Loonie at a crossroads 26Feb16


Loonie at a crossroads

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Upward US Q4 GDP revision lifts US dollar
  • Loonie strong, with USDCAD down from Jan peak of 1.4688 to 1.3506 this morning
  • USDCAD fighting competing influences and the loonie is at a crossroads
  • Domestic fundamentals and short-term USDCAD technicals point different ways
  • Month-end Monday may undermine greenback

Bloomberg’s CAD survey suggests that forecasters aren’t buying

the "Great Canadian Dollar Rally" theme. Image: iStock

By Michael O’Neill

The US dollar is ending the week on a mixed note, down against the commodity currency bloc while posting gains against Europe. GBPUSD is in its own "Brexit" world, and it is the only currency to have declined against the US dollar in the past month.

Loonie goes from dud to stud
USDCAD has fallen 0.1182 point from a January peak of 1.4688 to this morning’s low of 1.3506, and forecasters are taking notice. An analyst from Macquarie Capital Markets Canada made headlines in January with his "Canadian dollar will drop to 59 cents" forecast. (against US dollar). He hasn’t been heard from lately. Yesterday, RBC issued a “Special Report-USD/CAD: A Change in Sentiment”, noting a bearish long-term trend reversal below 1.3676. Arguably, the 0.1000 point drop suggests that the change in sentiment occurred long before yesterday.

The Canadian dollar forecast from Bloomberg, as of today, suggests that forecasters haven’t bought into the "Great Canadian Dollar Rally" theme.

USDCAD forecasts

Source: Bloomberg

Beware the hype

Happy Days are here again. Everything that was negative about Canada and the Canadian dollar at the beginning of the year has vanished. Oil prices will no longer fall, the US Federal Reserve won’t be hiking interest rates, the Canadian economy is rebounding robustly, rising Canadian budget deficits are not a concern and worries about China’s economic fortunes are no longer relevant.

I missed the memo.

OIL: How sustainable is this latest oil rally? WTI prices have rebounded from the February low and are in an intraday uptrend above $31.50/barrel. But that is a counter-trend rally as the downtrends from the November 2014 peak and the July 2015 peak remain intact and are guarded by additional resistance in the $34.20-70/b area. The fact that Opec and Russia are even talking about having meetings to discuss price stability seems to have put a floor in WTI at $26.05/b and got traders buying oil. For unknown reasons reports of planned "talks" carry more weight than Saudi oil minister Ali al-Naimi’s statement that “we can coexist with oil at $20/barrel”. Also ignored was Iran’s oil minister calling a production cap “laughable”. Oil traders looking for a silver lining in a black cloud determined that the Energy Information Administration report that US crude stocks rose 3.5 million barrels was a good thing, because it wasn’t as big as the 7.1 million barrel rise reported by the American Petroleum Institute a day earlier. This rally is fueled by "wishes" not reality.

CANADIAN ECONOMY: An announced federal budget deficit of close to $30 billion in the 2016-17 fiscal year barely raised an eyebrow in FX markets. Ontario, the most populated province in Canada, is indebted to the tune of $308 billion, making it the largest non-sovereign debtor in the world, and no one seems to care. Low oil prices are still decimating the western provincial economies and hurting federal revenues. Oil prices are close to January levels when the Bank of Canada was considering cutting interest rates. The Bank of Canada meeting and the Federal budget in March will be key to USDCAD’s direction.

US INTEREST RATES: Today, fourth-quarter US GDP data was revised higher to 1.0% from 0.7% previously reported. This data and Wednesday’s durable goods report are signs that perhaps the US economy isn’t at recession’s door. If next Friday’s US jobs report surprises to the upside, expectations for two or more Fed rate hikes in 2016 will be back on the table.

USDCAD TECHNICALS: Short-term USDCAD technicals turned bearish. Yesterday’s decisive break of 1.3650 snapped the uptrend that had been in place since May 2015. The down move also broke the 38.2% Fibonacci support level from the same period, which opens the door to a 50% retracement at 1.3301. For now the downtrend has stalled at the major support zone in the 1.3440-1.3500 area, which is derived from the confluence of prior resistance areas.

The intraday technicals are also bearish and appear to be taking a breather at the 1.3500 support area before heading lower to test support at 1.3440. If this level gives way, the 200-day moving average at 1.3257 is in play.

Canadian dollar conundrum

Pick your poison. In my opinion, the domestic fundamentals and the short-term USDCAD technicals point in different directions. I believe the Canadian economy is still a basket case and there is a real risk of additional monetary stimulus to complement the Federal government’s soon-to-be-announced fiscal stimulus plan. If the Canadian economy wasn’t in such dire straits, why would the Feds be spending the money to boost it? And if the Canadian economy needs such a boost, why would the Bank of Canada stay on the sidelines?

