Black Friday shopper snap up US dollars 27Nov15


Black Friday shoppers snap up US dollars

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US dollar climbs in thin markets
  • Markets look forward to the most dovish rate hike in history at next month’s FOMC
  • Turkey’s downing of Russian jet sparked risk aversion across markets
  • Week ahead brings major risk events, above all the ECB and Opec meetings

The Black Friday shopping spree in the FX markets consisted of a spurt of US dollar buying. Photo: iStock

By Michael O’Neill

The US dollar has had a good day, gaining across the G-10 spectrum aided by low liquidity due to the post-Thanksgiving half-day holiday in the US. It’s not really a day off for American employees, but efficient staffing and "brief illnesses" give it the appearance of a National holiday.

Most doveish rate hike in history

There are still 19 shopping days left until the Federal Open Market Committee (FOMC) announces that it is raising US interest rates by 0.25%. That will be the first rate action of any kind by the FOMC in seven years. Unfortunately, it will not put an end to the “when will they hike rates?” debate which has also lasted for seven years.

The only reason that December’s rate hike is a slam dunk is that Fed chief Janet Yellen has said, more than once, that US rates would rise in 2015. Except for the last employment report, recent US economic data have not screamed endorsement for a move.

Inflation is an issue. More precisely, lack of inflation is the issue, and according to the Fed’s Daniel Tarullo, “market-based measures of inflation compensation and survey-based measures of inflation expectations are sort of near historic lows”. He noted that although the US economy was chugging along, it was still an overall mixed picture.

Nevertheless, the FOMC will announce a rate hike. Yellen will be hailed as a “woman of action” who is decisive and does what’s necessary. After the announcement, a gaggle of Fed speakers will trip over their tongues telling everyone that rate hikes are data-dependent and will be gradual. Watch for forecasts that the next move may not occur until the third quarter of 2016 at the earliest.

US dollar bulls will not be happy. Long US dollars is the most popular trade in the FX markets with substantial profits available to many, at current rates. A dovish FOMC statement would create a stampede to profit-preservation trades. Another EURUSD rally back to 1.1500 cannot be ruled out.

Turkey – the farce awakens

There was a whiff of risk aversion in the air on Tuesday and lingering traces remain. It is all because of Turkey’s shooting down of a Russian SU-23 fighter jet on the Syrian border for ostensibly encroaching on Turkey’s airspace. The plane was destroyed and a pilot killed.

Turkey insists it was merely protecting its airspace though in reality it was more likely retaliating against Russia for numerous grievances and for backing Syrian President Bashar al-Assad.

Meanwhile, across the Turkish border in Syria, Russia is actively attacking ISIS positions. Turkey, on the other hand, is attacking Nato-backed Kurd positions, another group that is fighting ISIS. It is apparent that Turkey is using its Nato membership, the Syrian civil war and the Nato campaign against ISIS to advance its 30-year agenda against the Kurdish PKK party.

Is Turkey the rogue nation of Nato? It sure looks like it. By openly attacking Kurd positions in Syria it is essentially providing military support to ISIS as the Syrian Kurds are a key Nato partner fighting ISIS on the ground. The same holds true for their downing of the Russian jet.

Fear that Russia could escalate the conflict and suck Nato allies into a black hole of hostility is distracting key members from the main agenda — eradicating ISIS. Turkey is proving that its Nato membership is a farce.

Fear of escalation has distracted key Nato members’ attention from the main job of fighting ISIS. Photo: iStock

US dollar index shows the way

The USDX has been grinding higher since mid-October after finally breaking major resistance in the 98.40-70 area which had thwarted numerous attempts since last April. For the past two weeks, the uptrend has been rather ragged; rallies followed by retreats, while still managing to post higher highs and higher lows.

The intraday USDX uptrend remains intact while trading above 99.60, with a break of the 100.30-40 area suggesting further gains to around 102.00. A move below 99.60 would open the door for a deeper correction to the 98.50 area. Incidentally, the 61.8% Fibonacci retracement of the entire 2002-07 range comes into play at 101.95.

USDX weekly chart with Fibonacci noting approach to major resistance

Source: Saxo Bank

The week ahead

The week ahead has more than its fair share of event risk. The two biggest are Thursday’s ECB meeting and Friday’s Opec meeting.

Friday will be extra-busy thanks to the monthly US employment report. There’s more. Tuesday has a speech by BoJ governor Kuroda and an interest rate announcement from the Reserve Bank of Australia. The Bank of Canada announcement follows on Wednesday. It will be a fitting start to the holiday season as all the goodies are delivered at the beginning of the month.

— Edited by John Acher

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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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