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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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