USD battered as Fed sends mixed messages 30Mar16

USD battered as Fed sends mixed messages

Michael O’Neill

FX Consultant / IFXA Ltd


  • ADP employment beats forecasts
  • Fed officials send mixed messages; Yellen’s dovish Tuesday speech hits USD
  • Month-end flows may also batter USD
  • USD index looking soft
  • Dovish Yellen, neutral BoC, stable oil and improving domestic data create CAD upside

Greenback knocked by dovish Fed chief. Photo: iStock

By Michael O’Neill

The US dollar isn’t having a good day. In fact it’s having a lousy day as the fall-out from Federal Reserve chief Janet Yelln’s dovish speech on Tuesday continues. This morning’s ADP employment data beat the forecast, but only caused a slight pause in the USD selling, partly because of reports that month-end portfolio rebalancing may result in sizeable USD sales.

US dollar circling the drain

Yellen pulled the plug on the US dollar and it is circling the drain. In a speech to the Economic Club of New York on Tuesday, Yellen said she anticipates “that the overall fallout for the US economy from global market developments since the start of the year will most likely be limited.”

Then she went on to say why that won’t be the case. Yellen pointed out that there have been signs that inflation expectations may have drifted down, noting that “the measure of longer-run inflation expectations reported in the University of Michigan Survey of Consumers has drifted down somewhat over the past few years and now stands at the lower end of the narrow range in which it has fluctuated since the late 1990s.

She said she was concerned with the pace of global growth, particularly with how smooth China’s attempt to transition from investment to consumption will be.

Yellen was also wary of falling oil prices. “In the event oil prices were to fall again" she said, "either development could have adverse spillover effects to the rest of the global economy. If such downside risks to the outlook were to materialise, they would likely slow US economic activity, at least to some extent, both directly and through financial market channels as investors respond by demanding higher returns to hold risky assets, causing financial conditions to tighten”

US dollar bulls read or heard the speech and quickly bailed, assuming that the prospects for two or more rate hikes in 2016 had evaporated.

The Fed chief Janet Yellen said there were signs inflation expectations have

drifted lower. Photo: US Federal Reserve

Remember the dress colour furor?

In February 2015, a couple of women from the UK sought input from websites as to the colour of a dress and it sparked a world-wide debate. Was it white and gold, blue and white, or blue and black?

Last week, St Louis Fed president James Bullard said in a Bloomberg interview, “You get another strong jobs report, it looks like labour markets are improving, you could probably make a case for moving in April.”

His colleague, Atlanta Fed president Dennis Lockhart (non-voter) reportedly said the Federal Reserve could hike rates as early as next month. Richmond Fed president Jeffrey Lacker said he was confident that inflation would accelerate in coming years and hit the Fed’s target.

These hawkish-leaning statements were thought to be a message to markets that the March Federal Open Market Committee statement was not as doveish as initially believed. The US dollar started to rise. On Tuesday, Janet Yellen, put paid to that question.

Today, Chicago Fed president Charles Evans called for two rate hikes and wasn’t concerned about a China hard landing. He suggested that the Fed could hike in June on the basis of continued labour market gains.

All of the above is proof that Yellen and her fellow FOMC members are looking at the dress, and no one knows what colour it is.

USD index is looking soft

The US dollar weakness sparked by Yellen’s speech on Tuesday may continue if the USD index can be used as a guide. The USDX is in a downtrend while trading below 96.10, looking to extend losses through minor support in the 94.30- 94.60 area to 93.80. A recovery above 96.10 would negate the downside pressure.

USDX daily with Fibonacci levels shown

Source: Saxo Bank

Month-end flows could KO dollar

The dovish Yellen speech was just one major negative for the US dollar. The other, fleeting as it will be, is the prospect of sizeable month-end USD sales for portfolio rebalancing needs. The US equity market performance versus the major global indices reportedly points to USD selling. If so, key resistance levels like 1.1380 in EURUSD, 1.4580 in GBPUSD may get tested, while USDJPY 111.00 could be seen.

Loonie likes Yellen

Spring has sprung and it’s coming up roses for the Canadian dollar. The federal government announced a fairly hefty infrastructure spending programme to help boost the economy, allowing the Bank of Canada to sit on the sidelines and leave interest rates unchanged. On Thursday, real GDP data is forecast to rise 0.2%, supporting the view that the domestic economy is rebounding. Oil prices have remained firm and in an uptrend while trading above the $37.90-$38.25/barrel area. A dovish Yellen, a neutral Bank of Canada, stable oil prices and steadily improving domestic data suggest additional upside for the CAD.

USDCAD technical outlook

The intraday downtrend remains intact while trading below 1.3060, looking for a break below 1.2980 to test 1.2920. The short-term downtrend from the end of January remains intact while trading below 1.3330, and it is looking for a test of support at 1.2924, representing the 50% retracement level of the November 2014-January 2016 range. If that goes, losses will extend to the 1.2810-30 area and point toward 1.2500

USDCAD daily with Fibonacci levels

Source: Saxo Bank

— Edited by John Acher

Michael O’Neill an FX consultant at IFXA Ltd.

