The Pause before the panic 3Nov15


Pause before the panic

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

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  • Traders biding their time ahead of speeches and data
  • FX markets wait for speeches by Draghi and Yellen, US nonfarm payrolls data
  • NFP report could be a let-down
  • Loonie tracking euro more than oil

Calm before the storm? FX markets are biding their time, awaiting new direction. Photo: iStock

By Michael O’Neill

FX markets have hit the snooze button. There will be plenty of time to panic near the end of the week, but the first few days of November have been a sea of tranquility.

Last month’s European Central Bank bombshell of December stimulus followed by the Federal Open Market Committee’s (FOMC) indication of December tightening lit the fuse for an explosive December. The problem is that it is a very long, slow-burning fuse. It is only November and very early in November at that.

NFP scenarios

Traders are already anticipating Friday’s US nonfarm payrolls data. The consensus forecast is for a gain of 180,000 jobs, far better than September’s 142,000 gain and validation that US job growth is strong and sustainable.

Here are some scenarios:

Weak report: The spin doctors will explain a weaker-than-expected report by reminding markets that because the US is close to full employment, it is hard to sustain large gains, an excuse they used last time. They will also remind traders that there is still one more NFP report before the December FOMC meeting. Nevertheless, the US dollar should weaken.

Strong report: A strong report would be seen as validation of last month’s hawkish FOMC statement and encourage US dollar buying. At the same time, analysts will warn traders that there is still one more report before the FOMC.

Weaker than-expected but higher than previous report: Under this scenario, the USD should be extremely choppy, with bulls and bears trying to re-position themselves. This scenario would likely result in flat to small dollar gains, mostly because there is still another jobs report due before the December FOMC. Because there is still one more employment report ahead of the FOMC meeting, the effects of this report will be similar to many previous reports; short-lived and forgotten by the middle of the following week.

Who plugged the oil leak?

There hasn’t been much good news for oil price bulls in the past month. In fact, the news has been mostly dismal. There has been no shortage of bearish price forecasts, US crude storage is close to capacity, Russia and Saudi Arabia are pumping crude at a record pace, Iranian crude is expected to return to global markets soon, and the Chinese economy is slowing.

Yet WTI crude prices have stabilised and managed to hold on to last week’s gains. The $42.70/$43.30/barrel area has proven resilient and has withstood a multitude of tests since the end of August.

Perhaps Opec’s grand scheme to use low prices to crush non-Opec producing nations has worked. Earnings from major oil companies have been decimated. Exxon Mobil posted a 37% drop in revenue, Chevron’s third-quarter earnings plunged to $2.0 billion from $5.6 billion, and last week Shell wrote of $8 billion in investments in Alaska and Canada.

But then again, those three companies are still in business and have a diversified revenue stream. For those companies, Opec price cuts have left a mark, but so far, nothing they can’t handle.

The mix of oversupply, new production from Iran and possible capacity constraints in the US suggests that oil price gains are likely unsustainable. At the same time, the failure of WTI to break below the $42.70-$43.30 floor may be proof that the current range reflects these circumstances and needs another catalyst to break through the floor.

WTI daily with trading range

Source: Saxo Bank

USDCAD outlook

The loonie is a side show. USDCAD is tracking US dollar moves against the majors, particularly EURUSD, which is a good indication that domestic issues and data have taken a back seat to global events.

Even intraday oil price movements are failing to provide much stimulus for USDCAD. More than likely, the holiday from domestic data will end on Friday with the Canadian employment report. The consensus forecast is for a loss of 5,000 jobs, mostly due to “payback” from gains in the previous three reports.

A larger-than-expected loss of jobs would underscore the economic growth lag between Canada and the US and lead to USDCAD gains. At the same time, this report is volatile and its currency effects are usually short-lived.

USDCAD tracking EURUSD moves

Source: Saxo Bank

USDCAD technical outlook

The intraday USDCAD technicals are bullish while trading above 1.3080, looking for a break of resistance in the 1.3150-60 area to test minor resistance at 1.3180, which, if broken, would extend gains to 1.3280. A move above 1.3280 would put the focus on 1.3455. On the downside, a break of 1.3080 would lead to a test of support in the 1.2990-1.3010 area.

USDCAD 4-hour chart

Source; Saxo Bank

Low oil prices have decimated oil producers’ earnings. Photo: iStock

— Edited by John Acher

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Categories FX, Foreign Exchange, Currency, Canadian Dollar

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