I think the US will raise interest rates at least twice this year, and this week’s US GDP and durable goods data support that view.

I don’t think the oil price rally is sustainable due to the persistent over-production amid declining demand. Constant reports of future oil producer talks is just “verbal intervention”, especially if you believe that Iran and Saudi Arabia will stick to their stated views.

So my poison is bullish USDCAD. This view is wrong if USDCAD falls below 1.3440.

USDCAD daily chart with Fibonacci and support shown

Source: Saxo Bank

The week ahead

Fall-out from the G20, if there is any, will be felt on Monday, which also brings Eurozone CPI data, a key number ahead of the March 10 ECB meeting. It is also month-end portfolio rebalancing day, which could see US dollar selling. The Reserve Bank of Australia steps to the plate on Tuesday. As of February 25, the RBA indicator of market expectations for a rate cut on March 1 was a mere 6%, suggesting a rate cut is unlikely. There is plenty of top-tier data from the Eurozone and the US which, due to the proximity of the ECB and FOMC meetings, should boost their impact. The week will close with a bang thanks to the US employment data on Friday.

The week that was

This week the UK-EU summit result was expected to be the marquee event for sterling traders, and it was.

Monday’s Asia session started on an upbeat note with news that China replaced the head of the securities regulating agency, giving a “risk-on” tone to markets. Sterling wasn’t part of this rally. GBPUSD dropped over 0.150 point in early trading on news that the UK and EU had reached an accord, setting the stage for a UK referendum on June 23. GBPUSD and EURGBP trading dominated the European session, with traders ignoring Eurozone PMI data. It didn’t get any better for sterling in New York where it ended the day as the worst-performing G-10 currency.

Tuesday, Asia traders had a yen to buy yen, driving USDJPY to 111.97 from 113.05, is partly due to what were viewed as pessimistic remarks from Bank of Japan governor Kuroda. Traders also had a yen to sell sterling due to Brexit concerns. The European session kept the pressure on USDJPY while trying and failing to drive EURUSD below 1.1000 support. Risk aversion ran rampant through New York, for no good reason, though weak oil prices, mixed to soft US data and falling US yields shared some of the blame.

Wednesday’s Asia session received the risk-aversion handoff from New York though it was a fairly subdued session. GBPUSD didn’t suffer from risk-off but was engulfed in Brexit aversion, and it hit a seven-year low in European trading. EURUSD finally broke 1.1000 support, but not with conviction and was back at 1.1015 when New York opened. Sentiment changed by mid-day in New York, spurred by a rally in WTI and equity indices.

Thursday’s Asia session was choppy with USDJPY gaining and AUDUSD retreating. The upcoming G20 meeting was a major distraction but not a trading influence. EURUSD remained rangebound in Europe, while GBPUSD was offered. It was a good day for commodity currencies in New York, led by the Canadian dollar, which soared on a spike in oil prices. A stronger-than-expected US durable goods report offset much of the softer data seen earlier in the week, which helped US equities close on a high note. Even GBPUSD managed to close in New York with a modest gain. Brexit be damned.

Friday’s US fourth-quarter GDP report and profit-taking ahead of the weekend helped the US dollar post gains across the G10 by mid-morning in New York.

— Edited by John Acher

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Loonieviews: now on QBEATS


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Loonie defying gravity 19Feb16


Loonie defying gravity even as oil declines

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

(Original post on TradingFloor.com)

  • US data gives rate hawks hope
  • Oil rally petering out
  • Keep your eye on geopolitical tensions

By Michael O’Neill

The second-last week of February is fading to a memory, a good one for US dollar bulls and a bad one for the bears. The US dollar has gained against all of the G10 currencies with the exception of the Canadian dollar. EURUSD and NZDUSD were the biggest losers. EURUSD was undermined by a bearish technical shift, dovish comments from European Central Bank chief Mario Draghi and better than expected US data. Weak domestic data and the prospect of a rate cut kept Kiwi on the back foot.

Loonie on defensive

This morning’s Canadian retail sales data was expected to be weak. It lived up to its advance billing. The 2.2% decline in December retail sales, ex-food and energy was worse than the 0.6% decline expected, reminding markets that the Canadian economy is not all that healthy.

Chart: Canada Retail Sales

Source: Statistics Canada

The Organization of Economic Cooperation and Development (OECD) sees the same thing. It cut its forecast for Canada GDP growth in 2016 to 1.4% from their November forecast of 2.0%
.
Oil prices continue to dominate USDCAD trading and even though they are well above the low of $26.03, the rally has been less than impressive. The hopes that Russia and Opec would agree to a production cap have been proved to be just wishful thinking. Neither Iran nor Saudi Arabia are on board. Weak Canadian fundamentals, low oil prices and the risk of higher US rates point to a higher USDCAD in the next week.

