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

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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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