Oil fantasies and messing with Mario 16Feb16

Oil fantasies and messing with Mario

Michael O’Neill

FX Consultant / IFXA Ltd


  • 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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Categories FX, Foreign Exchange, Currency, Canadian Dollar

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