USDCAD technical outlook

USDCAD has tried and failed to crack major support in the 1.3630-50 area which is also support from the May 2015 uptrend line on the weekly chart. The intraday chart shows that the USDCAD downtrend from January 20th remains intact while trading below the 1.3840-60 area guarding additional resistance in the 1.4000-50 range.

USDCAD is almost exactly in the middle of the 1.3650-1.4050 trading band which is likely to contain trading for the next week.

Chart 4 hour with potential trading range shown

Source: Saxo Bank

Tensions stewing in the cauldron

There is a large cauldron full of geopolitical tensions that are stewing above an open flame. The Syrian civil war is sucking in global powers with a complex weave of alliances and interests muddying the waters. Syria is not alone; its allies include Iran, Russia and China.

NATO is flexing its muscles ostensibly to help quell the exodus of Syrian refugees that are swamping European nations. NATO is also in Syria as part of their war against the Islamic State of Iraq and Syria (ISIS) or Daesh, as many Arabs (and the US administration) call them. Russia is a Syrian government ally and it is also fighting Daesh.

The US is also backing Kurdish fighters as is Russia. That brings Turkey into the equation and they have their fez’s in a fizzle. The Syrian Kurdish Democratic Union Party (PYD) is viewed by Turkey as terrorists and they are actively fighting them, despite the fact that the Kurds, like Turkey are US allies.

Add China to the mix. China, a Syrian ally is also, not so subtly, annexing the South China Sea and has claimed the major part of this sea as its territory. It has built a series of man-made islands and this week, reportedly deployed missiles on an island. Naturally, the US is opposed to the move however it’s US election year so China has free rein.

China is also the only ally of North Korea. The US invaded Iraq, destabilizing the Middle East in the process, in a futile search for “Weapons of Mass Destruction”. Yet, the US gave North Korea a pass, despite the fact that Kim Jong-un gives “crazy” a bad name.

It is not a stretch of the imagination to see how the current mix of tensions could spill over with the US and NATO on one side and Russia and China on the other. Forget risk aversion, find a bunker.

The week ahead

There isn’t any major central bank event for traders to fret over but there will be plenty of second tier data. Monday is chock-full of PMI reports. “Brexit” discussions will dominate GBPUSD trading as the EU Summit/UK discussions get reviewed. Weak Eurozone data particularly CPI on Thursday, will keep EURUSD on the defensive due to Mario Draghi’s hints of additional stimulus in March. The week will end with Australia closed for Australia Day and US GDP.

The week that was

In the context of other week’s this year, this week was a Sea of Tranquility. There were fireworks but the displays lacked dazzle.

China’s return from a week of Chinese New Year celebrations and their domestic data releases didn’t create any havoc. Japan enjoyed a Nikkei rally of 7.6%. Mario Draghi addressed the EU Parliament and reminded markets that additional stimulus was possible in March. US and Canadian markets were closed.

Tuesday was oil rumour day, at least in Asia and Europe. Reports that Russia and Saudi Arabia would meet to discuss production drove oil currencies and oil prices higher. That news also bolstered risk sentiment and lifted equity indices. New Yorkers didn’t buy the hype. By the New York close, oil prices had retreated and commodity bloc currencies were lower. Sterling was in its own “Brexit” world and earlier gains became losses as the EU summit meeting drew nearer.

Wednesday was a bit of a “risk-off” day in Asia. That sentiment helped drive USDJPY lower and EURUSD higher. European traders saw the world in a different light and reversed the Asia FX moves. Equities and oil rallied. The UK employment report headlines were soft but derived some support from the details. New York traders weren’t overly convinced by either the Asia or Europe moves and were content to let EURUSD and USDJPY consolidate within the recent range. Mexico surprised markets by hiking interest rates 50 bps. WTI rallied on more production cap rumours which lifted the Canadian dollar. The FOMC minutes failed to deliver any surprises but confirmed that the Committee was concerned with global market turbulence.

Thursday, Asia markets took a step back. A weak Australian employment report was quickly forgotten and both EURUSD and USDJPY traded sideways. The European session was similar with the EU parliament meeting being the main distraction. GBPUSD got a lift from some comments by EU Commission President Juncker about keeping the UK in the EU. New Yorkers weren’t so laid back. News that Iran wouldn’t participate in any production cap, a report that Saudi Arabia flatly opposed any production caps and data showing a large build in US Crude stocks, crushed WTI prices and helped US equity indices end a three day winning streak.

Friday’s New York session started with no news from the EU/UK discussions which kept GBPUSD on the defensive. EURUSD was trading with an offered tone but well above key support in the 1.1030-60 area. US CPI data provided some support to those expecting a more hawkish sounding FOMC in March.

