Strong USD paints parity target on EURUSD 10Nov15


Strong USD paints parity target on EURUSD

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • G-10 currencies soft as dollar drifts higher
  • EURUSD seems to be heading for parity
  • Keystone pipeline cancellation not end of Canada’s oil sands

The euro and the dollar look headed for parity as the dollar keeps gaining. Photo: iStock

By Michael O’Neill

In 1968, Three Dog Night sang about how “One was the loneliest number”. EURUSD traders may soon be looking at “One”, in other words parity for the euro and the dollar, and there’s no chance that it will be lonely. In fact, it will get all the action it can handle.

Federal Reserve chief Janet Yellen all but confirmed a December rate hike last week. And Friday’s US nonfarm payrolls report suggested that Yellen’s view was a foregone conclusion.

Traders sold euros, which was to be expected, but EURUSD remains well above the 1.0475-1.0500 low achieved in March-April of this year. Back then, the move was in anticipation of a rate cut as early as June. Today, in addition to data and Yellen supporting a US rate hike, the European Central Bank president Mario Draghi got into the action and indicated that the ECB would inject additional stimulus into the Eurozone in December.

So what’s holding EURUSD sellers back? Draghi has a reputation for being cautious and delivering what he promises. The Yellen-led Federal Open Market Committee is not held in the same regard.

Contradicting remarks and speeches from various Fed officials have painted a picture of a fractured, squabbling central bank that is struggling to reach consensus on the US economic outlook. December may be “live”, but months of FOMC indecisiveness and the proximity to year-end may have left more than a few traders sitting on the bench.

If so, there’s a toxic cocktail ready to be served on the December FOMC day. The usual less-than-stellar year-end liquidity, combined with pent up demand to sell EURUSD from sidelined traders, year-end demand for dollars and bearish short-term and long- term technicals paint a target on par for EURUSD.

EURUSD monthly chart with Fibonacci retracement

Source: Saxo Bank

Obama rejects Canada’s Keystone

US President Barack Obama dealt Canada a blow when he rejected the application by Trans-Canada Pipelines to build the Keystone XL pipeline.

Obama said: “America is now a global leader when it comes to taking serious action on climate change.” It still isn’t clear if he was referring to the fight against climate change or the damage that Americans have already wreaked on the planet.

In Obama’s world, massive oil tankers plying the Seven Seas with cargoes of crude or huge train loads of oil rumbling across Middle America are more environmentally friendly than a pipeline. He didn’t say anything about the climate change havoc created by US bombing campaigns in the Middle East, either. In addition, two of the worst greenhouse-gas emitters on the planet, China and India, get a pass.

However, Obama did not ban crude from oil sands, just pipelines. The Toronto Star reported crude oil and equivalent exports have grown nearly 32% since 2011. Americans want the oil and a Republican president may decide that 47,000 new jobs and a $3.2 billion contribution to the US economy will improve the air quality.

USDX climbing Stairway to Heaven (or at least 100.60)

The US dollar index has broken above the 98.30-60 area, which has capped all rallies since May. That move hangs a target on the 2015 peak of 108.70 last seen in March. The intraday uptrend line support is at 99.04, guarding additional uptrend support at 98.10. A move below 99.40 would delay the inevitable move higher and result in a re-test of the 98.90-99.10 level

USDX with bullish set-up highlighted

Source: Saxo Bank

USDCAD outlook

The outlook for the Canadian dollar is tied to general US dollar and oil price movements for the rest of the week. Last week, strong domestic economic reports outweighed weak reports led by the 44,000 gain in Canadian employment.

A large part of the employment gains was due to the federal election, but it was still the fourth consecutive positive report. The narrowing trade deficit reflects growth in non-energy exports and may be a sign that domestic economic growth is benefiting from US economic gains. Still, the only real impact of the improving Canadian data is that it may have helped to slow USDCAD gains. Those gains could accelerate on Friday if the US retail sales are stronger than expected.

Oil prices are another factor. WTI crude is flirting with support in the $42.75/$43.00/barrel area. As long as this level holds, USDCAD gains will lag those against other G-10 currencies.

USDCAD technical outlook

The intraday and short-term USDCAD technicals are bullish, looking for a break above minor resistance in the 1.3310-20 area to extend gains back to the 2015 peak of 1.3455. A move below 1.3240 would lead to further losses to 1.3140-60.

USDCAD 4-hour chart

Source: Saxo Bank

Nebraska landscape. Do Americans think it’s safer to have oil cargoes rolling on the roads and rails across the American heartland than through a pipeline? Photo: iStock

— Edited by John Acher

Michael O’Neill is an FX consultant at IFXA Ltd. Follow Mike or post your comment below to engage with Saxo Bank’s social trading platform.

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Categories FX, Foreign Exchange, Currency, Canadian Dollar

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