A rare rally in oil and a surprising move by the BoJ 29Jan16


A rare rally in oil and a surprising move by the BoJ

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Beware upcoming China data
  • Loonie lifted by BoJ surprise
  • Month end madness in FX

Latest moves in oil are notable. Photo: stock

By Michael O’Neill

The USD was in great demand due to month end portfolio rebalancing needs which flew in the face of US dollar sellers putting new risk seeking trades on the books. The Bank of Japan decision to sort of cut rates into negative territory and hopes that Mario Draghi will deliver on his promised stimulus package in March have given equity markets a boost.

Rumours rampant in oil market

WTI oil prices hit a low of $26.82 on January 20, 2016 and then abruptly changed course. By Thursday January 28, WTI had rallied 30% to $34.81 in a move triggered by what can best be described as a “Reality Distortion Field”. RDF is a term coined by an Apple (APPL: NASDQ) engineer to describe Steve Job’s ability to convince himself and his employees to believe anything. It can also be used to describe the rationale behind the oil rally.

Last week, when WTI was plumbing the depths under $27.00/b, traders were worried that the oil glut would last longer and crude inventories would continue to rise; a fear exacerbated by hyperbole from the International Energy Agency who announced that the “world could drown in oil”. This week, oil traders were guilty of believing that a rumour of a meeting would erase the persistent glut of oil stemming from overproduction.

On Thursday, the Russian Energy Minister said that Opec had proposed oil production cuts of up to 5%. That same day, Opec delegates said that they have no meeting planned with Russia. Despite the denials, oil prices have climbed and held on to most of the gains.

It is a no-brainer to believe that the higher cost Opec producers would want a higher price for crude. Even Saudi Arabia would like that. Nevertheless, the Saudi’s have a strategy to protect their market share and having the second lowest production costs in Opec means that they can tolerate lower prices for longer.

Russia would like higher prices as well but they have a lot of baggage to deal with stemming from the US led sanctions. And if lower oil prices are hurting US producers, bonus. That is supposedly a Saudi goal as well. Iran just got free of sanctions and are probably eager to make up for lost sales. It stands to reason that they would prefer to rebuild their treasury through oil sales, especially since they have run out of US sailors to ransom.

Since there is no emergency Opec meeting scheduled, hope for a weekend agreement is merely wishful thing. Furthermore, oil has risen nearly 30% since the Russia/Opec talk surfaced which, arguably, reduces the urgency to have a meeting.

Unless WTI breaks above the $38.00-$40.00/barrel area the current oil rally is merely a correction inside a long term downtrend.

BoJ boosts Loonie

The Bank of Japan decision to cut interest rates into negative territory led to CADJPY demand and a plunge in USDCAD, which was already under pressure due to rising oil prices. CADJPY soared to 86.88 from 84.37 helping to drive USDCAD down to 1.3965.

Since then, USDCAD has been like a yo-yo, bouncing between 1.3975 and 1.4070. Month end demand for USDCAD to satisfy portfolio rebalancing requirements and general US dollar strength is in a tug-of war with the prospect of rising oil prices.

Canadian GDP data released this morning, posted a gain of 0.3%, which was mostly as expected. The fact that it was a positive number provided some support to the Canadian dollar but it will be short lived as more than a few economists predict a weak Q4
.
USDCAD technical outlook

USDCAD is in a short term downtrend while trading below 1.4090, supported by the prior break of support at 1.4150. The recent price action between 1.3950 and 1.4150 has identified the short term trading range which should remain intact over the next week. A decisive break below the 1.3920-50 will target major support at 1.3800. A break above the 1.4150-60 area should lead to another test of 1.4330.

