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

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Categories FX, Foreign Exchange, Currency, Canadian Dollar

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