The week ahead

There isn’t any major central bank event for traders to fret over but there will be plenty of second tier data. Monday is chock-full of PMI reports. “Brexit” discussions will dominate GBPUSD trading as the EU Summit/UK results get reviewed. Weak Eurozone data particularly CPI on Thursday, will keep EURUSD on the defensive due to Mario Draghi’s hints of additional stimulus in March. The week will end with Australia closed for Australia Day and US GDP.

– Edited by Clare MacCarthy

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Oil fantasies and messing with Mario 16Feb16


Oil fantasies and messing with Mario

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Markets might have expected more than what’s possible from ECB’s Mario Draghi
  • The ECB is expected to add to the December stimulus package on March 10
  • Large oil producers considering production cut
  • Loonie optimism could take a hit

No, Super Mario is not going bananas! Photo: iStock

By Michael O’Neill

You are not supposed to tug on Superman’s cape, spit into the wind or pull the mask of that old Lone Ranger and you certainly shouldn’t mess around with Mario (apologies to Jim Croce).

On Monday, European Central Bank president, Mario Draghi provided further hints that additional stimulus actions will be announced at the March 10 meeting. EURUSD dropped on the news but has since recovered most of the losses.

In the eyes of financial markets, Mario Draghi has fallen off the pedestal. He has gone from “Super Mario”, the man who promised to “do whatever it takes” to being a man whose ego got the better of him; a man who was not as omnipotent as his press clippings suggested, a shadow of his former self. It would be foolish to believe that Mr. Draghi got stupid, all of a sudden. He didn’t.

He may have had his leashed yanked by the Bundesbank back in December which prevented him from living up to the markets expectations of a massive stimulus package. And it wouldn’t be the first time that the market got way ahead of itself, elevating expectations to unwarranted levels.
However, he still seems intent on adding to the December stimulus package in March.

In a speech to the European Parliament on Monday, Draghi expressed concerns about low inflation and the effects of the recent global financial turmoil. He went as far to say “…we will not hesitate to act”. Also on Monday, Germany’s Bundesbank slashed its forecast for domestic inflation to 0.25% from 1.1%.

Is Buba finally seeing what Mario was seeing in December when they yanked his leash? Maybe, and if so, you may get a reminder on March 10 that you should not mess around with Mario.

Oil deal fantasy

FX markets kicked off Tuesday with news that Saudi Arabia, Russia, Qatar and Venezuela (SARQV) agreed to cap production at January levels. Oil prices, which had already been rising steadily on rumours of the SARQV meeting, spiked to $31.53/b from $29.58 and then just as quickly erased those gains.

The good news is that some of the major producers are talking about production caps. The bad news is that: a) it is only some of the producers. Iran did not attend the meeting. b) the deal is only valid if other producers join in. c) it does not address the issue of over-production

Last week, the International Energy Agency’s, Oil Market Report, noted than Opec production in January 2016 was 1.7 mb/d higher than January 2015 while forecasting that global demand growth in 2016 would decline from 1.6 mb/d to 1.2 mb/d in 2016.

So, in a nutshell, Opec, led by SARQV, may cap production at a level higher that the 5 year peak in an environment of reduced demand. Although that doesn’t sound like a recipe for higher prices for crude, the fact that the major producers are discussing ways to stabilize the oil market may indicate that a short term floor is in place.

World oil supply and world oil demand (click to enlarge)

Source: International Energy Agency

Loonie not out of the woods

Canadian dollar sentiment has made a U-turn; while maybe not quite a u-iey more like 2/3’s into a 3-point turn. At the beginning of January it was unequivocally negative. Today, it is not quite positive but it is a long way from negative.

The reasons for the shift in the outlook include, the Bank of Canada erring on the side of caution and leaving domestic rates unchanged and the sense that WTI prices may have found a floor supported by current efforts by Opec to talk about shoring up prices. Adding to the positive sentiment was an uptick in Canadian economic data which suggests some domestic economic improvement, except for the energy sector.

However, the optimism may be misplaced. The Bank of Canada (BoC) declined to cut rates partially because they feared a steeper decline in the Canadian dollar which was trading at 1.4688 ahead of the meeting. It is now trading close to 1.3900-problem solved.

Ted Carmichael of TC Global Macro points out that the domestic bond market sees downside risks to inflation expectations. He points out that the BoC responded with two rate cuts in 2015 in response to reduced expectations but hasn’t done anything in 2016. Perhaps more importantly, Mr. Carmichael notes that financial conditions are actually tightening despite the monetary easing.

With Opec unlikely to solve the over-supply, diminished demand issue and the possibility of a Bank of Canada rate cut in March, USDCAD has likely seen the bottom (1.3635) for the next month or so.

Is this the path to follow to get out of the woods? Photo: iStock

USDCAD technical outlook

The intraday USDCAD downtrend from the beginning of the month ended today with the move above the 1.3820-40 area. Failure to break above 1.3920 may indicate additional 1.3700-1.3920 consolidation. A decisive break above 1.3900-20 suggests further gains to 1.4000 and the possibility of further 1.3700-1.4100 range trading.

