Is EURUSD mooning the FX markets? 27Oct15

Is EURUSD mooning the FX markets?

Michael O’Neill

FX Consultant / IFXA Ltd


  • 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:

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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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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