Chart USDCAD 4 hour with support and resistance areas shown

Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more

The week ahead

If you are looking for a lull in the action, it won’t be this week. The week will start with China PMI data. Weak China data started FX fireworks at the beginning of January and it could repeat the performance on Monday. AUDUSD traders will be eagerly waiting the Reserve Bank of Australia interest rate and policy decision on Tuesday. On Wednesday, the European Commission releases economic growth forecasts. These will be closely scrutinized to see if they support Mario Draghi’s hint of additional stimulus in March. The Bank of England steps to the plate on Thursday and the week will end with the explosive US nonfarm payrolls report.

The week that was

This week had a lot of anticipation and a lot less drama, at least for FX traders. For oil traders it was a different story.

Monday, Asia traders started out unsure as to whether they should be buying or selling. So, they did both. USDJPY couldn’t get any traction due to the pending Bank of Japan meeting at the end of the week. The same pattern held true during the European session; one minute it was “risk-on” and the next “risk-off”. Risk off won out during the New York session on falling oil prices in a thin market that was recovering from what New Yorkers and Washingtonians call “Snowzilla.

Tuesday’s Asia session was a lot quieter than usual as Aussies were off celebrating Australia Day. In wasn’t all bliss. China’s SHCOMP index plunged 6.4% but FX traders just yawned and said” oh, that was so 3 weeks ago”. European traders bought oil, reversing the previous day’s decline and commodity bloc currencies rallied. New York watched oil rally and then decline and worried about the next day’s Federal Open Market Committee statement.

Wednesday’s Asia session was quiet with traders mostly sidelined ahead of both the FOMC and Reserve Bank of New Zealand interest rate decisions and policy statements. The same held true in Europe. In New York, oil price swings attracted attention in the morning and the FOMC statement was the focus in the afternoon. Fonterra, the New Zealand dairy company cut milk price forecasts for 2016 and the RBNZ delivered a doveish statement. NZDUSD sank.

Thursday, Asia and European traders digested the FOMC statement and concluded that, if anything it was on the doveish side and old US dollars. News that Japan’s Economy Minister resigned got some attention but only had a marginal impact on USDJPY. The dollar continued to be sold in New York and oil prices went on a rumour fueled rampage. US Durable goods data was a lot weaker than expected which contributed to the US selling pressure.

The week ended with twin sets of fireworks. The BoJ put on the first show and portfolio rebalancing followed in the New York morning

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Loonie soars on oil rally – recoups over 70% of January losses 22Jan16


Loonie soars on oil rally – recoups over 70% of January losses

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Loonie ignores mixed Canadian data
  • FOMC meeting won’t provide reprieve from volatility
  • Has oil seen the bottom?

It’s been a roller-coaster week. And a new one starts Monday. Photo: iStock

By Michael O’Neill

It is the end of another wild week in FX markets and at the moment, the Canadian dollar and sterling are vying for the best performing currency of the day. The Canadian dollar is leading by a nose. WTI prices have scampered to elevated levels as oil traders appear to have "drunk Mario’s Kool-aid" and believe his strong hint of a March stimulus package will put an end to the oil oversupply woes.

Has oil found a floor?

The 44% plunge in WTI oil prices from November to January of this year is identical to last year’s 44% in the same timeframe. Back then, within a few days of posting a new 2014 low at $43.70, WTI rebounded 25% to $54.12. Is history repeating itself? WTI has already rallied 16% in just two days. A 25% rally would lift WTI to $33.55/barrel

This begs the question: Is the 16% rally because the oil price decline overshot the level where the fundamental price should be or is it merely a correction in an oversold market?

The “correction” view is supported by the following:

a) China growth concerns are a big factor in the slide in oil prices. Slow growth means less demand for oil. The 2015 growth rate came in at 6.9% down from 7.4% in 2014. Forecasters peg 2016 growth at 6.3%. That doesn’t bode well for oil price support from Chinese demand.

b) Saudi Arabia is believed to be on a mission to derail rising oil production from other sources, particularly the US shale industry believing that the kingdom can withstand “lower-prices-for-longer”. In doing so, they have steadily boosted oil output. Saudi Arabia is also clashing with Iran and reportedly wants to keep oil prices low to undermine Iran’s economy.

c) US Crude supplies remain at elevated levels indicating supply is exceeding demand. The Energy Information Administration reported crude supplies rose 3.97 million barrels for the week of January 15.

