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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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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