Loonie rolling snake eyes 21Dec15

Loonie rolling snake eyes

Michael O’Neill

FX Consultant / IFXA Ltd


  • Canadian CPI disappoints
  • FOMC leaves EURUSD in limbo
  • Loonie partying like its 2003

Beware snakes. And the Canadian dollar too. Pic: iStock

By Michael O’Neill

This morning’s weaker-than-expected Canadian CPI data was just another kick to the head of the loonie while it is down and if the run of bad news continues, it won’t be long before the bird is out.

Sleigh bells ringing and the rate hawks are singing

‘Tis the season to be jolly. That should have been readily apparent after the Federal Open Market Committee raised US interest rates by 0.25 basis points. Yet, jolly people are hard to find, at least in FX land and especially EURUSD traders.

Short EURUSD positions were very large leading up to the FOMC meeting according to an admittedly stale Commitment of Traders report from December 11. Also, the fact that EURUSD was stuck in a 1.0800-1.1050 band between the European Central Bank and the FOMC decisions, suggests that positioning remained fairly static.

So when the big day arrived and the FOMC statement was released, instead of the highly anticipated “shock and awe” volatile reaction expected, EURUSD traders were greeted with “squawk and blah”. EURUSD jumped from 1.0880 to 1.1010 and then instantly reversed and dropped back to pre-announcement levels.

In contrast, following the just-as-highly anticipated ECB announcement on December 3, EURUSD soared 0.0450 points and has never looked back.

As grand finale’s go, and this was the Fed’s grand finale for 2015, it was a bit of a dud. It was like going to a rock concert expecting laser lights and pyrotechnics and instead seeing a dude with a flashlight and a lighter.

The final full week of FX trading is ending with the two biggest events of the second half leaving traders disappointed and bewildered. The ECB is still adding stimulus, although less than expected, while the FOMC is hiking rates with a distinct lack of urgency. FX markets like to move in the direction where it will cause the most pain to traders and in the case of EURUSD the pain trade is a rally. Ho, Ho, Ho.

Party like its 2003

The Canadian dollar is on the cusp of changing big figures and taking a trip down memory lane to 2003. Do you remember 2003?

George W. Bush decided to invade Iraq in search of either the holy grail or weapons of mass destruction. He didn’t find either of them. Facebook didn’t exist and a billion people had no idea how to connect with people that they never wanted to connect with in the first place. Oil prices were trading in a $25.50-$39-80/barrel range.

In December 2003, the Bank of Canada interest rate statement said that “core and total CPI inflation had fallen below the 2% target and complained that economic growth in the third quarter had fallen below target. The added that " the US economy exhibited exceptional growth although this growth has yet to show up in Canada’s export performance". Sound familiar? And USDCAD was at 1.4000.

Here we go again.

Oil prices are below the mid-point of the 2003 range and falling. CPI is well below the 2% target and the Canadian economy hasn’t seen much benefit from renewed US economic growth.

Loonie rolling snake eyes

In the crap shoot that is the FX market, the Loonie is rolling snake eyes. There is plenty of news and it’s all negative. Oil and other commodity prices are falling, CAD/US Interest rate differentials are widening, inflation is falling, exports are declining, federal government deficits are expanding, global demand for US dollars is expanding and the USDCAD technicals are bullish. The good news cupboard is bare. The only factor preventing a blow-out to the top is the fact that the market is well long USDCAD already and may traders have called it quits for the year.

USDCAD technical outlook

The USDCAD, intraday, short and long-term technicals are bullish and looking are for a test of 1.4055 in the very near future. The long-term uptrend from November 2014 remains intact while trading above 1.2990. The short-term uptrend is intact while trading above 1.3340. The intraday technicals are bullish above 1.3820 supported by the break of 1.3845 and looking for a move above resistance at 1.3990 to test 1.4055. In addition, the break of 1.3465, which was the 61.8% Fibonacci retracement level of the 2002-2007 range targets the 76.4% retracement level of 1.4500. Intraday corrections should be halted at 1.3860.

Chart: USDCAD weekly with Fibonacci retracement

Source: Saxo Bank

The week ahead

Next week is a short week for everyone and an extra short week for all the other people who are able to book vacation time. It is also chock full of top tier data that in any other week, would attract all kinds of attention an analysis. The problem this week is that no one cares. ‘Tis the season to be jolly, and all of that.

The week that was

It was supposed to be a fairly quiet week until the afternoon on Wednesday as oftentimes, a looming Federal Open Market Committee meeting and press conference keeps traders sidelined. That wasn’t the case.

Monday started with the South African Rand (ZAR) hogging the spotlight. USDZAR tanked and retraced all of the prior Thursday-Friday gains in one fell swoop on news that the president back-tracked on his finance minister decision. G10 currencies were choppy but remained within their recent ranges.

Tuesday’s Asian session didn’t create much excitement and Europe wasn’t any better. The US dollar traded with a heavy tone as positions continued to be trimmed ahead of the FOMC meeting. EURUSD poked above 1.1000 but stalled at 1.1060. That move may have been helped by positive German ZEW data. GBPUSD ignored “as expected” inflation data and traded sideways. WTI oil prices hovered around $37.00/barrel and US equities closed higher.

Wednesday saw the US dollar catch a minor bid in Europe and EURUSD started the New York session near its lows. GBPUSD was sold despite large gains in employment because traders were put off by a drop in the average weekly earnings component. That was the morning.

Wednesday’s New York afternoon began at 1900 GMT. Janet Yellen announced a 0.25% hike in US interest rates and for a very brief moment FX markets went wild. The reaction was similar to a light being turned on in a cockroach infested kitchen. The roaches are startled and scurry every which way. As soon as darkness returns they are back to doing whatever cockroaches do in the dark.

The FX market reaction wasn’t a whole lot different than the cockroaches. The activity abated and the FX majors returned to the levels they were at prior to the news. (except for USDJPY, it held on to its gains.) New York traders left for the day thinking “is that all there is”?

Well it wasn’t. On Thursday, the USD dollar saw modest demand in Asia and Europe although EURUSD performance was lack-luster. That changed in New York. A whole mess of data and a rethink of the FOMC’s actions created a stir. News that the brand new freely floating Argentina peso dropped 35% sparked a bout of risk aversion. Commodity prices were already wobbly when another huge build in US crude inventories was reported. Oil prices tanked as did the commodity currency bloc. All the moves were aggravated by poor liquidity which promises to get worse.

– Edited by Clare MacCarthy

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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