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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Categories FX, Foreign Exchange, Currency, Canadian Dollar

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