Longer term, the USDCAD uptrend from May 2015 remains intact while trading 1.3600-20 which also represents the 38.2% Fibonacci retracement level of the May 2015-February 2016 range.

USDCAD Daily with Fibonacci and uptrend (click to enlarge)

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

– Edited by Clemens Bomsdorf

Michael O’Neill is an FX consultant at IFXA Ltd. Follow Mike or post your comment below to engage with Saxo Bank’s social trading platform

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No Valentine for the Loonie from crude oil 12Feb16


No Valentine for the Loonie from crude oil

Michael O’Neill No

FX Consultant / IFXA Ltd

Canada

  • Retail Sales gives US dollar a boost
  • China data next week could raise risk aversion
  • Loonie and oil – not a love story

Sorry folks. There’s no "happy ever after" for the Canadian dollar and oil. Pic: iStock

By Michael O’Neill

WTI made a new 2016 low at 26.05 on Wednesday. USDCAD did not make a correspondingly new high for 2016-far from it. USDCAD remains over 0.0700 points below the level it reached on January 20 when oil first broke $27.00/barrel and traded at $26.85/b.

The relationship between USDCAD and WTI price movements may have cooled somewhat in the past 10 days but make no mistake, it is far from over. In January, USDCAD soared with oil’s relentless decline and peaked January 20 at 1.4688, coinciding with WTI touching $26.85/b. Since then, USDCAD has declined far faster and deeper than what appears warranted by WTI price moves.

It is debatable, but a large part of the USDCAD rally in January can be explained by the pessimistic expectations leading up to the Bank of Canada policy meeting on January 20. You will recall that China’s equity market crash at the beginning of the year spark risk aversion trading around the globe. The situation was made worse with sliding oil prices due to expectations of new Iran oil supply, rising storage constraints in the US and Opec’s unwillingness to cut production

While all that was happening, Canada was posting ugly economic data and the Bank of Canada (BoC) governor’s three prior speeches hinted that the BoC was considering cutting interest rates. By January 18th, the rate cut view was the majority view. USDCAD blew through key resistance in the 1.4000-20 area and then accelerated through 1.4440 like a Honda Civic on nitrous oxide.
When the rate cut didn’t happen, USDCAD reversed course.

Interestingly, it has taken just as many days for the Loonie to recoup its January losses as it took to make them. That is probably useless trivia but does speak to the diminished impact of low oil prices on the Canadian dollar.

The damage is still being done

The Saudi Arabian mission to crush high cost competitors has been a resounding success at least from Canada’s perspective. The Canadian oil patch is bleeding red ink into the black pools of Canadian crude. The damage to the Alberta economy due to massive lay-offs, housing price declines, and oil revenues is just part of the story.

The Canadian banks have large exposures to domestic oil companies in the form of loans while investors are watching energy stock prices collapse. Companies are facing additional woes. Oil hedges put in place to protect producers from falling prices are expiring. The Financial Post reported yesterday that nine small to mid-sized producers had 19% of their crude hedged at $58.00/b and those hedges are expiring this year. In 2017, those companies have hedges on only 3%. A TD bank report argues that Canada’s Oilsands producers need $40.00/b to break even so at current prices these companies are bleeding cash.

Oil matters but global sentiment matters more

Oil will still be a main driver of USDCAD direction but for the next little while intraday oil price swings may have a diminished impact on USDCAD trading. The February shift by global markets to a heightened sense or risk aversion has aligned USDCAD with overall US dollar direction. And US dollar direction is being driven by interest rate spreads, diminished expectations of US tightening and risk on/risk off trading with China as a major catalyst. China unloads a lot of data next week which may add fuel to risk averse sentiment.

Recently, USDCAD couldn’t break above 1.4000 even when WTI punches below 2016 lows but at the same time it can’t get below 1.3740 either. However, the topside cap is far more vulnerable than the bottom.

There is a lot of Canadian data next week including Retail Sales and CPI on Friday. If it is weaker than expected, it should maintain the topside pressure on USDCAD. The long term technicals are bullish as well. USDCAD is in an uptrend from May 2015 and that line doesn’t even get tested until the 1.3680-1.3710 area.

Heightened risk aversion, stable oil price and stronger than expected US data will make USDCAD a better buy on dips than a sell on strength, at least for the next week.

Chart: USDCAD daily with long-term uptrend

Source: Saxo Bank

The week ahead

China returns from holidays on Monday and the US and most of Canada take that day off. Monday, the European Central Bank’s Mario Draghi gives a speech and perhaps he can do what the Fed’s Janet Yellen couldn’t; provide some calm to the markets.