The “bottom is in” camp look at the following:

a) The price history in January 2015 compared to January 2016 is eerily similar and in January 2015, prices rebounded and then consolidated for a few months.

b) This week’s cold weather snap will go a long way in reducing inventories and suggests further consolidation is likely. (Dubious conclusion, I know.)

c) Potential stimulus packages from the European Central Bank, the Bank of Japan and China may spur demand.

The oil price rally is likely just a correction in an oversold market and not sustainable until there is evidence of rising demand or decreased production. That is, unless $32.15 resistance breaks. That would signal that a short term floor is in and maybe a period of consolidation in a $29.00-$35.00/b range.

Chart: US oil hourly with major resistance shown

Source: Saxo Bank

Loonie may erase January losses

USDCAD collapsed in less than 48 hours and as collapses go, it was a doozy. Since touching 1.4688 during the European session on Wednesday USDCAD has declined to 1.4120 and recouped 70% of this year’s losses. This morning’s break of 1.4120 snapped the uptrend from the November 1.3310 low. The move below the 1.4180 (61.8% Fibonacci retracement level of the January 2016 range) opens up a deeper test to 1.4060 (76.4%) and then the possibility of the erasing the entire January 2016 USDCAD gains. The major risk to this assessment if the drop below 1.4140 proves to be a “spike” and is not sustained.

Chart: USDCAD hourly with Fibonacci retracement

Source: Saxo Bank


The week that will be

There may be no rest for the wicked and likely no timeout from the turmoil in FX markets next week. In fact, it could get even crazier. The Federal Open Market Committee policy decision and Janet Yellen’s press conference are on tap Wednesday afternoon. Traders across markets will finally get a read on how the Fed sees the risks of additional slowing in China, falling oil prices and equity market turmoil affecting the US economy. A hawkish sounding statement or press conference that convinces traders of another rate hike in March would create havoc in FX markets. The Reserve Bank of New Zealand follows the Fed on Wednesday and the Bank of Japan policy decision is on Friday. In addition to central bankers, there is a lot of data and of course the usual gyrations surrounding the month end fix.

The week that was

This week was expected to be turbulent and no one was disappointed. Monday’s Asia session was fairly calm. AUDUSD was an outlier, staging a bit of a rally on a bounce in iron ore prices. The European session was quiet but not nearly as quiet as the New York session. Bond and equity markets were closed for Martin Luther King Day and FX desks were lightly staffed.

Tuesday started with traders eagerly awaiting China GDP data. Not surprisingly, GDP came in exactly where China President Xii Jinping told the statisticians it would be. Initial FX volatility quickly subsided. By the New York close, GBPUSD had been undermined by dovish remarks by the Bank of England’s Mark Carney and oil prices were plumbing new lows.

Wednesday’s session started with Kiwi and Aussie under pressure due to weak data, falling equity indices and oil prices making new lows. The UK delivered a robust employment report but that wasn’t enough to keep GBPUSD from falling. USDCAD dipped then rallied when the Bank of Canada left interest rates unchanged while ignoring a bounce in oil prices.

Thursday started on a positive note in Asia but couldn’t get any traction in Europe as traders awaited the ECB rate decision and Mario Draghi’s press conference. In the event, Draghi hinted at additional ECB stimulus in March and sparked a massive rally across asset classes. Equity indices roared higher, oil prices and commodity currencies soared and EURUSD traders just yawned knowing that Mario has been more mediocre than super, lately.

– Edited by Clare MacCarthy

Loonie going the way of the dodo 15Jan16


Loonie going the way of the dodo

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • BoC could well cut rates at next meeting
  • US retail data miss forecasts, raising growth concerns
  • Sub-$30/b offers no respite to battered CAD

By Michael O’Neill

FX markets are ending the week the way they started: choppy with a bearish bias to the commodity bloc currencies.

