ECB and Opec-for markets nothing else matters 20Nov15


ECB and Opec – for markets, nothing else matters

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Canadian data mixed and ignored
  • WTI prices scratching bottom, almost.
  • Waiting for the ECB and Opec

Nobody’s talking turkey as we wait for the ECB and Opec. Photo: iStock

By Michael O’Neill

It will be good to be an American next week. Their focus will be on family, friends, football and turkey. The rest of the FX world will be at their desks wondering why they turned on their computers. It’s not like there isn’t the usual array of regional data and even a few top-tier US releases on tap for traders to focus on, it’s because of the December 3 European Central Bank (ECB) meeting and the December 4 168th (Ordinary) Opec meeting in Vienna. Until then, as Metallica sang in 1991, “nothing else matters”.

Countdown to ECB begins

European Central Bank president, Mario Draghi, in a speech in Frankfurt today, reiterated his earlier remarks alluding to another round of stimulus action being announced on December 3. He repeated that “the ECB is willing to act quickly and has the available instruments to do so.” He has garnered a reputation as a man who backs up his words with action. That is a sharp contrast to the approach of the Federal Open Market Committee members or the Bank of England’s Mark Carney. They have switched between hawkish and dovish almost as fast and as often as FIFA officials took bribes.

Mario Draghi’s stated intentions ensures that next month’s ECB meeting will be a game-changer and set the tone for EURUSD direction for the next few months. That risk and Thanksgiving provides all the rationale needed for FX traders to sit on the sidelines for the next 13 days.

More fun than an oil barrel of monkeys

A surprise at the Opec meeting on December 4 would be the steroids for whatever action the ECB takes. Oil prices are hovering just above their 2015 lows with no end in sight to the problem of overproduction and dwindling demand. Early last week, Opec Secretary General, Abdalla El-Badri, confidently predicted that oil demand will reach 17 million barrels/day by 2040, 25 years from now. His crystal ball has a hyperopic flaw as the 2016 prediction was rather vague and fluid and extended to 2017.

The chances of Opec cutting production targets are slim to none. Goldman Sachs analysts said in a report this week that Opec’s ability to raise prices by reducing supply is hampered by the ability of US shale producers to ramp up low cost production.

Although few should be surprised by Opec maintaining production quotas as they are, the fact that Opec is essentially powerless to change prices may lead to renewed oil price weakness and spark another selloff in commodity currencies. Another good reason for traders to sit on the fence until that meeting.

The two major events (ECB and Opec) and US Thanksgiving will ensure very quiet FX markets next week and right up to December 3. There will be a few regional distractions but these two meetings will dictate US dollar direction and ensure range bound markets for the next two weeks.

USDCAD outlook

Today was a prime example demonstrating that Canadian data not matter, at least in the current environment. Core CPI rose 2.1% (forecast 2.0%) while the headline CPI number was unchanged at 1.0%, year over year. Retail sales declined as well, in large part due to falling gasoline prices. Neither release will be much of a factor for the Bank of Canada interest rate deliberation in December. For the Canadian dollar, oil is the story and at the moment, oil is very soft.

Chart: CPI and Retail Sales

Source: Statistics Canada/IFXA Ltd

USDCAD technical outlook

The short- and long-term USDCAD uptrends remain intact while trading above the 1.3090-1.3100 area and 1.2750 respectively while the intraday uptrend is at 1.3240. The 1.3350-70 area has proved to be very sticky ahead of strong resistance at 1.3455-65 representing the 2015 peak and the 61.8% Fibonacci retracement level of the 2002-2007 range. Next week’s US holidays will sap out a tonne of liquidity which could lead to some volatility within the 1.3240-1.3370 trading band.

Chart: USDCAD

Source: Saxo Bank. Create your own charts with SaxoTrader click here to learn more

The week that was

The week started with traders still digesting the horrific news from Paris and concerned about its impact on financial markets.

Monday’s Asian session was shaky. Gold prices rose, EURUSD was offered and the Nikkei was down. The European open defied expectations. The Paris bourse drifted higher from the open and EURUSD rallied. The New York session saw US dollar buying across the G-10 spectrum.

Tuesday was very quiet in Asia. The release of the Reserve Bank of Australia minutes didn’t rate a ripple. European FX was busy with UK CPI and German ZEW data releases. The New York session was nervous and FX consolidated. A bomb scare in Germany cancelled a soccer match that Angela Merkel was supposed to attend. Kiwi came under pressure following another soft milk auction but overall trading was stifled ahead of Wednesday’s FOMC minutes release.

Wednesday’s Asian, European and New York sessions saw steady demand for US dollars in anticipation of some new, hawkish revelations in the FOMC minutes due later that day. That was wishful thinking. Commodity currencies were softer on lower commodity prices. The fun started after 1900 GMT when the FOMC minutes didn’t provide anything new. And that news led traders to sell dollars, right across the board in what appeared to be a “wash-out” of weak long dollar positions.

Thursday’s Asian session was busy. US dollar selling, post FOMC minutes, continued unabated. In Japan, the BoJ interest rate decision and policy statement ended up being a non-event. GBPUSD mostly ignored the retail sales report. New York sold dollars throughout the session and equities rose. Forget economics 101. In 2015, the new economics means that rising interest rates are good for equities as it is a sign of a strong economy.

The week ahead

This will not be a banner week for FX markets. It never is when it is the week with the US Thanksgiving holiday. FX trading activity will evaporate in New York starting around lunch on Wednesday and not get back to any semblance of normalcy until the following Monday. The loss of that liquidity gives traders around the globe a reason to do nothing and they will.

Tuesday is shaping up to be the busiest day of the week. A speech by the RBA governor starts the day followed by a host of data from the Eurozone, UK and USA. For the most part, traders will be sidelined awaiting the marquee events of December, starting with the ECB meeting on December 3 and the Opec meeting the next day.

– Edited by Clare MacCarthy

Michael O’Neill is an FX consultant at IFXA Ltd

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Author: Loonieviews

In the past 30+ years, I have been an FX interbank market making trader, a high performing FX and Derivatives Sales person, creator of simple and complex risk mitigation strategies and a manager of high performance FX teams. The Trade of the Day is a culmination of that experience. Retail FX traders have access to a well-crafted and carefully researched FX trade strategy designed to generate FX profits while mitigating losses.

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