We’re all being torpedoed by the Yellen submarine
FX Consultant / IFXA Ltd
- 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.
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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.
Source: Saxo Bank
— Edited by Michael McKenna