Welcome to the “What Just Happened Zone 24Nov15


Welcome to the ‘What just happened?’ zone

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US data leads to profit taking
  • Risk aversion rising on Turkey shoot
  • Loonie benefiting from oil gains

Didn’t see that coming. Photo: iStock

By Michael O’Neill

FX markets are entering the “What just Happened?" zone. This zone is that trading session (or sessions) when an obscure piece of economic news or event triggers a sharp price swing in a currency or currencies. When it occurs, it is usually followed by a collective WJH? from FX traders.

A WJH zone is a market phenomenon that occurs when there is a large drain of liquidity exacerbated by a lack of data for a period of time, which could be hours, days or even weeks. The latest version of the WJH zone is shaping up to be a doozy and it may already be starting.

Normally, the US Thanksgiving holiday provides all the excuses needed for traders to lighten up positions and retreat to the sidelines. This year, they will be sidelined for longer.

The European Central Bank meeting, scheduled for December 3, promises to be a momentous occasion, especially for EURUSD traders. ECB president Mario Draghi has alluded to unleashing a host of stimulus measures which will determine the fate of the euro for the next few months.

Anticipation of that meeting will keep EURUSD traders, not just on the sidelines, but glued to the bench.

Opec is the other major risk. Normally, Opec meetings are of interest only to attendee’s and their entourages.

Last November’s meeting changed that when it led to the oil price collapse. What’s in store this year? The 168th (Ordinary) Opec Meeting is on December 4, immediately following the ECB meeting.

Saudi Arabia made fresh noises about cooperating with Opec and non-Opec countries yesterday, and that created a furor in oil markets especially since traders are reportedly, well-short oil. Although still a long shot, the possibility of a production cut accommodation, cannot be ruled out which would likely leave a mark.

Opec could stir the markets’ pot if a bit of give-and-take
sees a move towards price stabilisation. Photo: iStock

Together, Thanksgiving, ECB and Opec, have provided the ingredients for a WJH zone. The only thing left is the catalyst.

For the next nine days, FX traders may be exposed to wild price swings on anything that spooks them. It could be Russia retaliating against Turkey for shooting down a Russian fighter jet. It could be ISIS launching another terrorist attack in Europe or blowing up a major oil terminal.

It could be a central banker pulling a peg or putting one in place. It could be a piece of data or a series of data that could play havoc with ECB plans to add stimulus. The point is; it could be anything and with so many traders not active, the price swings can be enormous leaving a lot of people asking WJH?


Fun with figures or Canada Finance 101

Last Friday, Canada’s new Finance Minister, Bill Morneau, provided an update for Economic and Fiscal Projections. He announced that Canada will end the year (March 2016) with a $3 billion dollar deficit. In July, his predecessor, Joe Oliver maintained that Canada would end the year with a $1.5 billion dollar surplus. Pinocchio complained that both men’s noses were longer than his at the fall fair fib telling contest.

In reality, Finance Canada, has created a new accounting category, the “deficitsurplus”. A “deficitsurplus” is always 100% accurate, never needs an adjustment to balance and contains no numbers.

Nevertheless, Bill Morneau’s reality is all that matters going forward. His party is the government and he is the Finance Minister. Joe Oliver is now a footnote.

The Finance Department’s latest projections are for the Canadian economy to grow at 1.9%, year over year 2015-19, 0.2% lower than previous forecasts, making sure to attribute some of the slowdown to ongoing global economic weakness. He also noted that the balance of risks for the Canadian economy were tilted to the downside, in part due to the oil market outlook.

This assessment is just another notch in the negative Loonie stick.

Budget balance

Canada Department of Finance

USDCAD outlook

USDCAD is consolidating recent gains within a 1.3230-1.3460 range. There isn’t any data of note from Canada for the balance of the week leaving general US dollar sentiment and oil price movements to dictate direction.

This morning’s US data (GDP, Trade, PCE) were all as expected and did not provide any fresh insight to inject into the rate hike debate. What has changed was the notch higher in geopolitical risk. Turkey’s downing of the Russian fighter jet is not likely to endear them to Vladimir Putin and his associates, especially since Putin can argue that the jet was being used to help the Europeans in their fight against terrorism. Whose side is Turkey on — the West or ISIS?

However, any US demand from risk aversion trades may be offset by a rise in oil prices which should limit USDCAD gains.

USDCAD technical outlook

USDCAD is in a short term uptrend while trading above 1.3110 and an intraday uptrend while trading above 1.3240. At the same time, upside momentum has stalled in the 1.3450-70 area.

USDCAD hourly with potential trading range

Source: Saxo Bank

A break of minor uptrend support at 1.3320 suggests a retest of 1.3240 is likely and if that level goes, 1.3110 is in the cards.

The US holiday and the ECB/Opec meetings looming at the end of next week may lead to a period of 1.3240-1.3450 consolidation.

— Edited by Martin O’Rourke

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Categories FX, Foreign Exchange, Currency, Canadian Dollar

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