Loonie on the ropes as WTI wilts
FX Consultant / IFXA Ltd
- Poor US data ignored as traders focus on December rate hike
- EURUSD parity looms as ECB appears poised to boost stimulus
- FOMC, RBA minutes could skew AUD, USD’s present ranges
Come December, markets expect, US rate hike hawks will finally quit sitting on the fence. Photo: iStock
By Michael O’ Neill
This morning’s US data releases were on the soft side of the equation and largely ignored. Federal Reserve chair Janet Yellen’s statement that the idea of a December rate hike was "live", followed by blowout employment data, seems to have convinced traders that a rate hike is a done deal and today’s data are relatively meaningless
Will Yellen be Santa or Scrooge? For many traders, the wait until the December 16 Federal Open Market Committee meeting is as excruciating as a four-year-old’s wait until Christmas. At the moment, 70% of market participants expect the Fed to hike rates. If this is indeed true and if they have positioned themselves for a rate hike, will the ensuing price action be of the “buy the rumour-sell the fact” variety?
Maybe so, but FX markets are never satisfied and fretting about the next hike will begin as soon as the first one is announced.
Still, 30% of the market is not convinced that the FOMC will move rates in December, in part due to the contradictory messages by various Fed members that have left the G7 currencies to wallow within their recent ranges. Fortunately, the European Central Bank meeting on December 3 is only 20 days away.
ECB president Mario Draghi has put markets on notice that there is additional stimulus in the works which if announced could send EURUSD crashing towards par. The problem for traders is that since both meetings can set the trading tone for the next few months, it is prudent to keep their powder dry until they occur.
That could mean we are in for a long period of skittish trading like we saw this week.
The USDCAD outlook
USDCAD has been locked within a 1.3240-1.3340 trading band this week. The absence of any Canadian data of note left the currency direction to the whims of WTI price movements and US dollar sentiment against the majors. To its credit, the loonie held its own despite the nonfarm payrolls report empowering US dollar bulls.
The week ahead could see the loonie benefit from some domestic data; unfortunately, however, the good stuff won’t be released until Friday.
CPI is forecast to rise 1.1% (year-over-year), core 2.1% which won’t do anything to undermine the CAD.
A drop in retail sales could be damaging unless it is explained away by lower gas prices. The bearish outlook for oil prices combined with the expectations of rising US rates and a sluggishly growing Canadian economy will ensure continuing downward pressure on the Canadian dollar.
It is shaping up to be a long, cold winter for the Canadian dollar. Photo: iStock
USDCAD technical outlook
USDCAD is currently pressuring topside resistance in the 1.3340-50 area with additional (but minor) resistance lurking just behind at 1.3380. If broken, it will be a straight shot to 1.3455-1.3466 and perhaps higher.
At present, 1.3466 represents the 61.8% Fibonacci retracement of the entire 2002-2007 range and it should be sticky. In the past, the 1.3450-70 area provided plenty of support and resistance which may be the case again.
If it breaks, the next key Fibonacci target is 1.4507.
In the short term, the USDCAD uptrend from the beginning of the month remains intact while trading above the 1.3240-60 area which should contain short-term pullbacks if the USDCAD rally is to continue
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Source: Saxo Bank
The week that was
This week was, for the most part, a bit of a non-event. Sure there were occasional bursts of action, but those bursts were few and far between.
Monday started off with Chinese trade data. The report was slightly weaker than expected but for the most part, didn’t have much of a long-lasting impact. A Reuters “exclusive” stating that the ECB was contemplating even deeper negative interest rates raised a few eyebrows and led to a small drop in EURUSD. All in all, however, FX markets were very quiet across the globe
Tuesday wasn’t any better. Chinese CPI data were weaker than forecasted and, again, ignored by FX traders in Asia and Europe. New York traders sold EURUSD in the early going but the move quickly petered out and the day ended with the G10 currencies closing near to their opening levels.
Wednesday should have been even quieter than Monday and Tuesday due to Diwali and Veterans Day/Remembrance Day holidays, but it wasn’t. In Europe, EURUSD rallied in a short squeeze but couldn’t crack the 1.0800-30 resistance area. Traders were at a loss for why the move occurred. In New York, bond markets were closed and FX desks operated with greatly reduced staff, so that session was a write-off.
On Thursday, a blowout Australian employment report led to a steep rise in AUDUSD despite warnings from economists that the data were suspect. Europe was pretty subdued due to a lack of data and a bevy of Fed speakers on tap later in the day.
The EURUSD was offered to start the New York session, but it didn’t stay that way as another short squeeze took the single currency from 1.0695 to a high of 1.0825. Plunging oil prices (WTI dropped 4%), a lack of major data, weak equity markets, and no fresh direction from the day’s Fed speakers contributed to the move.
The week that will be
The week ahead should have fewer quiet periods. Japan’s GDP print will set the tone in Asia while Eurozone CPI will be the European focus.
On Tuesday, the RBA minutes will be scrutinised for clues as to whether the Reserve Bank of Australia will cut rates at the next meeting (it is expected to). UK and Eurozone ZEW data will be the other key events.
On Wednesday, the FOMC minutes will be released which may provide clues to how “live” the December meeting will be. The Bank of Japan takes center stage in Asia on Thursday with an interest rate decision and policy statement. The week will end with US traders looking ahead to the Thanksgiving holidays.
At that point, all talk of hawks and doves will turn suddenly towards turkeys. Photo: iStock
— Edited by Michael McKenna