Tuesday will be sterling’s turn to shine and to see if economic data can take the focus off Brexit concerns.

Wednesday, the Federal Open Market Committee minutes will be studied to see if Yellen’s Humphrey Hawkins testimony bears any relationship to the monetary policy discussion on January 27. Thursday, Australia and China data will be the focus.

It is not a great week for data in the early part of the week but it finishes on a high note on Friday with US CPI .

The week that was

The past week had more than enough reasons for FX and equity markets to be quiet, dull and range-bound led by Chinese New Year, a holiday in New Zealand on Monday and a holiday in Japan on Thursday. That wasn’t the case.

The Monday Asia session lived up expectations and was deathly dull. It was a lot different in Europe. USDJPY started to slide (a trend that lasted until Friday), EURUSD rallied than dropped and GBPUSD just dropped. The sterling slide was on “Brexit” concerns and yen was bought due to risk aversion sentiment, in part due to a Wall Street Journal article on rising Investment Grade credit spreads. New York took the risk aversion ball from Europe and ran with it. US equities dropped, WTI oil broke below $30.00/b and gold caught a bid. FX volumes were high and liquidity was poor.

Tuesday’s Asia session picked up where New York left off. USDJPY continued to drop sparking a bit of verbal intervention from the Japanese Finance Minister which helped shore up the 114.00-20 floor, a level not seen since November 2014. EURUSD rallied in early New York trading but the move stalled at 1.1330. The Swiss France was the big winner by the end of the session and the US dollar ended the day down against all the G-10 currencies except for AUDUSD.

Wednesday, expectations of a quiet Asia session ahead of Janet Yellen’s testimony were dashed early on. USDJPY spiked higher on a bogus intervention rumour and then reversed itself just as quickly. Aussie and Kiwi slid initially but rallied into the Europe opening. Traders started being cautious in Europe ahead of Yellen and ignored domestic data. Yellen came across concerned about risks to the US economy and helped drive EURUSD higher by the end of the day. The big mover was USDJPY which crushed key support at 114.00-20 and never looked back.

Thursday brought an added measure of poor liquidity. Japan was closed but that didn’t stop traders from selling USDJPY which sank to 111.89 from 113.35. AUDUSD and NZDUSD both dropped on falling commodity prices. In Europe the Swiss National Bank president said that the SNB would be willing to intervene in FX markets which supported USDCHF. Janet Yellen’s second day of testimony delivered the same sort of remarks as the day before and naturally the result was the same. The US dollar finished the day down across the board except against GBPUSD and NOKUSD. “Brexit” worries undermined cable and falling oil hit the Norwegian krone. WTI made another new low, this time $26.05 but surprisingly the Canadian dollar held in very well, finishing flat on the day.

By Friday, the US dollar higher was higher on the day but mixed for the week with safe haven currencies gaining and the rest declining.

– Edited by Clare MacCarthy

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Monkey business in Year of the Monkey 9Feb16


Monkey business in Year of the Monkey

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

Original post on TradingFloor.com

  • US dollar on the defensive
  • JOLTS survey helps US economic outlook
  • OIl could go lower

By Michael O’Neill

It’s the Year of the Monkey. The Chinese New Year is barely two days old. Mardi Gras has just kicked off. And global markets are discombobulating.

Equity indices are bleeding red ink. The Nikkei lost 5.4% overnight. The Bank of Japan is making noises implying some sort of FX intervention. The Swiss National Bank is threatening to cut negative interest rates even deeper. The European Central Bank’s Mario Draghi is talking stimulus. The UK is fixated on Brexit. The media is talking about a European banking crisis. Goldman Sachs analysts warn that oil could drop below $20/barrel. Throughout all these distractions, calming words and soothing actions from the big four central banks are sorely lacking.

Instead of Kuroda, Carney, Draghi and Yellen, it appears that Caesar, Curious George, Donkey Kong and Bubbles are the Supreme Simians in charge of the central banks.

Volatility index rising

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX is the markets expectation of 30-day volatility), is pushing towards the January 20 peak of 27.50. That was the day before the release of the Federal Open Market Committee statement when there were fears of an extremely dovish statement which proved to be unfounded. The index declined until February rolled around but its been climbing steadily since. According to Investopedia, A VIX reading above 30.00 indicates large volatility while below 20 indicates periods of less stress. It is not surprising, given the 2016 price action in various markets, that the VIX has only been below 20 twice this year and even then, the dip was shallow and short-lived.

VIX is currently sitting at 26.00 after touching 27.00 overnight and needs to get back below 24.25 to signal a respite from the current turmoil

Chart Volatility Index hourly

Source: Saxo Bank

USDX falling as volatility rises

The US dollar index is probing support in the 96.00-20 zone and if the bottom gives out, there is nothing but air until 94.98. It would be the exact opposite of the move seen October 22, 2015 when the ECB press conference hinted at a massive stimulus package to be announced at the December meeting.

