Monkey business in Year of the Monkey 9Feb16

Monkey business in Year of the Monkey

Michael O’Neill

FX Consultant / IFXA Ltd


Original post on

  • 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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Categories FX, Foreign Exchange, Currency, Canadian Dollar

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