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Frustrating Fed muddling their message 24Mar16

Frustrating Fed muddling their message

Michael O’Neill

FX Consultant / IFXA Ltd


  • US Durable goods a tad less durable
  • FOMC members back to their old tricks
  • Canadian budget is a small positive for Loonie

"White Rabbit" is an old song, but does Janet Yellen remember those times? Photo: iStock

By Michael O’Neill

This morning’s release of US Durable Goods likely didn’t do anything to change the opinions of either hawks or doves. on the Federal Open Market Committee. The headline data was well down from the previous month but slightly better than expected. On the other hand jobless claims were better than the previous week but slightly worse than expected. All in all a non-event, allowing those that can, to get an early start on their Easter holiday.

“Go ask Janet, when she’s 10 feet tall”

Janet Yellen, the former president of the San Francisco Federal Reserve is of the age to remember when that city’s Haight Ashbury district was the scene of all that was cool in 1967, USA Hippies roamed the street like the hordes of extras in "Walking Dead", and the Jefferson Airplane were singing “White Rabbit”.

“One pill makes you larger, one pill makes you small. And the ones that mother gives you, don’t do anything at all. Go ask Alice Janet, when she’s ten feet tall”- Grace Slick; Jefferson Airplane

You may be forgiven for thinking that its 1967 all over again and the Janet Yellen led Fed is under the influence of illicit, mind altering pharmaceutical’s which have negatively impacted their ability to communicate a coherent, uniform message.

A little over a week ago, the Federal Open Market Committee statement and Janet Yellen’s press conference left FX traders and others convinced of their dovish bias. And why not?

Hawks on the horizon or is it doves? Photo: iStock

The FOMC reduced the number of rate hikes projected for 2016 from 4 to 2, downgraded their outlook for the US economy and expressed concern over global economic and financial risks.

This week, a series of Fed speakers, (Atlanta Fed President, Dennis Lockhart, Chicago Fed President, Charles Evans, and San Francisco Fed President, James Bullard) gave speeches or interviews that suggested an entirely different view-point.

They all gave indications that the Fed was not dovish at all. Yesterday, in a Bloomberg interview, James Bullard was advocating an April rate hike. Confused? You shouldn’t be.

Riding around on a Carousel

This week’s communication carousel is the identical ride as the one markets experienced in September 2015. At that time, markets concluded that Ms. Yellen’s FOMC press conference was dovish. The rate hikes that were penciled in for December were quickly erased. A week later, the Fed Chair was telling markets that a 2015 rate hike was a distinct possibility while the Atlanta Fed President, Dennis Lockhart was hyping an October move.

We all know what happened then and we can guess what will happen this time. US rates will rise, probably a couple of time between April and year end.

Borrowing for prosperity

Canadian’s ousted Stephen Harper and his budget conscious Conservative party and gave a landslide victory to Justin Trudeau and his Liberal’s in October 2015. They promised to create jobs and grow the economy by spending other people’s money. That’s just what they are doing.

On Tuesday, the Finance Minister, Bill Morneau, announced that the government would repeal the Balanced Budgets Act, a law passed by the Conservative government on June 23, 2015, to promote fiscal responsibility by governments. In the next breath he announced that Canada would run a cumulative $118.6 billion deficit over the next 6 fiscal years. So there!

The jury will be deliberating the pros and cons of this move for years to come but the government’s goal is clear. They are hoping to combat the deterioration in the Canadian economy due to the plunge in oil prices.

The government announced tax cuts, infrastructure and new social housing spending initiatives which are forecast to boost GDP by 0.5% in 2016 and by 1.0% in 2017. In the short term, those measures may provide some support for the CAD.

Source: Department of Finance

USDCAD Outlook

There isn’t a whole lot of data on tap next week to provide USDCAD direction except for Wednesday’s GDP report. A weak report will raise the possibility that the Bank of Canada (BoC) could cut rates at the April 13 meeting but those chances are rather slim. The BoC has already stated that they would like time to assess the impact of the Federal stimulus actions and three weeks is probably not enough time.

USDCAD will also be vulnerable to shifting expectations around the results of the April 17 Opec and non-Opec meeting in Qatar. The prospect of some sort of agreement on production caps or other price stabilization measures has been a major factor in the oil price rally since February. However, next week may be too early for any concerns to manifest into USDCAD trading.

There are two main events that will create short term volatility and they are month end portfolio rebalancing flows on Thursday and the US employment report on Friday. Either one of these events could propel USDCAD above resistance at 1.3350.

The break of resistance at 1.3140, diminished liquidity due to Easter and event risk from both month end flows and nonfarm payrolls suggests that USDCAD will consolidate within a 1.3050-1.3450 range next week.

USDCAD hourly with suggested range for the week

Source: Saxo Bank

USDCAD technical outlook

The short term USDCAD technicals are bearish while trading below 1.3350 which represents the downtrend line from January. In addition, the breach of the 38.2% Fibonacci retracement level at 1.3487, (Jan-2015-Jan. 2016 range) targets a test of the 61.8% retracement level at 1.2750.

At the same time, the intraday technicals are bullish while trading above 1.3080, supported by the break of resistance at 1.3140 and is targeting 1.3350. A break of 1.3350 would lead to 1.3450-60 in a hurry.