The intraday downtrend remains intact while trading below 97.20. Only a break above this level would negate the downward pressure and re-target 98.40.

Chart: USDX Daily with downtrend and support

Source: Saxo Bank

No shortage of oil

There is no shortage of oil and according to the International Energy Association, that isn’t going away anytime soon, at least that’s how Bloomberg reports it. Opec increased oil production by 280,000 barrels/day in January, thanks in part to an additional 80,000/b per day from Iran.

The IEA predicts that there will be a larger than previously forecast surplus in the first half of 2016 which will then ease back considerably by year end due to slowdowns in China, Europe and the USA. Goldman Sachs analyst, Jeffrey Currie warns that the only thing cheap in oil is volatility and warns that storage capacity constraints are in danger of being breached. In a Bloomberg interview, he says “once you breach storage capacity, prices have to spike below cash costs because you have to shut in production almost immediately”. He went on to say that he wouldn’t be surprised to see prices in the teens.

So far oil traders have ignored both the IEA report and Mr. Currie. WTI has bounced between $29.30 and $30.60 all day and is currently at $29.64/b

One thing to remember, Goldman made the $20/b call for oil in September 2015 and at the time, it was scoffed at and ignored. It doesn’t look too outlandish today.

The WTI technicals are bearish while trading below $33.40. The move back below $30.60 has renewed the intraday downtrend and is looking for a break of $29.10 to extend losses to the January low of $26.77.

Chart: OIL US continuous

Source: Saxo Bank

Fed’s Yellen on deck

There is a high degree of uncertainty permeating financial markets, including FX. Traders are desperately seeking guidance and evidence that central bankers are “on the case” and have a clue. So far, that has been just wishful thinking. Fed speakers, Stanley Fischer and William Dudley have spooked the markets with their apparent U-turn away from rate hikes.

Their comments have led to speculation of zero rate increases in 2016 which is a radical change of heart. In December, the Federal Open Market Committee members dot plot indicated 4 rate hikes. Has a little financial market turmoil in January completely altered the landscape or are these two Fed members just following the herd? Today’s JOLTS survey reported job opening increases which when coupled with last weeks NFP report provides another measure of support to the US dollar.

Janet Yellen has a chance to set things right, tomorrow and from that the monkeys aren’t running the zoo. In her remarks to the Humphrey Hawkins committee, she can demonstrate to the world that the Federal Reserve does have a handle on the US economic outlook and confirm that it is a big picture view, not one altered by short-term volatility.

– Edited by Clare MacCarthy

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The US dollar finds a bid in payrolls report 5Feb16


The US dollar finds a bid in payrolls report

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Dollar sellers become buyers
  • Has the US interest rate view changed?
  • Mark Carney, Canada’s "gift" to the UK

By Michael O’Neill

The US employment report missed the forecast. Nonfarm payrolls posted a 151,000 job gain, well below the 190,000 forecast. At first blush it is weak but in the context of the December report (revised down to 262,000) and in light of the likely distortions due to the major snowstorm on January 23, the two-month average of 206,500 looks pretty healthy. The key part of this report was the rise to 0.5% in the average hourly earnings component. That has helped turn the US dollar from offered to bid. We will learn what Janet Yellen thinks of the data next Wednesday.

Canada is a different story

Canada lost 5,700 jobs in January after a gain of 22,800 in December. This report is notoriously volatile. The 4-month average is a mediocre 6,450 jobs, further evidence of Canada’s struggles to cope with the fall in oil prices. Elsewhere, the Merchandise Trade report provided a ray of sunshine. The trade deficit narrowed, led by a surge in exports.

Assuming that the weak Canadian dollar contributed to the rise in exports, this week’s sharp Canadian dollar rally, which recouped all of the January losses, may raise concerns at the Bank of Canada.

One of the reasons that the BoC stayed on hold in January was due to the steep spike in USDCAD. They wanted to avoid a disorderly Canadian dollar decline which would have occurred it rates were cut. They may be rethinking that concern now that USDCAD is at 1.3800 and not 1.4688.

USDCAD technical outlook

The intraday USDCAD technicals are bearish while trading below 1.3990 which represents the downtrend line from the January 20 peak. There is additional resistance at 1.3970 representing the 50% Fibonacci retracement of the November 30-January 20/16 range. The move below this level opened up the possibility of further USDCAD losses to 1.3590, the 76.4% level.

The intraday technicals are bullish while trading above 1.3740 supported by the move above 1.3800 which suggests further gains toward 1.3880.

Chart: USDCAD 4-hour with Fibonacci and intraday uptrend noted

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

Misdirection by Mark

Mark Carney’s arrival in the UK was greeted with fanfare usually reserved for rock stars. The boy wonder of central bankers had been aggressively recruited to become the first foreign governor in the history of the Bank of England, in part because he was credited with helping Canada avoid the worst of the 2008 financial crisis. That is like calling a lottery ticket winner a shrewd investor.

