Draghi, data and euro bears, beware 1Dec15

Draghi, data and euro bears, beware

Michael O’Neill

FX Consultant / IFXA Ltd


  • US Markit PMI buffers soft ISM PMI
  • Canada GDP data mixed
  • ECB and Opec meetings to dominate agenda
  • Fed headless chicken approach could see USD selloff

A man who delivers on what he promises: Photo: TradingFloor.com

By Michael O’Neill

The US dollar is drifting lower in a fairly subdued market ahead, ignoring this morning’s US data. The focus is clearly on Thursday’s ECB meeting, Friday’s Opec meeting and also the US payrolls report.

Don’t discount Draghi

The EURUSD selloff since Mario Draghi’s October 22 speech has stalled ahead of Thursday’s European Central Bank meeting. No one should be surprised. EURUSD has shed over 0.0700 points (or 6.2%) since he declared that he was prepared to cut interest rates while increasing and expanding bond purchases, blaming a renewed economic slump in eurozone.

As the countdown to D-Day (Draghi Day) shifts from days to hours, it makes sense that traders take a moment to reflect.

In the last few days, FX traders have been bombarded with warnings that short EURUSD positions are at risk. The argument is that the sheer size of positions and the magnitude of the EURUSD decline (13.2% YTD) will limit additional losses if Draghi’s expected “Bazooka” ends up being more of a ”shotgun”.

Expectations for a “game-changing” stimulus package have increased steadily since October and may have reached the point that whatever the ECB announces will be considered a disappointment.

Don’t discount Draghi. The ECB president has earned his reputation as a man who delivers on what he promises and there is no reason to disbelieve him now.

But do worry about the Fed

The ECB and the US Federal Reserve both earned well-deserved reputations this year. The ECB reputation is that of a central bank with a good understanding of the Eurozone economy, one that has developed an action plan to deal with shortcomings and one that is able to effectively communicate its policies and procedures.

The Fed is none of that. The 2015 version of the Federal Open Market Committee is akin to a poultry processing plant; numerous birds flocking around, all lacking heads.

Since October 28, a host of Fed speakers have made an attempt to appear united. All appeared to imply that the end of the zero rate policy would be in December. Many of these same members have proclaimed loudly and often that rate hikes are data dependent and a lot of the recent data doesn’t support a rate hike.

Yet, they will hike rates. That won’t be a big deal. The tone of the statement will be the big deal and that statement seems very likely to be dovish. A dovish Fed will be bearish for the US dollar and with massive short dollar exposures, a US dollar selloff could turn nasty. (Just a thought for the holiday season)

Are Loonie bears hibernating?

Where have all the Loonie bears gone? Canada just announced the largest monthly contraction in GDP since 2009, posting a negative 0.5% for September. (Forecasts were for flat). USDCAD responded as expected, soaring to 1.3395 from 1.3325, but that was it.

Why? As usual, the devil is in the details and these details were not as bad as the monthly change suggested. Oil production was reduced due to fires and maintenance shutdowns.

More impressively, Canada’s third quarter growth of 2.3% surpassed that of the US, which only grew 2.1%. The result is that today’s GDP report didn’t provide any new incentive for traders to take out resistance at 1.3395 or support at 1.3310.

GDP and final domestic demand

Source: Statistics Canada

The Bank of Canada interest rate decision and statement is due tomorrow. Canadian interest rates aren’t going anywhere, however the recent tick higher in CPI may be viewed in a positive light. That may help to offset, to a degree, the ongoing pains from low oil prices.

The lack of a press conference or an updated Monetary Policy Report will diminish the impact of the meeting allowing the Loonie bears to continue to nap.

The reaction to Friday’s Canadian employment report will be interesting. Almost all forecasters predict “payback” since last month’s 44,000 gain was due to the federal election.

A negative number will be discounted while anything above a 10,000 gain should be seen as positive. More than likely, the data will be overshadowed by the US report and only have a fleeting impact.

Friday’s Opec meeting is the best chance to awaken the Canada bears from their slumber. The problem of over supply has not disappeared. In fact with increased production from Iran on the horizon, it appears that it will get worse and no one really expects Opec to agree on a production cut.

But that isn’t news and shouldn’t drive WTI below the 2015 low. That will only happen if the meeting ends with a lot of bickering and threats to further increase production. The wild card is Saudi Arabia.

The Wall Street Journal reported today that the Saudi’s may be willing to discuss steps to prop up crude prices. If that happened and WTI rallied strongly, Canada bears would wake up and stampede for the exits.

Listen fellas, who fancies putting a cat among the pigeons this Friday? Photo: iStock

Food for thought

As stated earlier, many bank forecasters predict USDCAD to head toward 1.3800 in 2016 which is about .0450 points from the current market. Major support in USDCAD is at 1.2850 which is .0500 points from the current market. The market is already well-long USDCAD.

Where is the path of least resistance? It wouldn’t take much of an Opec surprise or an extra dovish FOMC statement in year-end, holiday thinned markets to cause a ruckus.

USDCAD technical outlook

USDCAD is in a well-entrenched uptrend that began in November 2014 and one that remains intact while trading above 1.2850. There is a lot of support that needs to be chewed through before this uptrend is jeopardised.

However, the short-term uptrend from October 2015 is a different story. That line has been tested frequently over the past week and now comes into play at 1.3300. A break of this level will only lead to 1.3240 and that’s where it gets interesting.

The 1.3200-40 area has limited USDCAD losses throughout November with 1.3205 being the 38.2% retracement of the October-November range. A break below this level may shake out some long USDCAD positions.

The USDCAD top side is well protected with strong resistance in the 1.3400-60 area which has capped USDCAD in 2015.

USDCAD daily with support areas noted

Source: Saxo Bank

— Edited by Martin O’Rourke

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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