NZD and CAD are the worst performing G10 currencies while NOK and JPY are the best. EURUSD is slightly higher on the week while Brexit concerns and poor data keep GBPUSD under pressure. Today’s US Retail Sales data were worse than expected and had the added woe of negative revisions. How sustainable is domestic US growth, really?

Rate cut fever fells Canadian dollar

A fair number of bank economists are forecasting that the Bank of Canada will cut interest rates by 0.25 basis points at its January 20 meeting. In the same breath, however, the same economists are adding the word “maybe”. That way, no matter what the BoC does they can claim to have nailed it.

Nevertheless, the 2016 landscape is eerily similar to last January when the BoC surprised markets with a rate cut. At that time, the bank stated that “the decision is in response to the recent sharp drop in oil prices which will be negative for growth and underlying inflation in Canada”.

Central bankers’ hands were forced because WTI prices had dropped from $104.60/barrel in July 2014 to $44.25/b by the end of the year, a 58% decline.

Today’s oil price picture is very similar. WTI was at $56.80/b in July 2015 and today it is $29.65/b, a 48% decline. Arguably, $29.65/b oil is far more damaging to the Canadian economy than $44.25/b.

The outlook for the Canadian economy will remain frozen over for as long as the

global oil rout continues. Photo: Nick Harris, Flickr.com (Creative Commons)

The January 2015 statement also predicted that the oil price decline would boost global economic growth, particularly in the United States, and the bank got that half right. The US economy grew by an annualised 2.0% by the end of Q3 2015.

When the BoC cut rates again in July 2015, it was concerned by Canada’s poor economic growth and downside risks to inflation while playing lip service to slowing Chinese growth as it “rebalances to a more sustainable growth path”. The China equity market crash and CNY devaluation in August had not even yet occurred. The Chinese meltdown in August could have been chalked up to an “anomaly” but then January 2016 happened, which has to have an impact on the BoC decision.

There is no reason to believe that Canada will get any relief from oil prices in the near term. US Energy Information Administration reports continue to show rising crude oil supplies, indicating that low prices haven’t done much to curtail US production. Any US production cuts may be countered by fresh Iranian production, which is rumoured to hit the markets by the end of January.

Canada is in a worse position today than it was in at policy meetings in January and July of 2015 when interest rates were cut, supporting the view that the BoC would reduce rates further.

Voodoo technicals and the Canadian dollar

The BoC rate cut on January 21, 2015 resulted in USDCAD rising 0.745 points within six trading days. If history repeats itself, and using the current 1.4500 price as a starting point, USDCAD will be dealing at 1.5245 by the month’s end.

The long term Fibonacci retracement levels support additional gains. The break above 1.4500, (the 76.4% Fibonacci retracement level of the entire 2002-2007 range) targets a 100% retracement at 1.6190.

In January 2000, the world was relieved that the Y2K calamity had been avoided. Computers didn’t shut down and dates were able to roll over from 1999. January 2000 also saw USDCAD at 1.4310, the lowest level seen for the next three years. Back then, 1.4570 and 1.4780 capped gains which may provide similar resistance in 2016.

USDCAD hourly (January 15-30, 2015) showing USDCAD gains:

Create your own charts with Saxo Trader click here to learn more.

Source: Saxo Bank

Back to reality

USDCAD has risen for 10 consecutive days, racking up gains over 0.700 points. That leaves it ripe for a correction which may occur on January 20 if the BoC leaves rates unchanged or if WTI prices climb back above $34/b.

The steepness of this year’s rally could see a pullback to 1.4095, the 61.8 Fibonacci retracement of the January range.

USDCAD 30-minute with Fibonacci retracement levels shown:

Source: Saxo Bank

The week that will be

The week ahead is unlikely to provide any relief from market turbulence. Monday may be a tad quiet ahead of potential fireworks on Tuesday when China releases GDP, Retail Sales and Industrial Production figures. Later in the day, a slew of UK data may keep the downward pressure on sterling, although the EU CPI data will be the major focus.