The week ahead

UK traders will be extra-grumpy to start the week as the switch to daylight savings time deprives them of an hour’s sleep. Most of Europe will have the Easter Monday holiday to recover. There is a lot of data from everywhere which should spice up FX markets in the lead up the usual month end portfolio rebalancing volatility. The US nonfarm payrolls report will provide an entertaining end to the week.

The short week that was

This week was expected to be as dull as dishwater and it lived up to the billing, at least in FX markets where a distinct lack of key US data made for quiet trading.

Monday was a sleepy start to this holiday shortened week. Japan was closed for Vernal Equinox Day and AUDUSD traders were sidelined awaiting a speech by the Reserve Bank of Australia (RBA) governor on Tuesday. A spike in the USDCNY fix was a bit of surprise but there were no ill effects. Europe was quiet. A trio of dovish sounding ECB speakers failed to garner much attention. The US dollar was bid during the New York session although volumes were reportedly lighter than usual. GBPUSD was undermined by “Brexit” woes and WTI prices seemed to have topped out.

On Tuesday, AUDUSD traders ignored news that Uncle Sam had been complaining about the Reserve Bank of Australia talking the currency lower. The RBA governor’s speech had zero impact on the currency as well. The European session was ruined by the news of the Brussels terrorist attacks. GBPUSD dropped, in part, due some believing that the UK was a terrorist target which could raise the chances that the "leave" side would win the Brexit vote. EURUSD also declined albeit modestly and recovered during New York hours. The same pattern happened in USDJPY. When all was said and done, the terrorist impact on G10 currencies was muted.

Wednesday’s Asia session was quiet as traders prepared for the annual Easter Bunny hunt. In Europe, more Brexit poll results weighed on GBPUSD. The US dollar started the New York session with a bid and it stayed that way all day. A number of Fed speakers managed to get traders re-thinking their doveish Fed view. St Louis Fed president, James Bullard told Bloomberg that an April rate hike is possible. Oil prices dropped and the commodity currency bloc were the worst performing currencies on the day.

Thursday the US dollar entered the New York session with a modest bid due to a combination of pre-Easter weekend position adjustment, softer oil prices, mixed data and hawkish comments from Fed speakers.

Friday will be a lonely day for US traders as they will be at their desks while most of the world is observing Good Friday. Fortunately, they will be entertained by the US GDP report.

— Edited by Clemens Bomsdorf

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A little knowledge is a dangerous thing 18Mar16

A little knowledge is a dangerous thing

Michael O’Neill

FX Consultant / IFXA Ltd


  • You shouldn’t be surprised by central bank surprises
  • Loonie rally may not be over
  • Early Easter egg hunt will shorten trading week

Listen if you must. But believe them at your peril. Photo: iStock

By Michael O’Neill

It hasn’t been a good week for the US dollar bulls and this morning’s drop in the Reuters Michigan Consumer Confidence Index didn’t help mattersat all. The US dollar is ending the week substantially worse for wear compared to last Friday and a lack of top tier US data next week, suggests that the dollar woes are not over.
You really don’t know what you think you know

There is an old adage that goes something like “fool me once, shame on you, fool me twice, shame on me”. Well, many FX traders are red-faced again this week. Red-ink, the FX version of a scarlet letter, is splashed across their trading blotters, painful evidence that they have been fooled again.

Should they be ashamed? Or are the central bankers, the Mario Draghis and Janet Yellens of the world singing “Fool to Cry” by the Rolling Stones.

You don’t even need to have the memory of an elephant to recall the number of times that central bankers have provided guidance for a course of action and then delivered something substantially different. Wednesday’s Federal Open Market Committee statement was just the latest act in a long line of misdirection and market disappointment by various G10 bankers.

Everyone knew that the Fed was going to hike rates in September 2015. The economy had delivered all the data that Fed officials claimed was needed to end the Zero Interest Rate Policy (ZIRP) so a rate hike was a foregone conclusion. Except it wasn’t. Instead the FOMC left rates unchanged.

Mario Draghi warned the world of his plan to launch a massive new round of economic stimulus in December 2015. Except he didn’t.

The Bank of Canada had set the table for a rate cut in January 2016 through a speech about unconventional monetary policy tools available to combat falling inflation and plunging oil prices. It was a close call and even the BoC governor, Stephen Poloz, admitted that he thought Canadian interest rates would be cut. They weren’t.

Earlier this month the European Central Bank’s Mario Draghi delivered even more stimulus than what he had promised for December but then fooled traders when he said in the press conference “Rates won’t be going any lower”. He hadn’t hinted at that before.

Taken in this context, the Fed’s actions (or lack of action) on Wednesday shouldn’t have surprised anyone. Just because you think you know what you know, you don’t.

Is it time to stick a fork into the Loonie?

The Canadian dollar is ending the week as the best performing G10 currency since last Friday with a gain of 2.87%. Even more impressive the Loonie has posted a whopping 12% gain since January 21. A 55% jump in WTI prices from the February low his behind the lion’s share of the gains but modestly improving economic data has also provided a lot of support. So has this week’s free-fall in the US dollar against pretty much everything.

Chart: Friday-Friday change in G10 vs. USD

Source: IFXA

The magnitude of the USDCAD decline in such a short timeframe has more than a few traders ready to stick a fork in the bird to see if the move is done. But that move may be premature.

