Beware the Thanksgiving squeeze 17Oct15

Beware the Thanksgiving squeeze

Michael O’Neill

FX Consultant / IFXA Ltd


  • Today’s US data fail to alter the rate hike narrative
  • December Opec meeting may surprise crude oil traders
  • USDCAD poised for gains despite encouraging Canadian data

By Michael O’Neill

It has been a reasonably active day in FX markets although the overnight ranges remain intact. This morning’s US data did nothing to dissuade traders expecting a Federal Reserve rate hike next month, nor did they change the minds of those who believe the Fed won’t move until 2016.

Meanwhile, oil and loonie traders will be watching for the American Petroleum Institute’s oil inventory data release.

Opec meeting looming large

The Force awakens and no, it has nothing to do with Star Wars Episode Vll. Rather, it is all about Opec’s December 4 response to decreasing oil prices in the face of rising production in a dwindling demand environment.

That supply imbalance has renewed downward pressure on oil prices and woken both oil and loonie bears of late. Luke, Han and Princess Leia are nowhere to be found.

A few of R2-D2’s distant relatives, however, may have been spotted. Photo: iStock

A year ago this month, the Saudi-led Opec cartel decided against using production cuts to shore up the price of crude which had been declining steadily. An economic slowdown in China and the rise of non-Opec production had created a supply imbalance which remains to this day.

At last year’s meeting, the cartel concluded that it was better to maintain market share rather than support non-Opec producers. That decision resulted in a steep plunge in the price of crude, with WTI reaching a low of $42.20/barrel in March and a new low of $37.40/b in late August.

In between, the price ceiling lowered from $61.80 in May and June to $50.50-$52.50 more recently.

American and Canadian oil producers have been hammered on the price declines but that hasn’t stopped them from pumping oil. The EIA forecasted that US crude production increased to 9.3 million barrels/day in 2015, up from 8.3 b/d in 2014.

Lately there is evidence that production is starting to decline and the EIA expects this to be the case throughout 2016. The EIA are also looking for Opec production to rise by 0.2 million b/day in 2016 after an increase of 0.9 million b/d in 2015.

With all this oil sloshing around and China’s economic growth set to slow to 6.5% in 2016, it isn’t too difficult to understand why prices are falling.

WTI is trading at $40.88/b after breaking support in the $42.70/b area and setting its sights on the August $37.70/b low. A break of that level would lead to a test of the 2008 low of $32.40/b. WTI needs a move above $42.70 to negate the short-term downtrend and imply additional $40.00-45.50 consolidation.

The glut of crude has splashed all over the loonie leading to its 16.9% decline since last November. In actual fact, there were a lot of factors contributing to the CAD’s decline, the key ones being the two Bank of Canada rate cuts, lagging Canadian economic growth versus the US, and the prospect of higher US rates.

That was then, this is now

Oil prices began a new push lower at the beginning of November following a late October rally. The retreat broke both the September and October lows and has the August $37.80-90/b bottom in its sights.

The catalyst appears to stem from the belief that the toxic mix of overproduction and slowing demand will persist into 2016, according to reports from Opec and the EIA.

Arguably, October and November production volumes aren’t a surprise to anyone and neither is the evidence of rising capacity constraints. So why sell oil now, ahead of the annual Opec meeting?

Last year, Opec members surprised markets and a repeat performance this year cannot be ruled out

WTI crude oil (four-hour chart):

Create your own charts with SaxoTraderGO click here to learn more

Source: Saxo Bank

Still the best of friends

USDCAD has tracked oil price movements very closely for the past few months and it is no coincidence that WTI is near major support while USDCAD flirts with major resistance.

At issue is the timing of the moves, as there haven’t been any new oil market developments. At the same time, Canadian economic data have been improving, a sign that Canada is benefiting from the modest US recovery.

The employment report has posted gains for four consecutive months, GDP growth is in positive territory, exports have improved slightly, and the housing market remains robust.

It is still cold there though. Photo: iStock

Month-end squeeze risk rising to Defcon 4

For Americans, next week is Thanksgiving and forget a one-day break… for many, this is the major holiday of the year and they intend to make the most of it.

The actual Thanksgiving Day holiday is Thursday and all US markets are closed. Wednesday and Friday may as well be closed, as activity will be dismal. In addition, a lot of traders take the whole week off – especially those who want to get a good spot in line for the Black Friday sales.

Selling WTI and buying USDCAD are popular trades. WTI technicals are bearish pointing to further downside to $37.70/b while USDCAD is targeting 1.3455. Both have impressive moves this month.

The US Thanksgiving holiday(s) will not just delete the American turkey population but will also suck out a ton of liquidity from markets. At the same time, the December 3 European Central Bank meeting, the Opec general meeting on December 4 and the Federal Open Market Committee meeting on December 16 provide enough potential risk to keep a lot of traders on the sidelines, at least those that are still active and have not closed their books for the year.

All of these elements combined raise the risk of a Thanksgiving squeeze to "Defcon 4".

USDCAD technicals

There is no denying that the short term USDCAD technicals are bullish. The uptrend from October 12 is intact while trading above 1.3200 and rallies have been capped by minor resistance at 1.3375 which guards the 2015 peak of 1.3455.

Notably, the 61.8% Fibonacci retracement level of the entire 2002-2007 range sits at 1.3466.

The intraday set-up is interesting. The USDCAD uptrend line from the November 4 low of 1.3050 was broken overnight with the move below 1.3320 which points to further weakness to the 1.3250-70 zone.

If that support level gives way, it suggests further losses to 1.3140 are likely.

USDCAD four-hour with Fibonacci retracement:

Source: Saxo Bank

— Edited by Michael McKenna

Michael O’Neill is an FX consultant at IFXA Ltd.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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