There are a ton of US data on Wednesday including CPI and the BoC interest rate decision. Thursday’s European Central Bank meeting may have a bigger impact than originally thought due to the tone of the minutes released on January 14
.
The week will end with headlines from Davos attracting attention although there won’t be any comments from the North Korean delegation as they were uninvited following the H-bomb test.

The week that was

The turmoil and chaos that characterized the first week of January should have made it a tough week to follow.

It didn’t.

Monday started out as nervous as a man using a match to find a gas leak. It didn’t help that Japan was closed for Coming of Age day, seriously reducing liquidity. Friday’s blowout US nonfarm payrolls report gave the US dollar a bit of a bid to start the day while China’s SHCOMP index closed down 5% leading to dips in other Asian indices. A steep drop in oil prices got most of the attention during the New York session.

On Tuesday domestic Chinese issues were both calm and stormy. The calm was due to the SHCOMP closing flat on the day while USDCNY was fixed a mere 2 basis points higher. The storm was in USDCNH where overnight funding spiked to 66%. The government of China was rumoured to be behind the move in an effort to make shorting USDCNH too expensive to consider – and it seems to have worked.

Beijing’s efforts at the Shanghai Composite, however, have been less successful. Photo: iStock

The highlight of the European session was GBPUSD tanking and hitting a 5/12 year low. Oil was the story during the New York session as WTI punched below $30/barrel for the first time in a dozen years.

Wednesday’s Asian session was rather tame compared to the previous two days, helped by a modest improvement in Chinese trade data. The European session was also fairly quiet as EURUSD remained rangebound and GBPUSD consolidated the previous day’s losses.

The tranquility didn’t last in New York, however, as oil price weakness led to a sea of red in US equity indices and launched USDCAD to 1.4375.

Thursday, Asian markets followed US equity markets lower and AUDUSD didn’t get much of a boost from a better than expected jobs report. By the time Europe walked in, however, equity markets were higher and EURUSD was enjoying the weather above 1.0900 on a headline suggesting additional ECB stimulus was likely in the near term.

Traders disputed that headline after reading the ECB minutes and EURUSD dropped back to the 1.0810 area. The Bank of England minutes were not as dovish as expected and GBPUSD took off. Numerous predictions of a Bank of Canada rate cut next Wednesday kept USDCAD underpinned.

— Edited by Michael McKenna

Flashback to the 60s for Canadian dollar 13Jan16


Flashback to the 60s for Canadian dollar

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Loonie having 60s flashbacks
  • USDCAD rally through 1.4300 coincided with WTI’s dip below $30.00/barrel
  • China turmoil shows signs of diminishing
  • WTI crude oil bias is still lower

Unlike this bus, the Canadian dollar is not on a magical mystery tour. Photo: iStock

By Michael O’Neill

This morning’s oil rally gave commodity currencies a lift right up until the Energy Information Administration reported another gain in US crude stocks. So far, oil’s plummet does not appear to be affecting US crude production. USDCAD rallied and WTI sank.

Throwing wind into the caution

What a difference a few days make. Last week traders feared that China’s economic slowdown, equity market meltdown and ham-fisted CNY knockdown would lead to another global financial calamity.

Those fears have dissipated modestly this week, and today traders are cautiously optimistic. The mood has been aided by relatively stable USDCNY fixes (unlike the recent shock and awe) and today’s better-than-expected China trade surplus ($60.1 billion vs forecast $52.0 billion).

In addition, China’s exports did not fall as much as expected, suggesting that perhaps the equity market crash did not accurately reflect the true state of the Chinese economy. A cynic would say that no Chinese data accurately reflects anything, but that’s another story.

Are the markets out of the woods? Has last week’s risk aversion rout run its course? If the August turmoil caused by China is any indication of how events will play out this month, then, maybe so.

