Countdown to Fed may sideline many next week 4Dec15

Countdown to Fed may sideline many next week

Michael O’Neill

FX Consultant / IFXA Ltd



  • USD drops, euro climbs in aftermath of Thursday’s ECB surprise
  • Loonie defies gravity
  • Opec stays the course, leaving oil markets oversupplied
  • Draghi disappoints, Yellen tolerates dissent
  • Calmer week seen ahead after week of drama

By Michael O’Neill

It’s been quite a week in the markets.

The US dollar continues to sink under the weight of disappointment from the European Central Bank’s underwhelming easing package. The previous "no-brainer " short EURUSD trade quickly turned into a plenty-of-pain" trade which is still taking a toll today.

Opec’s decision to raise the production ceiling has given the Canadian dollar and other commodity currencies a boost, perhaps because that decision wasn’t as bad as what traders were anticipating.

Unpredictable central bankers

Mario Draghi reminded markets on Thursday that despite being the president of the European Central Bank, his voice is not the only one that counts. Other governing council members and interested parties exert large influence, and while Draghi gets the spotlight, he is only one member of the orchestra.

He may have truly wanted to launch the mother of all stimulus packages, but his will was not enough. The Financial Times predicted Thursday’s ECB outcome on Wednesday when it said that German opposition to the ECB’s stimulus plans would result in a watered-down package.

ECB president Mario Draghi surprised markets with a less-dovish-than-expected QE package on Thursday, spoiling the day for many euro shorts. Photo: ECB webcast

Fed chief Janet Yellen is in a similar situation. She has been alluding to a December rate increase since October and twice this week essentially announced that rates were going up in December. If she fails to follow through, she will look weak and ineffective leading to questions about her capability as head of the Federal Reserve. She won’t want that.

Yellen is acutely aware that not all members of the Federal Open Market Committee agree with her view and went out of her way to say “I think we have to tolerate some dissent”. Obviously she is expecting dissent so the question is “how much?”

A Fed rate hike with three or more dissenting votes would be rare and could lead to FX volatility similar to the EURUSD price action after Thursday’s ECB announcement. It certainly wouldn’t be bullish for the US dollar.

You don’t want to dance with this Russian bear

What’s up with Nato? It seems to be going out of its way to pick a fight with Russia rather than concentrate on the threat that is the Islamic State of Syria and Iraq. Nato invited Montenegro to join its "anti-Russia” alliance. Montenegro has the population of a medium-sized town and doesn’t have much of anything that could pass for a military. So why is Nato eager to have Montenegro under its wing, other than to antagonise Moscow?

The US went absolutely berserk when Russia parked missiles in Cuba in October 1962. America saw the missiles as a threat to its security and nearly started a nuclear war. Now Washington is incensed by Russia again and pretends not to understand why Russia is perturbed.

A cynic would suggest Nato’s reaction to Russia is merely to divert the world’s attention from its collective failure to address adequately the threats from ISIS and al Qaeda while turning a blind eye to China’s hostile actions in the South China Sea.

Opec did nothing to cut production to bolster oil prices, but increased Russia-Nato tensions and the risk that ISIS and al Qaeda could disrupt the supply chain will do the job for them. If so, it will have the added benefit of boosting the commodity currency bloc.

It’s not quite the Cold War, but geopolitics are back in the form of increased tensions between the US and Russia. Photo: iStock

USDCAD outlook

The Canadian dollar negatives are starting to pile up. The October trade report showed a wider-than-expected trade deficit (CAD 2.76 billion vs. forecast 1.9 billion). Exports to the US declined, which doesn’t bode well for Canada’s fourth-quarter GDP. The employment report isn’t all that impressive. Canada posted growth of a mere 0.7% in full-time jobs from a year ago.

Canadian economic data were unimpressive

Source: StatsCanada

Oil prices are in danger of pushing through the 2015 lows. If that occurs, it could take prices down to $32.00/barrel. Opec agreed to extend its policy of maintaining production to retain market share, but unexpectedly raised its output ceiling to 31.5 million barrels/day from 30 million bpd. It could still have a nasty short-term impact on prices, but so far WTI prices are holding up.

Still, the risk of lower oil prices is likely to trigger a whole new round of “buy USDCAD" strategies.

Be cautious. The worst may be behind us, at least until the December 15-16 FOMC meeting. The ECB meeting fall-out will dissipate, leaving traders to fret about an FOMC surprise. That should be enough to keep USDCAD shuffling between 1.3300 and 1.3460 at least until the Fed’s announcement on December 16.

USDCAD – "Home on the Range"

Source: Saxo Bank

The week ahead

The week now ended will be a tough act to follow. Even three central bank interest rate decisions on the agenda (Bank of Japan, Reserve Bank of New Zealand and Bank of England) will not provide the degree of tension and drama that the ECB just delivered.

Still Aussie and kiwi traders will have their moment in the spotlight. December is not normally the month when traders strap on new positions, and this year will be no different. With the ECB and Opec meetings behind us and the FOMC meeting ahead, FX activity is likely to remain subdued.

The week behind

It was expected to be an eventful week and was it ever. Traders teed off on every bit of rumour, speculation and innuendo about the ECB and Opec, and it was a week when conventional wisdom proved to be folly.

Monday was also month-end, and it came with all the usual FX volatility. Bank of Japan governor Kuroda failed to deliver any dovish remarks, and USDJPY traded sideways. USDCNH had a big drop, which many guessed was due to the pending IMF announcement of China’s inclusion in the SDR basket. That news was confirmed at the end of the day. The USD was offered in Asia and ended mixed in New York.

Tuesday’s Asian session saw the USD sold across the board. USDJPY led the market lower on a report that the Government Pension Investment Fund (GPIF) was hedging currency exposures. The Reserve Bank of Australia left rates unchanged; its statement was on the hawkish side of neutral and AUDUSD edged higher. The “sell USD” theme continued throughout the US session, with weak data helping the cause.

Wednesday’s Asian session was quiet. EURUSD traded lower when Eurozone HICP missed expectations. ECB chatter was background noise throughout the US session. Fed chief Yellen spoke in Washington and appeared to confirm that rates will rise in December. Oil prices rode a rollercoaster and finished the day near lows.

Thursday was the day that Super Mario wasn’t. After many weeks of setting up the market for an “epic” stimulus package and the market anticipating even more, the ECB president delivered a damp squib. How do you say "disappointment" in EURUSD-speak? It’s a 0.0420 point rally.

After the ECB, next come the American central bankers with a potentially historic FOMC meeting in mid-month, which will keep markets in suspense until then. Photo: iStock

— Edited by John Acher

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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