the move didn’t last. In Europe, the lack of US dollar upside and confusion surrounding the Fed’s intentions drove the US dollar down against the majors. That theme lasted throughout the New York session aided by disappointing retail sales and PPI data.

Thursday saw Asia picking up where New York left off, selling US dollars and selling them aggressively. Weak employment data in Australia did nothing to dissuade dollar sellers.
EURUSD couldn’t break above 1.1500 and when a usually hawkish ECB official sounded concerned about inflation, EURUSD sellers emerged in droves. The New York session was mixed. Commodity currencies rallied while yen and European currencies retreated. The week is ending the way it started with rising concern about a dysfunctional Fed.

The week ahead

The European Central Bank interest rate decision and press conference on Thursday is the marquee event of the week. ECB board member Nowotny’s comments on inflation concerns may keep EURUSD on the defensive ahead of the meeting.

On Monday, Chinese data will be closely watched for a fresh read on the health of that economy. There are plenty of Fed speakers, a Bank of Canada interest rate statement and the minutes of the RBA meeting to provide additional entertainment and round out the week.

– Edited by Clare MacCarthy

We’re all being torpedoed by the Yellen submarine 13October15


We’re all being torpedoed by the Yellen submarine

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Fed speakers delivering mixed messages
  • CAD dependent on volatile WTI price
  • Canadian election risks not fully priced in

The upcoming Canadian election could apply pressure to the loonie,

particularly if the NDP or Liberal parties emerge victorious. Photo: iStock

By Michael O’Neill

USDCAD traders appear to be making up for lost time this morning as the loonie has sank and then soared, tracking oil and general US dollar sentiment in a market devoid of tier one data.

Federal Obfuscation Market Committee?

Is it deliberate obfuscation? Last March, the Federal Open Market Committee lost “patience” and markets lost what was described as “forward guidance”. Since then, global markets have been whipsawed by a series of contradictory FOMC statements and speeches from a variety of Federal Reserve speakers.

Last month, the FOMC statement was dovish and Fed chair Janet Yellen’s press conference even more so, leading to forecasts for a rate hike being pushed out into 2016. A week later, however, Yellen was telling all who listened that a 2015 rate hike was still on the table. Yesterday, Atlanta Fed president Dennis Lockhart went a step further and talked about an October move. On the weekend, Fed vice-chair Stanley Fischer said he expected a December move.

Confused? You should be.

The US dollar remains soft. In the past month, the greenback has lost ground against the G10 currencies with the exception of the GBP. More telling is the rally in emerging market currencies. The FX market is saying to the Fed: “we don’t believe you” – a view supported by the US dollar index.

USDX testing uptrend line

The USDX is in an intraday downtrend and is probing the resilience of the long term uptrend from the July 2014 low (currently 94.80), a decisive break of which could lead to a retest of the 2015 low of 91.43.

The intraday downtrend remains intact while trading below 95.10 with another downtrend line at 95.50. A break above this level would argue for additional 94.80-96.20 consolidation.

USDX daily showing uptrend line being tested:

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

Source: Saxo Bank

The enigmatic loonie

An enigma is something that is mysterious, puzzling or difficult to understand and that accurately sums up the loonie in recent days. Unless of course you were on the right side of both moves, of course – then there is nothing enigmatic about it!

The loonie had rallied strongly since the beginning of the month until last Wednesday when the two-week downtrend appeared to have ended. Then came a short-lived rally followed by a plunge through key support in the 1.2950-1.3000 area (1.2950 was the 38.2% Fibonacci retracement of the June-September range and it also represented August and September’s lows in the 1.2990-1.3010 zone).

Based on the technicals, it was reasonable to expect additional USDCAD weakness and a move down to pre-Bank of Canada July rate cut levels.

Except that assumption was wrong…

Driving Miss Daisy

The USDCAD is not being driven by economic fundamentals, technicals or politics. It is oil. West Texas Intermediate is the chauffeur and FX traders are in the back seat. Even worse, the vehicle isn’t a Bentley but a scrap yard refugee that can careen out of control at any time.