Next week, on March 22, the finance minister will table his first budget, one loaded with $10 billion or more of infrastructure spending stimulus which should keep the Canadian dollar in a positive light. In addition, there is no Canadian data available and the US data that is available is of the 2nd tier variety and still too soon after the FOMC meeting to carry much weight.

Admittedly, USDCAD is vulnerable to a profit taking correction but those rallies’ may be an opportunity to sell as long as USDCAD stays below 1.3368 or intraday below 1.3040.

Chart USDCAD 4-hour

Source: Saxo Bank

The week that will be

“Move along folks, move along. There is nothing to see here”. Following the central bank drama in the past two weeks, this holiday-shortened week will certainly be lacking in excitement. A good part of the world will be observing Good Friday, which means a lot of traders will want to get an early start to their Easter egg hunt by leaving early on Thursday.

There isn’t much in the way of top tier data except for CPI in the UK on Tuesday and coming so close to the BoE statement, no one will really care. There are a lot of Fed speakers who may attract attention as they try to convince Americans that the Fed does know what it’s doing.

The week that was

The bar for drama and theatrics was set rather high this week, following last week’s ECB meeting, but Jane Yellen made leap in spectacular fashion.

Monday wasn’t quite a slumber party but it was close which is usual ahead of a mid-week FOMC meeting. The New Zealand dollar was the worst performing currency on the day while the JPY closed flat. There was a late day “leak” in the Nikkei news suggesting that the Bank of Japan (BoJ) would “downgrade its assessment of an economic recovery. The chatter was biased toward a somewhat hawkish fed meeting later in the week.

Tuesday’s Asia session was all about the BoJ meeting. The previous day’s leak proved prophetic when the BoJ cut its overall economic assessment. The statement was on the dovish side but USDJPY declined. A Brexit poll showing the “Exit” side in the lead pressured GBPUSD lower. Oil traded lower dragging the commodity bloc down with it and EURUSD flat-lined.

Wednesday, the dollar drifted higher throughout the Asia and European sessions in quiet trading. New York traders kept the dollar bid in the morning following reasonably supportive economic data which included higher inflation and housing starts. That set the hawkish Fed camp to salivating. And then it changed. A far dovish than expected FOMC statement and Yellen’s press conference had traders tripping all over themselves trying to sell dollars. And sell dollars they did. Remember the salivating Fed hawks-they choked on their own drool.

Thursday was St Patrick’s Day wherever Irish people are found. He is famous for driving the snakes out of Ireland and for most of this day he could add driving the US bulls out of FX, to his resume. Asia didn’t offer any respite from the dollar bears who devoured every bid in sight. AUDUSD climbed despite a mixed to soft labour report while NZDUSD got an extra lift form better than expected GDP data. USDJPY dropped from 113.80 pre-FOMC to 110.75 by the New York open. FX traders rather snubbed the Swiss National Bank’s interest rate decision and policy statement, but not the Bank of England’s. GBPUSD soared on a headline that said “BoE: more likely than not that rates will rise in next 3 years". There was a lot of US data released as well but it didn’t matter to FX traders with the FOMC still on their minds.

Friday was like Monday. FX trading was fairly subdued and the dollar was closing the week on a very weak note.

– Edited by Clare MacCarthy

Michael O’Neill is an FX consultant at IFXA Ltd

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Loonie at home on the range 15Mar16

Loonie at home on the range

Michael O’Neill

FX Consultant / IFXA Ltd



  • Mixed US data halts dollar rally, while commodity currencies remain soft
  • BoJ didn’t surprise; nothing in this morning’s data to embolden FOMC hawks
  • USDCAD consolidating in downtrend channel with risks fairly balanced

USDCAD "roamed" today just above the mid-point of a 1.3100-1.3600 range, with scope in either direction. Image: iStock

By Michael O’Neill

This morning’s US data didn’t provide any nourishment for rate-hike hawks on the Federal Open Market Committee, though none of it was bad enough to get the doves cooing, either.

The Bank of Japan didn’t surprise anyone overnight, and will the Fed follow in its footsteps tomorrow? This FOMC is widely described as divided, so tomorrow’s statement probably won’t make anyone happy. Rate hikes may be in the coloring book but someone has stolen the crayons.

Dead men and USDX tell no tales

The US dollar index has yet to recover fully from the post-ECB plunge, but there are signs that the healing may have begun. For starters USDX was unable to extend losses below the 95.90-96.00 area on five attempts on the hourly charts. The latest uptrend from the support area remains intact above 96.55-60 and has broken intraday resistance at 96.70.

However, this move is merely a countertrend rally. Failure to extend gains above the 96.95-00 area, which represents the downtrend from the beginning of March, would keep the series of lower, highs intact. If 97.00 is decisively broken, USDX could extend gains to the 98.55-70 area.

The USDX is rather murky, with intraday swings more noise than substance and reflective of the general uncertainty surrounding the US dollar, which is unlikely to change after Wednesday’s FOMC meeting. Like dead men, this USDX chart doesn’t tell any tales.

USDX 4-hour chart highlighting downtrend inside trading band

Source: Saxo Bank

Oil direction even murkier

Oil traders may have got ahead of themselves. WTI prices have been in a steady uptrend since hitting a low of $26.05/barrel a month ago. A large part of the rally has been attributed to sizeable, speculative short positions being unwound when talk of production cuts started making the rounds.