January is the new August.

In August 2015, a Chinese equity market collapse and currency devaluation thrashed global financial markets. Global stock markets sank as did commodity currencies. The Dow Jones Industrial Average plunged to 15,666 points from 17,545 within just days. At the same time, FX markets were thin due to summer vacations, China data was soft, and there was a lack of top-tier data from the US. The September FOMC meeting loomed and kept traders sidelined.

After finding the bottom, the Dow recovered to 16,654 points and spent the next month consolidating those gains within a 16,000-16,700 range. By the end of November, the August plunge was just a bad memory, and the index had surpassed the August high and traded at 17,968 points.

The January global financial turmoil is extremely similar to the events of August. There was a dearth of key US economic data, and meaningful FOMC insight was still weeks away. It is still early days, but if today’s drift into risk-seeking takes hold, global equity markets will recover and the focus will shift back to the US rate-hike timing, the possibility of additional ECB stimulus and Middle East issues.

There are the sixties, and then there are the 60s. Photo: iStock


Loonie sinks into the 60s

The pop culture image of the sixties is of hippies, love and peace, and flower power. Far out, man! The Canadian dollar view of the 60s is not a whimsical nostalgic trip, but one of pain especially for consumers, US travelers and importers.

Yesterday, the Canadian dollar shattered the 0.70 cent level, a psychological barrier and dropped to 69.85 cents to the US dollar. That hit the headlines and hammered home to the average person how weak the currency is. On this date in 2015, USDCAD was 1.1950. A US$6,000 trip to Disney World in Florida for a family of four cost CAD$7,120. At yesterday’s USDCAD peak (1.4316, or Canadian 69.85 cents to the dollar), the cost for that same trip was $8,589.60. That’s almost the price of one extra person. Parents may face the uncomfortable choice of which kid stays at home.

In Canada’s oil patch, Calgarian’s were already well aware of the perils of a weak currency and global markets. They’ve been hurt. TradingFloor editor Michael McKenna recaps their troubles in his story “Oil boomtown going bust as crude staggers lower”.

Oil prices swamping Loonie

The Canadian economy is growing sluggishly. The much heralded H2 growth rebound did occur in so far as Canada was no longer in a technical recession in the summer. The Bank of Nova Scotia’s forecast for 2016 Canada GDP is 1.6%, while the US economy is expected to grow 2.5%. The US growth should lead to increased non-resource exports from Canada, aided by the weak Canadian dollar.

The commodity currency bloc (Aussie, kiwi and CAD) are the three worst performing G-10 currencies year-to-date. If China jitters fade, they should rebound. But the Canadian dollar, which has been the most resilient of the three currencies, remains vulnerable to oil prices.

The USDCAD rally through 1.4300 coincided with WTI’s dip below $30.00/barrel. Morgan Stanley has joined Goldman Sachs in forecasting $20.00/b, which, if correct, puts USDCAD close to 1.4800. Even worse, there is nothing on the horizon to suggest that Saudi Arabia and Iran will kiss and make up, so that will be a barrier to any Opec production agreements. US oil production is reportedly still going strong, and crude oil supplies are still nearing storage capacities.

USDCAD technical outlook

The intraday and short-term USDCAD technicals are bullish. The January uptrend remains intact while trading above 1.4160, a level supported by the move above 1.4220 this morning which snapped an intraday downtrend. That break re-targets yesterday’s high and keeps 1.4500 in focus.

USDCAD 30-minute chart

Source: Saxo Bank

– Edited by John Acher

Loonie binned as BoC plots its next move 5Jan16


Loonie binned as BoC plots its next move

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • More weak data from Canada add to loonie’s woes
  • Traders awaiting FOMC minutes for hike path clues
  • Bank of Canada’s Poloz may be ‘priming the pump’

By Michael O’Neill

FX markets are becalmed relative to yesterday and US equity indices are flat (at the time of writing), but that is unlikely to last.