Canada was shielded from the worst of the 2008 meltdown because Paul Martin, Finance Minister from 1993 -2002 and Prime Minister 2003-2006, vetoed a couple of bank mergers (RBC and BMO, CIBC and TD) preventing them from getting into the same financial cesspool as their American counterparts. Forget too big to fail – they were too small to matter.

Now the UK has had the pleasure of 2½ years of Carney’s governorship. He no longer has rock-star status, its more of a garage band vibe.

Carney is a notorious flip-flopper. He could hold his own with a salmon on a sandbar. In 2013 he said that UK rates would rise when unemployment fell below 7%. Didn’t happen. Early last summer, he hinted at rate hikes by the end of the year. GBPUSD rallied and was flirting with 1.6000. By August he had changed his tune and sterling started to slide.

On Thursday, the Bank of England cut its forecasts for growth, wages and inflation. Normally, that’s a sign that interest rates may be heading lower. Not in Mark Carney’s UK. The Guardian reports that Carney started cautioning investors that interest rates were “more likely than not” to need to go up in the next two years.

Those comments are probably misdirection. A YOUGov poll suggests that 45% of Britons survey favour “Brexit” compared to 36% against. In addition to all the other global distractions (China, oil, US Fed), Brexit uncertainty helped drive GBPUSD down from 1.5500 in October to below 1.4100 in January.

It wouldn’t be too much of a stretch to believe that Carney opined about interest rate increases in order to introduce an element of two-way trading back into GBPUSD.

Chart GBPUSD daily

Source: Saxo Bank

The week that will be

Gong Hey Fat Choy. Happy Chinese New Year. FX liquidity will be at a premium in Asia all of next week. China ushers in “The Year of the Monkey” and markets take an extended holiday.

Monday will be even quieter because New Zealand celebrates Waitangi Day, commemorating the signing of the country’s founding document. FX markets should be moribund until Wednesday. That’s when Fed Chair, Janet Yellen emerges from hibernation and gives her Semiannual Monetary Policy Report to Congress.

Data wise, all the top tier stuff gets released on Friday including Eurozone GDP and US Retail Sales.

The week that was

It was a tumultuous week although that wasn’t very evident at the start of the week.
Monday’s expected fireworks from the release of the China PMI data (as forecast) failed to materialize forcing Asia traders into a futile search for inspiration elsewhere. The same held true in Europe, although GBPUSD was in demand early due to modestly strong data but couldn’t hold onto the gains. It changed in New York. A steady slide in oil prices and a doveish sounding speech by Fed vice chair Fischer had the dollar on the defensive throughout the day and made GBPUSD the best performing G-10 currency.

Tuesday, Asia saw a continuation of the dollar selling seen earlier in New York. The Reserve Bank of Australia left interest rates unchanged and delivered a relatively optimistic statement but that wasn’t enough to stem the tide of risk aversion sentiment. A spate of global PMIs were a tad on the soft side which undermined sentiment as did ongoing oil price slippage. The oil slide continued in New York resulting in the commodity currencies being the biggest losers against the US dollar in G-10 currencies. US equity indices were in the red and fixed income yields dropped. The risk aversion sentiment helped USDJPY break support in the 120.30 area.

Wednesday’s Asia session took the risk aversion hand-off from New York but it didn’t last. The Reserve Bank of New Zealand governor, Graeme Wheeler gave a hawkish sounding speech and the bounce in Kiwi helped shift the sentiment to a more positive outlook.

Meanwhile, the Bank of Japan’s Kuroda said that it is possible to cut negative rates further which failed to have an impact on USDJPY. Oil bounced off the lows in early European trading and put downward pressure on the US dollar. The downward dollar pressure exploded into a panic during the New York Day spurred by a weak ISM services PMI report. Adding fuel to the fire was New York Fed president Dudley. In an interview, he said that conditions had tightened since December. Traders concluded that all future US rate hikes were in doubt and the US dollar tanked.

Thursday’s Asia session was far calmer than the New York session that preceded it and the G-10 currencies (except USDJPY) traded in fairly narrow ranges. BoJ president Kuroda’s testimony to the Diet was dovish, but nothing new. The calm in Asia preceded a storm in Europe. Despite Mario Draghi reminding markets of his dovish intentions, he was ignored. The US dollar continued to be sold throughout the New York day, undermined by falling bond yields and weak economic data. The weak US dollar had an added benefit as it helped WTI prices rise.

The week ended with Friday’s US employment report and it rise in the hourly earnings component forcing traders to re-evaluate their dovish FOMC beliefs.

– Edited by Clare MacCarthy