Today’s decline is said to be due to concern that production caps may remain just a proposal and not become reality. Maybe so, but today’s move is also due to general US dollar strength on position jockeying ahead of the FOMC meeting.

Furthermore, WTI technicals are negative due to multiple short-term and long-term downtrends remaining intact and multiple resistance areas capping gains.

The intraday technicals are bearish below $37.50/b, supported by the break of the $37.25-30 area representing the hourly uptrend line from the February low. A move through support at $35.20/b will extend losses to $33.90 which is the 38.2% Fibonacci retracement of the February-March range.

USOil hourly chart showing broken uptrend line

Source: Saxo Bank

Loonie consolidating within downtrend channel

The Canadian dollar has hung on to its recent gains despite another ugly employment report and a central bank that may be out of step with reality. The Bank of Canada believes the global economy will expand in the second half of 2016, contrary to the views, in varying degrees, of the International Monetary Fund, the Organization for Economic Cooperation and Development, the European Central Bank, the Reserve Bank of New Zealand and the Reserve Bank of Australia, all of which expect lower growth. If the BoC is proved wrong, a rate cut is likely, although if it happens, it won’t be until the fall.

The Bank of Canada’s visions of second-half 2016 global expansion are looking increasingly out of step with the views of other economic forecasters. Photo: iStock

At the same time, even with today’s data, the US economy appears to be motoring right along, although the road is a tad bumpy, and that is good for the Canadian dollar.

Friday will bring Canadian retail sales and CPI data, both of which can be expected to be on the strong side and provide another layer of support to the loonie.

In the short term, the risks appear to be fairly balanced between USDCAD strength and weakness. The strength of the US economy offsets the weakness from a soft global economic outlook while the Fed remains cautious and divided, keeping rate hikes at bay.

USDCAD technical outlook

USDCAD is in a steady downtrend channel following the January 21 break of support at 1.4400. Today the channel is bound by 1.3100 on the bottom and 1.3600 on the top. USDCAD is hovering just above the middle of that range (1.3360), with scope to move in either direction.

However, the intraday technicals are bullish and suggest gains toward the top of the channel are likely, though there is resistance at 1.3450 and again at 1.3510.

Like buffalo that roam, the loonie is at home in the range.

USDCAD daily chart with downtrend channel

Source: Saxo Bank

— Edited by John Acher

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Loonie takes a shine to new oil order 11March16

Loonie takes a shine to new oil order

Michael O’Neill

FX Consultant / IFXA Ltd


  • Loonie shrugs off weak data
  • Is the worst over for oil?
  • Plenty of drama in store for next week

The IEA sees signs oil may have bottomed out. Oil well storage tanks and snowy peaks in Colorado. Photo: iStock

By Michael O’Neill

The US dollar is ending a very volatile week on the defensive, having ceded sizable ground to all G10 currencies except for the Japanese yen. Thursday’s European Central Bank drama has traders and analysts scrambling to devise a new outlook for the single currency for the rest of the year, while contending with the lack of guidance from the US Federal Reserve.

The Canadian dollar, in contrast, is ending the week basking in new-found respect on prospects that oil prices may have bottomed out (more on this theme below).

Oil drama fading

Large oil price swings have roiled FX markets in the past few months and affected market sentiment across asset classes. “How low can they go?” was a popular refrain. That question may have been answered, and the answer is, for WTI, $26.10/barrel. At least, that’s an opinion in the International Energy Agency’s new monthly oil market report.

“There are signs that prices may have bottomed out,” the IEA’s March 11 report says. The IEA cites producer actions to control output, supply outages in Iraq, UAE and Nigeria and a weak US dollar as reasons for higher prices. It still sees a high surplus over demand in the first half of 2016 but expects the excess to narrow in the second half. It also cautions that the risks are still to the downside.

Source: International Energy Agency Oil Market Report

If accurate, it would suggest that intraday oil price movements should have a decreasing impact on G10 currencies (unless they are out-sized moves) due to diminished fears of the bottom falling out in prices. Intraday WTI price swings may just be seen as noise, provided that the current uptrend from the February low remains intact and WTI keeps trading within a $35.00-$40.00/b band.

WTI technicals are bullish while trading above $36.30-40/b, which represents the uptrend line from the February low of $26.10/b and supported by the break of previous support/resistance lines in the $34.80-$35.20/b area.

Longer term, the downtrend line from the December 2014 plunge remains intact while trading below the $45.60-80/b area. In addition, the current uptrend is still below the 38.3% Fibonacci retracement level of the December 2014-February 2016 range.

OILUS continuous daily with Fibonacci retracement and uptrend noted

Source: Saxo Bank

Loonie can do no wrong

USDCAD dropped as fast as Deutsche Bank’s bonus pool (though not even close to 17%) when the Bank of Canada surprised markets with a fairly upbeat policy statement on Wednesday.

The surprise was nothing in the magnitude of what ECB chief Mario Draghi delivered to his parishioners, but it did raise some eyebrows. Of the three central banks that announced policy decisions this week, only the Bank of Canada thought that the outlook for the global economy was improving. The other two (ECB and Reserve Bank of New Zealand) cut rates due partly to concerns of a global economic slowdown. The BoC also downgraded prospects of future rate cuts by hanging its hat on anticipation of a favourable impact from the Canadian federal government’s stimulus plan that will be announced March 22.

