Crude weakness leads loonie to the abyss 11Dec15


Crude weakness leads loonie to the abyss

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • China formally introduces CNY basket
  • Oil prices hit new multi-year lows
  • Loonie heading to 1.4000 versus USD

By Michael O’Neill

China formally announced a trade-weighted CNY index which analysts consider just another baby step towards loosening the peg to the US dollar. EURUSD popped immediately but quickly reversed the move as the Federal Open Market Committee meeting next Wednesday is the bigger and more current risk.

The FOMC meeting also provided markets with an excuse to ignore the US data today, which for the record were pretty close to expectations.

Loonie neck-deep in oil

Last Friday, Opec failed to announce a production cut and this week reported that crude output was at the highest level in three years. The benchmark Brent and WTI prices made new multi-year lows today after the International Energy Agency forecasted that crude oversupply will continue throughout 2016.

It just keeps coming. Photo: iStock

WTI touched $35.78/barrel, well below the previous $37.75-80/b support level with nothing to impede its slide to the March 2009 lows.

Unholy matrimony

USDCAD and oil have always been closely linked, but this week saw the two assets get closer than newlyweds on their honeymoon.

One of the main reasons for the tightened link is that there hasn’t been a whole lot of anything else going on. The Opec meeting and the decision to not cut production, combined with various reports of record crude production, has largely been the only game in town.

The Swiss National Bank and the Bank of England interest rate meetings were total non-events for traders this week, and key US data releases have been in short supply. With the highly anticipated FOMC meeting not rolling in until Wednesday, oil and the loonie were thrust into the spotlight.

EURUSD demand on last week’s European Central Bank disappointment has resulted in a bit of EURCAD demand as well, which exacerbated the USDCAD move on weak oil.

That relationship is unlikely to change next week as the only major release from Canada is a CPI print that won’t be enough to overshadow oil price movements. The Bank of Canada will hold a press conference following the release of the Financial System Review, and will also be a snooze-fest – especially with the FOMC meeting the next day.

One-hour USDCAD and oil overlay

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Source: Saxo Bank

USDCAD technical outlook

“To the moon” may not be a conventional technical analysis term but the expression seems appropriate – especially if the moon is considered to be 1.4000. With the break above 1.3680 today, there are only four daily resistance levels until 1.4000 and you have to go back to 2004 to see them.

The short-term and intraday setup is bullish as the USDCAD uptrend remains intact while trading above 1.3570. This level is in turn being guarded by support in the 1.3620-30 zone.

This latter area may contain intraday retracements.

USDCAD daily (2004 daily tops highlighted):

Source: Saxo Bank


Pulling a fast one, perhaps?

Did Bank of Canada governor Stephen Poloz try to sneak a dovish bomb past markets in the guise of the “always at the ready” speech delivered on Tuesday?

Think about it… the ECB had just announced additional stimulus measures on the previous Thursday, sending interest rates deeper into negative territory and extending the bond-buying program was extended…

So what was Mr. Poloz attempting to accomplish when he delivered a speech about “unconventional monetary policy measures”?

Sure, he prefaced his remarks with the following lengthy caveat: “I need to be absolutely clear about two things. First, today’s remarks should in no way be taken as a sign that we are planning to embark on these policies. To reiterate, our base case sees the Canadian economy returning to full capacity around mid-2017 and the risks to the outlook are roughly balanced. We don’t need unconventional policies now, and we don’t expect to use them

But EURCHF traders do not need to be reminded about the dangers of taking a central banker’s words at face value. I’m sure they all remember SNB vice president Jean Pierre Danthine’s remark assuring traders that minimum exchange rates are a cornerstone of SNB monetary policy just four days prior to the EURCHF floor being abandoned.

Poloz is insisting that the BoC does not need unconventional policies now and doesn’t expect to use them. If so, why talk about them and why talk about them so close to the ECB stimulus announcement? Does he not have much confidence in the bank’s own forecasts?

He did say forward guidance was the first tool in the toolkit… but is talking about unconventional policies forward guidance? A made-in-Canada quantitative easing programme in the face of plummeting oil prices would hang a target on the 2002 USDCAD peak.

If you live outside of Canada and have ever wanted to visit, a dovish BoC might just be the excuse you need. Photo: iStock

The week that will be

Nothing will matter until Wednesday. Sure, commodity currencies will stay under pressure if oil prices continue to slide but that’s it. The data prior to 1930 GMT on Wednesday will be ignored and the data afterwards will be overshadowed by questions and comments about what is next for the Fed. And then the Christmas holiday season starts in earnest – Ho Ho Ho!

The week that was

This week was expected to lack the drama and excitement of the previous week and it lived up to expectations. Despite three central bank meetings and speeches from the governors of the Bank of Japan, the BoC, and the Bank of England, FX moves were mostly noise inside of recent ranges.

There are always exceptions, however, such as USDJPY which broke a four-week low and USDCAD which made new highs.

Monday saw a sleepy Asian session ignore a BoJ speech but came to life in Europe. Traders sold US dollars against everything without any apparent reason. Then New York had good reason to sell commodity currencies and did just that as oil prices tumbled in a delayed reaction to Friday’s Opec announcement.

Tuesday’s Asian and European sessions saw a continuation of the soft commodity currency theme due to plunging iron ore prices, weak Chinese data and soft crude prices while the USD lost ground against the European currencies. EURUSD traded sideways in a low-volume environment.

Wednesday’s Asian session saw a bounce in WTI prices due to late New York news from the American Petroleum Institute which reported a larger-than-expected crude inventory drawdown. The positive sentiment led to widespread US dollar selling in Europe and New York. Kiwi soared in the New York afternoon/early Asian session on a hawkish statement from the Reserve Bank of New Zealand, despite the fact that it cut rates by 0.25 basis points.

Thursday’s Asian session had analysts concerned with the accuracy of Australia’s blowout employment data.while AUDUSD traders weren’t puzzled and bought the currency. The US dollar rallied against all the European currencies (except NOK) in part due to dovish ECB comments.

The GBPUSD headed lower after the BoE statement didn’t give traders reason to buy while the Swiss National Bank meeting was a snooze-fest as well. New York traders drove EURUSD well above its 1.1000 resistance as the ongoing short squeeze continued. Oil prices continued to leak lower as the New York session ended.

— Edited by Michael McKenna

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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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