Loonie takes a shine to new oil order 11March16


Loonie takes a shine to new oil order

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • 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.
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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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Author: Loonieviews

In the past 30+ years, I have been an FX interbank market making trader, a high performing FX and Derivatives Sales person, creator of simple and complex risk mitigation strategies and a manager of high performance FX teams. The Trade of the Day is a culmination of that experience. Retail FX traders have access to a well-crafted and carefully researched FX trade strategy designed to generate FX profits while mitigating losses.

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