This morning’s employment report was weak and far worse than expected, but it will have little lasting effect. In fact, the initial reaction to buy USDCAD, taking it to 1.3310 from 1.3245, was short-lived, and USDCAD is currently weaker than it was before the data.

Spring is in the air and the warm weather has melted this winter’s Canadian dollar negativity. Well, perhaps not entirely, but the more positive outlook for oil prices, a neutral to upbeat BoC, the prospect of government stimulus and bearish USDCAD technicals have given the loonie a rather rosy tone.

USDCAD technical outlook

The short-term USDCAD technicals are bearish while the pair trades below 1.3360, looking for a break below 1.3210-20 to extend gains to 1.3105, which represents the 50% Fibonacci retracement level of the January 2015-January 2016 range. If broken, it could extend losses to 1.2740, the 61.8% level. There is also support in the 1.3130-50 area. A break above 1.3360 would extend gains to 1.3450.

USDCAD 4-hour chart

Source: Saxo Bank

The week ahead

The bar for drama and theatrics is high following Thursday’s bombshell ECB announcement of rate cuts and aggressive new stimulus measures.

But it is not insurmountable, and the US Federal Open Market Committee may be up for the task when it meets in mid-week. Rate hike or unchanged, hawkish or dovish or something in-between. All will be revealed on Wednesday. Before then, the Bank of Japan or the Reserve Bank of Australia could provide some entertainment with their policy decisions on Tuesday.

The Bank of England meeting on Thursday will give sterling traders something to think about. Numerous economic data releases are scheduled, though the Eurozone data shouldn’t have much impact, coming so soon after the ECB’s meeting. It will be a good week for FX traders.

Attention now swings from the ECB to the Fed as the FOMC meets Wednesday. Photo: iStock

The week that was

Traders who expected an entertaining week were rewarded. Warm-up acts by the Bank of Canada and Reserve Bank of New Zealand nearly stole the show, but Mario Draghi’s ECB headliner proved more than worthy of its top billing.
On Monday, traders twirled their thumbs, waiting for central bank announcements later in the week. Oil prices rose and G-10 currencies were mixed and traded in fairly tight ranges. There wasn’t any US data of note.

Tuesday brought a bit more “risk aversion”, sparked by weaker-than-expected China trade data, with a little pre-central bank meeting position adjustment thrown in. In the UK, Bank of England official Martin Weale opined that the next rate move would be higher, which only had a minimal and short-lived impact in GBPUSD. Oil prices were soft after the EIA released its short-term outlook and pared back 2016 forecasts. In a G10 session with reportedly light FX volumes, the JPY was the biggest gainer, while the CAD was the biggest loser. EURUSD traded flat.

Wednesday was “wait-and-see day”, at least during the Asian and European sessions, with currencies bouncing around within well-defined ranges. New York had two central bank meetings to contend with, the BoC in the morning and the RBNZ at the end of the day. The loonie rallied after a rather upbeat BoC statement that diminished prospects of a future rate cut (see above). The kiwi sank when the RBNZ cut its policy rate by 25 basis points and delivered a pessimistic statement. The RBNZ saw risks to global growth where the BoC did not.

Thursday’s Asian session was all NZDUSD though USDJPY attracted some attention, and a rebound in the Nikkei led to USDJPY gains. The European session was deathly dull up to a point, but that changed when the ECB’s Draghi delivered a broad new stimulus plan and EURUSD plunged. At his news conference, Draghi indicated that interest rates weren’t going any lower and, all hell broke loose. EURUSD offers vanished only to appear about 300 points higher. Traders are now rewriting their EURUSD outlooks for the rest of 2016.

Friday’s Asian and European sessions were all about dealing with the fallout from the Draghi bombshell. EURUSD tested the 1.1200 area, but it was rejected. USDJPY bounced nearly 100 points from the Asian session low. Oil got a boost from an EIA report suggesting that there a signs that prices may have bottomed out.

Pretty bird. Photo: iStock

— Edited by John Acher

Michael O’Neill is an FX consultant at IFXA Ltd

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A loonie fairy tale: neither hot nor cold but just right 9Mar16

A loonie fairy tale: neither hot nor cold but just right

Michael O’Neill

FX Consultant / IFXA Ltd


  • Don’t expect much from the Bank of Canada today – it won’t cut rates
  • The bigger risk is what the ECB announces and its impact on EURUSD
  • USDCAD consolidation set to continue and remain in a 1.3250-1.3450 range.

By Michael O’Neill

A narrowing of China’s trade surplus was all it took to spook traders desperately seeking guidance from central banks. While on that theme, there is a lot of skepticism that European Central Bank president Mario Draghi can deliver on what traders believe is his promise of additional meaningful stimulus today.

Speaking of guidance from central bankers, the Bank of England’s, Mark Carney is warning of Brexit risks. His remarks should be taken seriously because ever since he went on about climate change in September, the weather here in Canada has gone from cold to warm. The evidence is undeniable.

Once upon a time in Canada

“Once upon a time” is the classic opening phrase of many fairy tales and it is an appropriate opening line for the Canadian dollar story so far in 2016.