Markets will be hoping to find out clues as to the next US rate hike (many are guessing March) from the Federal Open Market Committee minutes due tomorrow, although yesterday’s ISM data raises questions about the strength of the US economy.

US manufacturing can barely catch a break. Photo: iStock

Skyrockets in flight

At the stroke of midnight on December 31, the new year is heralded by impressive pyrotechnic displays in cities around the world. This year, FX markets rang in 2016 with a fireworks display of their own, promoted by a meltdown in Chinese stocks.

That collapse erased 7.02% of the value of the Shanghai Composite, triggered circuit breakers that halted trading, and led to a series of government moves to prop up the markets.

And that was just day one.

There are still another 253 (give or take) trading days remaining in 2016, leaving plenty of time for additional madness and mayhem.

Let the mayhem begin

In Canada, the mayhem may begin at 1140 GMT on January 7 when the text of a speech by Bank of Canada governor Stephen Poloz is released.

The title of this speech is “Life after Liftoff: Divergence and US Monetary Policy Normalization”. True, it sounds about as boring as a bylaw but if you consider it in the context of his December 8 speech entitled “The Evolution of Unconventional Monetary Policy” and October 12’s “Integrating Financial Stability into Monetary Policy”, a theme begins to emerge and that theme is that Canada’s economy is at risk.

If correct, the consequences will be anything but boring – at least for USDCAD traders.

In the first two entries of this apparent trilogy, Poloz discussed the risk management options on hand in the case of financial imbalances destabilising the economy and reminded markets of the unconventional monetary policy tools available to the BoC. Now, it seems, he will talk about the issues and risks of diverging Canadian and US interest rate policies.

Making matters worse, Canada’s economic outlook took a turn for the worse since the December 8 address. Not only were the fourth-quarter GDP and October retail sales prints both weak and below forecasts, but WTI oil prices are slightly softer at $36.74/barrel versus 37.74/b on December 8.

Also? The Federal Reserve hiked rates. So here we are.

No room of one’s own

Yesterday’s equity meltdown reminded the world of the fragility of market sentiment while the dispute between Saudi Arabia and Iran elevated risks in the Middle East and added to oil price uncertainty in the process.

Faced with renewed Chinese economic risks, Middle East geopolitical risks, widening Canadian/US interest rate differentials, and soft oil prices, what is Poloz to do?

Last year he surprised markets with a rate cut.

This year? Let’s just say the Rockies are likely to remain

well ahead of Ottawa as a hiking destination. Photo: iStock

USDCAD technical outlook

The short, medium and long term technicals are bullish USDCAD while the intraday technicals are neutral.

The short term uptrend remains intact while trading above the 1.3830-50 area which guards triple bottom support in the 1.3770-80 zone. Topside resistance in the 1.3980-1.4010 area, however, has capped all rallies since December 14.

USDCAD four-hour highlighting uptrend lines and support:

Source: Saxo Bank

The long-term outlook doesn’t bode well for USDCAD and is likely the source for those forecasts predicting a 1.4500 USDCAD rate. This weekly chart shows USDCAD in a steady uptrend since July 2014 as well as displaying key Fibonacci retracement levels.

November 2015’s decisive break of 1.3466, representing the 61.8% Fibonacci retracement level of the entire 2002-2007 range, is a bullish indicator projecting additional gains to the 76.4% Fibonacci level at 1.4500.

USDCAD weekly with Fibonacci retracement levels:

Source: Saxo Bank

As a matter of interest, the range of USDCAD forecasts for Q1 2016 is 1.3500-1.4500 which is also very close to the range between the 61.8% and 76.4% Fibonacci retracement levels.

The prospect of a BoC rate cut, lower oil prices, higher US rates, and geopolitical issues will keep the Canadian dollar on the defensive – at least for the next month.

Latest USDCAD forecasts and graph of forecasts:

Source: Bloomberg

— Edited by Michael McKenna