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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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