Once upon a time the Canadian dollar was in a dive, driven by China, oil, the Federal Reserve Bank and weak domestic data. And then, with just a mere sprinkling of pixie dust by the Bank of Canada governor Stephen Poloz, the dive became a rally and the Canadian dollar soared.

Many modern fairy tales have been Disney-fied; re-written with happy endings while the original version endings were a tad less cheery. Little Red Riding Hood, eaten by a wolf, stayed eaten and the Little Mermaid turned to sea foam.

Which way will USDCAD go? Back to the woods or somewhere in between? Photo: iStock

What story will Poloz be reading today? The Disney version or the Brothers Grimm tale?

The Disney version will read something like this: The Bank of Canada is maintaining its target overnight rate at ½ per cent. Inflation is evolving as expected and expansion in the US is on track.

Prices for oil and other commodities have risen which has provided support for the Canadian economy. Federal government stimulus programs which will be announced on March 22 will put the economy on track for a return to above-potential growth.

The Brothers Grimm version will be very similar except it will come with a warning that the large gains in the CAD since the last meeting have the potential to delay the economy’s return to above-potential growth.

The Disney version will lead to further USDCAD losses and a move toward 1.3000 while the Brothers Grimm version may lead to 1.3250-1.3500 consolidation at least until after the March 22 budget.

USDCAD pros and cons

The pros

  • Oil price stability. The rebound in WTI prices from the $26.10 low has WTI in a steady uptrend, supported by the break of the long term downtrend from June 2015.
  • Neutral Bank of Canada: The BoC is reluctant to cut interest rates and appears to view the recent market turmoil sparked by China and falling oil prices as just a temporary distraction
  • Rising commodity prices: The Bank of Canada Commodity Price Index (BCPI) is almost back to where it was on January 1, 2013. The difference today is that it is on an uptrend and not a downtrend.

Bloomberg Commodity Price Index

Source: Bloomberg

  • Federal government fiscal stimulus: On March 22, the Federal government will announce $10 billion in stimulus spending programs which are expected to jump start the economy.
  • Strong domestic data: Recent Canadian economic releases surprised to the upside with additional positive sentiment derived from the bump in December GDP.
  • Rebounding US economy: The US data has been mixed to strong providing further evidence that the economy is growing. A healthy US economy is always beneficial to Canada and the Canadian dollar since the US is the destination for over 75% of Canadian exports.
  • CAD demand: This stemming from the selling of GBPCAD on Brexit concerns and sales of EURCAD due to diverging Eurozone and US economic growth trajectories as well as widening interest rate differentials

The cons

  • The USDCAD correction from the January peak may be overdone. The presence of support in the 1.3200-50 area as a result of multiple tops and bottoms in 2015 may limit USDCAD losses. Also, the 200 day moving average is significant in that USDCAD has rarely spent much time below that area since 2013.
  • US interest rates are still likely to rise while Canadian rates are still more vulnerable to a rate cut than a hike.
  • Oil prices have rebounded strongly, however the sustainability of the gains is questionable considering that Iran is not part of the production cap agreement and Kuwait says that they won’t participate unless everyone does. US crude stocks inventories remain at elevated levels.
  • China news and policies are still disrupting markets. The drop in the trade surplus announced overnight undercut global equity indices. In addition, most analysts still believe that China will continue to devalue their currency.

USDCAD technical outlook

Intraday: The intraday technicals are bullish while trading above 1.3305 looking for a break of resistance in the 1.3370-80 area to extend gains to 1.3405. A move below 1.3310 targets a retest of Monday’s low.

Short term: The downtrend line following the break of support at 1.3650 remains intact while trading below 1.3410, looking for a break of support in the 1.3220-80 zone to extend losses to 1.3000.

USDCAD hourly chart

Source: Saxo Bank

Long term: The long-term uptrend line remains intact above 1.3120 which is being guarded by multi-bottom support in the 1.3200-50 area and the 200 day moving average at 1.3291. Fibonacci retracement of the 2015-2016 range warns that a move below the 50% level of 1.3145 would target the 61.8% level of 1.2778

USDCAD daily chart with Fibonacci

Source: Saxo Bank

A penny’s worth of thoughts

Don’t expect much from the Bank of Canada today. They will not be holding a press conference after the rate decision is announced. Since they have already said that they will want to see the details of the Federal stimulus package, the statement will likely be blander than normal and therefore a non-event.

The bigger risk is what the European Central Bank announces and its impact on EURUSD. Then there’s next week’s Federal Open Market Committee meeting. Because of that, USDCAD is likely to remain in a 1.3250-1.3450 range.

Strong NFP sinks USD 4Mar16

Strong NFP sinks USD

Michael O’Neill

FX Consultant / IFXA Ltd


  • NFP job gains beat forecasts
  • Additional good data for Canada
  • ECB in the driver’s seat for EURUSD

US job gains announced today were stellar. Photo: iStock

By Michael O’Neill

It has been one of those days. The headline nonfarm payrolls (NFP) number soundly beats the consensus forecast and the USD sinks. Suddenly, average hourly earnings is a more important number than new jobs. The EURUSD reaction suggests that the market was short going into the number and today’s move may just be a stop-loss infused short squeeze ahead of the weekend.