Hold onto your hats. Photo: iStock

We know that oil will drop to as low as Saudi Arabia wants and we know that stated oil production volumes are as fluid as the commodity itself. Everything else is a crapshoot. How much of the recent WTI rally to $50.85/barrel, for instance, was short positions getting squeezed in thin markets?

This morning, the International Energy Agency warned that the global supply glut would last until 2016, driving WTI lower. That move was short-lived and WTI has bounced above the overnight peak.

Fake break or fake rally?

At first glance the Friday morning dip below 1.2950-1.3000 appears to be a “false break”, a short-lived move in thin pre-holiday markets that triggered stop-loss selling. On the other hand, the subsequent bounce from the 1.2899 low may be a fake rally on the back of profit taking, also in thin markets.

Those in the “fake rally” or USDCAD bear camp point to the a shift toward 2016 as the earliest date for the Fed to raise rates – a view that appears to be supported by the emerging market currencies that have rallied. They also note that the intraday drop in WTI prices appears to be corrective as the rally from the August 24 lows remains intact.

The "fake break" (USDCAD bull) camp points out that technically, the WTI rally failed in the $51.00-$51.50/b area and fundamentally, oil overproduction concerns haven’t gone away as evidenced by today’s EIA report. This camp also notes that the 1.2860-1.2900 level has contained all USDCAD losses since July’s Bank of Canada rate cut.

They also note that according to the latest IMM Commitments of Traders report, speculative short Canada positions have been greatly reduced. In addition, the Canadian election is being ignored. FX traders appear oblivious to the implications of a Liberal-led minority government winning on October 19.

In my opinion, the USDCAD selloff has been exaggerated by both CAD demand from speculative position squaring in thin markets and oil demand for the same reasons. The risk that the FOMC decides to save face and raise rates in December is still valid, oil overproduction continues and the negative implications of the likely Canadian election result suggests that USDCAD is a buy on dips.

USDCAD with broken downtrend and support noted:

Source: Saxo Bank

— Edited by Michael McKenna

Commodity bloc surges on dovish FOMC 9Oct15


Commodity bloc surges on dovish FOMC

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • USDCAD breaks key support
  • Do the Fed and media have their signals crossed?
  • Oil gushing higher, but is it for real?

Higher and higher for oil. But for how long? Goldman analysts reckon it’ll fade. Photo: iStock

By Michael O’Neill

Commodity currencies are the big winners today as traders bet that the Federal Open Market Committee meeting minutes were dovish. US wholesale data was ignored and the US dollar remains offered.

FOMC minutes clear, media muddles message

Rate hike expectations for 2015 have ping-ponged between “go” or “no-go” since the September FOMC meeting. The immediate conclusion was that the Fed would not be raising rates in 2015. Commodity currencies rose. Then Fed chief Janet Yellen gave a speech on September 24 in which she reaffirmed her belief that rates will rise in 2015, a view repeated often by a series of Fed speakers. The commodity bloc retreated.

Yesterday’s release of the FOMC minutes put the “no-go” camp back in the driver’s seat and commodity currencies and oil rallied. Many economists, strategists and the media have all concluded that the Fed is in a “wait and see” mode which traders interpret to mean no hike in 2015.

That may be the wrong conclusion. Yellen continues to maintain that rates will rise in 2015. Furthermore, so does the FOMC. “Most participants continued to anticipate that, based on their assessment of current economic conditions and their outlook for economic activity, the labor market, and inflation, the conditions for policy firming had been met or would likely be met by the end of the year”.

Unless the committee is deliberately misleading the world, December is the date for the first US rate hike since June 2006.

Is the oil rally for real?

What a week for oil bulls! WTI has rallied nearly $7.00/barrel since last Friday rising from $43.98/b. to $50.90/b this morning for a 15.6% gain.

The possibility that Opec would discuss production cuts at their “technical” meeting later this month appears to have triggered a short squeeze. Oil prices have been talked “up” with a series of rumours including a coup in Saudi Arabia and rumours of the Saudis announcing a price increase in November. US dollar weakness on what is thought to have been “dovish” FOMC minutes helped fuel the rally.

On the other hand, Goldman Sachs analysts maintained their call for “lower prices, for longer" this week. They believe that this rally was more a function of positioning and technicals and will fade due to still weak fundamentals because the global market is still over-supplied. They do not see any evidence of global production cuts.

Personally, I think Goldman has the right view. The rally is based on hopes and expectations while Goldman’s view is supported by facts.

US Oil 4-hour with resistance area noted

Source: Saxo Bank

Rallying loonie’s wings may get clipped

Oil was the driver of Canadian dollar weakness and oil will be the driver of Canadian dollar strength. The break of resistance at $49.50 in WTI targets further gains toward $53.50 which if they occur would likely lead to USDCAD testing the 1.2750-1.2800 area. At the same time, the oil rally without evidence of production cuts and rising demand does not appear to be sustainable.

However, the Canadian dollar strength may be short-lived.

The better-than-expect job gains announced in today’s Canadian employment data masked a weak employment report. All the gains were in part-time jobs. Full-time jobs shrank by 64,000. That is not evidence of a rebounding economy. Earlier in the week, the merchandise trade deficit widened as exports declined, also highlighting domestic economic growth issues.

There are only 11 days left until Canada’s general election. At this juncture, the Liberal Party, led by a drama teacher, could form a minority government with the left wing NDP party. That would not be a good result for the Canadian dollar.

USDCAD technical outlook

The intraday USDCAD technicals are bearish while trading below 1.3010 with this morning’s breech of 1.2950 suggesting further losses toward the 1.2750-1.2800 area. The move below 1.3130 last Friday proved to be important as it snapped the uptrend which had been intact since June. It won’t be a straight shot lower, as evidenced by today’s bounce to minor resistance at 1.2980. The 100-day moving average should provide some support at 1.2887. For next week, USDCAD support will be at 1.2910 1.2880 and 1.2840. Resistance will be at 1.2980, 1.3010 and 1.3040

Chart: USDCAD

Source: Saxo Bank

The week that was

At the end of last week, this week looked very promising. There were three central bank policy meetings and the minutes from two others on the agenda as were speeches from Mario Draghi and Mark Carney. Taken together, it was a recipe for volatility. Alas, it was not to be.
For starters, China was well into its Golden Week holiday which sucked liquidity (and global economic recovery concerns) out of Asia.
.
Monday saw US dollar selling in Asia and Europe reverse course in New York and the announcement of the Trans-Pacific Partnership Agreement.

Tuesday started with the Reserve Bank of Australia policy meeting and statement which ended up being a tad less dovish than expected, giving the Aussie a boost in the process. Oil staged a sizeable rally while the US dollar retreated. Kiwi rode a milk powered rocket on news of a 12.9% rise in the price of whole milk powder. Yen traders patiently awaited the Bank of Japan policy meeting.

Wednesday’s Bank of Japan statement didn’t disappoint. Nothing was expected and nothing was delivered. A rise in commodity prices helped encourage risk seeking trades in Europe and Asia but New York didn’t feel the same way. WTI oil prices probed resistance in the $50.00/ barrel range and then dropped back quite aggressively, mostly due to a report of a decline in US inventories.

Thursday welcomed China back to work. An expected big rally in Chinese equities based on steady gains across global indices while they were away, failed to materialise, which cooled some of the rally fever in other markets. The Bank of England delivered what was expected and markets yawned. The FOMC minutes were as clear as the previous statement, which isn’t saying much. A brief flurry of activity in FX markets around the release returned to equilibrium shortly after.

The week that will be

It is a short week for Canadians who will be celebrating Thanksgiving on Monday. Americans honour Christopher Columbus on Monday, as well but not equally. FX markets are open as are stock exchanges but bond markets are closed. Spain is also closed for National Day.

The week will likely be directionless but choppy due to the lack of major central bank guidance. However a plethora of data from the likes of China, the UK and the Eurozone as well as retail sales and CPI from the US should provide enough drama for intraday trading.

– Edited by Clare MacCarthy