Puzzling payrolls performance

US nonfarm payrolls smashed consensus forecasts and printed a gain of 242,000 jobs (forecast 190,000). EURUSD plunged (as expected) and then soared (unexpected)

Part of the answer is that average hourly earnings declined and came in at minus 0.1% vs. expectations of a 0.2% rise. This data muddies the waters as to the need for higher US interest rates in the near term.

However, that may be just a case of traders over-thinking ahead of the weekend. There is no denying that the NFP report was strong and even last month’s report was revised 23,000 higher.

The EURUSD downtrend is under duress. Since peaking at 1.1375 on February 11, EURUSD has been in a steady downtrend which has been tested often but never broken. That changed this morning with the EURUSD short squeeze. A break of the 200 day moving average at 1.1045 could lead back to the January peak.

Rate cuts shall boost, not hurt the economy. Photo: iStock

Enter the Draghi

Which Mario Draghi will show-up at the European Central Bank (ECB) press conference on Thursday? Will it be “Super Mario”, he who will do “whatever it takes” or will it be “Neutered Mario” tamed by the Bundesbank.

An MNI story purportedly claims that ECB members have no policy consensus beyond a 0.10 deposit rate cut which led to EURUSD buying in Europe. Why is that news? What’s the point of having a policy meeting if everything is agreed upon beforehand?

On January 21, Mario Draghi expressed concern that the annual inflation rate for 2016 would be significantly below forecasts largely due to low oil prices. Since then, WTI has rallied 15.3% but the price remains below the long term downtrend line ($35.90/b) which has capped gains since October 2014.

Last Friday, Eurozone inflation was reported to have dropped 0.2%, most of which was due to the oil price decline. The minutes of the January ECB meeting hinted that there was wide support from the board to get ahead of the inflation threat, according to the Financial Times.

The recent US data has surprised to the upside including this morning’s nonfarm payrolls report which posted a 242,000 gain vs. consensus forecast for a gain of 190,000. However, the average hourly earnings (AHE) component was the star of the show. AHE were weak which has diminished the near term prospect of higher US rates while handing near term EURUSD direction to the ECB.

Mario Draghi may not be armed with a bazooka at next week’s meeting but he probably doesn’t need one, since traders appear to have discounted his effectiveness and that may be a mistake.

Finally found: Mario Draghi’s famous Bazooka. Photo: iStock

Exports boost Loonie

The short term outlook for the CAD took another turn for the better with this morning release of the Merchandise Trade data. Of note was the 3.6% jump in exports, a key metric that the Bank of Canada monitors to help measure economic growth potential. That data combined with the USD decline vs the majors, has USDCAD probing support in the 1.3370-90 zone.

The Loonie has benefitted from a series of positive data surprises including a big jump in headline GDP. That news plus promised fiscal stimulus by the Federal government and stable to firm oil prices will weigh on USDCAD, at least for the next week.

USDCAD 30 minute

Source: Saxo Bank

The week ahead

It’s going to be a good week, although “good" is a relative term depending upon how you are positioned in EURUSD. Thursday’s European Central Bank meeting headlines closes the central bank show with the Bank of Canada and the Reserve Bank of New Zealand being warm-up acts on Wednesday. Preceding the ECB will be key Chinese trade and Inflation data as well as the Eurozone GDP report. There isn’t much in the way of key US data which may limit USD moves.

The week that was

This week lacked the drama and price volatility seen in previous weeks. Monday was noisy with moves lacking conviction. The only thing of note to come out of the G20 meeting was a large carbon footprint, created by leaders and their entourages. Even China’s 0.50 bp. cut in the RRR didn’t create much of a stir in FX markets.

EURUSD lost ground on worse than expected CPI data but ended the New York session pretty flat on the day. Weak US pending home sales and Chicago PMI data was ignored. NZDUSD was the biggest loser by the close of the New York session.

When the first day of March arrived on Tuesday, traders donned their rose-coloured spectacles helped by an improvement in ISM Manufacturing data and higher equity markets. The Reserve Bank of Australia left rates unchanged and sounded rather optimistic which gave AUDUSD a boost.

Kiwi got a lift from a jump in the prices at the GlobalDairyTrade auction while the Loonie took flight on strong headline GDP and higher oil prices. USDJPY was unable to crack resistance at 114.20 and EURUSD stayed within a narrow band.

Wednesday, AUDUSD rallied again, this time on strong GDP data. The Nikkei soared 4.1% boosting USDJPY but 114.56 capped gains in New York. The ADP employment report beat forecasts and the EIA Crude Stocks change report showed a gain of 10.37 million barrels. Both pieces of data had little, lasting impact. EURUSD traders turned a deaf ear to ECB officials and EURUSD closed flat on the day in New York.

Thursday, the USD was mostly mixed in fairly narrow ranges during the Asia and European sessions. AUDUSD had another good day thanks to an improvement in the trade data. GBPUSD ignored weak data and rallied as some of the Brexit panic positions were unwound.

New York traders used news of a soft-ish ISM non-manufacturing index to sell dollars and by the time of the handoff to Asia, the US Dollar was down across the board, with only the JPY ceding a bit of ground.

Friday, the stellar job gains announced in the NFP headline was tarnished by a decline in average hourly earnings resulting in a hefty US dollar short squeeze.

Traders donned their rose-coloured spectacles. Photo: iStock

— Edited by Clemens Bomsdorf

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