Loonie lurches higher, but don’t count King dollar out yet 29Apr16


Loonie lurches higher, but don’t count King dollar out yet

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US data aren’t doing the greenback any favours
  • EURUSD bull run appears primed for fatigue
  • Lofty loonie may get knocked from its perch

Backed into a corner: The USD has fallen back against a host of its rivals, but has the selloff gone too far? Photo: iStock

By Michael O’Neill

The US dollar had a losing month. April is ending with the Japanese yen posting a 4.9% gain against the greenback followed by the Canadian dollar which is up 3.2%.

The Australian dollar is the only G10 currency to lose ground and it was a tiny loss, just 0.13%.This morning’s US data had only a minimal impact on trading, overshadowed by US dollar selling for portfolio rebalancing reasons.

Do EURUSD bulls have mad cow disease?

The Eurozone has negative interest rates and Eurozone inflation is still falling. Greece is back in the headlines with Athens balking at reforms and seeking the next loan installment. The migrant crisis hasn’t been fixed and Daesh is bringing a taste of middle eastern unrest into Europe’s heart.

Despite all this, FX traders think that it is better to own euros than dollars. Admittedly, this is a simplistic view and there are a myriad of issues impacting EURUSD, including the fact that the bulk of the latest rally may be attributed to the unwinding of stale long euro positions. However, the European Central Bank is still fixated on deflation risks and further stimulus action – including rate cuts – cannot be ruled out. That puts the ECB at odds with the US, where rates are heading higher.

The proximity of major EURUSD resistance and the possibility of a US rate hike in June should have EURUSD bulls at least checking in with a vet.

USDX technicals are bearish

The USDX began a rally in July 2014, that started from a low of 79.86 and peaked at 100.65 in March of 2015. Since then, it has spent its time bouncing between the 38.2% Fibonacci level (92.71) and the top. Today, USDX is hovering just above that key support level.

Is this time different? Will the USDX price break its 16-month bottom and spark a new downtrend? Or will it rebound? Roll the dice…

The intraday technicals are bearish while trading below 93.80 looking for a move below 93.22 to extend losses for a test of the 38.2% Fibonacci level of 92.71. Only a decisive break above 94.00 would negate the immediate downward pressure and suggest 93.50-94.50 consolidation ahead.

Longer term, the downtrend from February remains intact while prices are below the 94.80-95.00 zone looking for a break of support at 92.70 to extend losses to 90.26.

This morning’s US data did nothing to alter the bearish USDX trend.

USDX daily noting major support:

Source: Saxo Bank

June is for brides and maybe the Fed

What did we learn from Wednesday’s Federal Open Market committee statement? We learned that rates could go up – or maybe not. We learned that the economic and financial developments that posed risks in March weren’t a factor in April. That could mean a rate hike is in the offing for June.

On the other hand, the Fed failed to indicate where the balance of risks stands. The last time that the FOMC mentioned that risks were balanced or nearly balanced was in December 2015.

Either they don’t really know what is going on or they do and are afraid to tell us.

Nevertheless, the March dot plot indicated two rate hikes in 2016 and if that is still the case, what better time than the halfway point of the year?

Loonie punching above its weight

The Canadian dollar cracked the psychologically important 80 Canadian cent level this morning, but only enough to say it did as it quickly retreated. The USDCAD decline has been fueled by rising oil prices and a general disdain for US dollars.

Rising on oily wings: The loonie’s strength has little to do with the Canadian economy

and much to do with the rebound in WTI crude prices. Photo: iStock

The CAD is not rising because the Canadian economy is booming or, as is the case with NZD, because domestic interest rates are attractive. Just as a three can become a nine at closing time, the US dollar’s fortunes may change as well. Today’s US data were in line with expectations which, if you were looking for a June rate hike, wouldn’t have hurt your view.

WTI oil has cracked well above the $46/barrel level and is sitting at $46.34/b. The strength is a tad perplexing due to the following:

  • US oil inventories rising (EIA crude stocks report shows a build of 2 million barrels.
  • Reuters reporting that Saudi Arabia will increase production to 10.5 million barrels/day, up from April’s output of 10.15m b/d.

Today’s Canadian GDP data were soft, but that was expected. The data didn’t really impact the currency but do confirm that Canadian economic growth is a tad less than stellar. USDX is approaching key support which has contained downside moves for 16 months.

USDCAD has rallied in the May-June period on five out of the past six years.

The loonie is punching above its weight and it is likely to suffer the same fate as Conor MacGregor did versus Nate Diaz in UFC 196.

The week ahead

It will be an extremely quiet start to the week in Asia on Monday and in parts of Europe that will be closed for various holidays. Japan is also out celebrating Golden Week which will put liquidity at a premium.

The Reserve Bank of Australia interest rate decision is Tuesday and that could be entertaining as a rate cut is a possibility. There are some mid-week European holidays and then the week ends with the US employment report.

A dovish RBA could certainly provide some headwinds for the struggling AUD. Photo: iStock

The week that was

This week unfolded as expected – dull at the beginning and lively at the end. Monday started sleepily with traders unwilling to get too involved ahead of the Reserve Bank of New Zealand, FOMC and BoJ meetings later in the week.

The EURUSD had a modestly negative bias due to a bearish close below 1.1235 on the previous Friday. Sterling was bid thanks to US president Barack Obama’s comments supporting the UK’s continuing membership in the EU. The US dollar ended the day in New York a little worse for wear.

Tuesday was a lot like Monday – very quiet in Asia but picked up in Europe. Sterling was in demand which gave EURUSD a modest lift. A rally in gold from $1,231.00/oz to $1,244.88/oz lifted WTI prices and they soon flirted with $45/b. helped by a 1.1m barrel drawdown as reported by API. The US dollar ended down against the majors due a string of weak data releases, led by durable goods.

Wednesday opened with a surprise and ended the same way. Australia’s Q1 CPI surprised traders by dropping 0.2% and managed to put a rate cut on the agenda for next week’s meeting. AUDUSD dropped a big figure.

GBPUSD was fairly volatile in Europe but stayed within a 1.4520-1.4620 range. WTI punched through resistance to touch $45.20/b before that rally was interrupted by the EIA news of a crude inventory build of 1.9m barrels.

The FOMC meeting finished with rates left unchanged and when the dust settled, the US dollar declined. The RBNZ followed and left rates unchanged as well, fueling the kiwi’s rapid rise.

Thursday didn’t allow traders much time to catch their breath. They were still trying to digest the FOMC statement when the BoJ announcement came out. The market had been primed for news of additional stimulus in part because the BoJ governor had told them so. They were disappointed. The BoJ left rates unchanged, downgraded growth forecasts and sent USDJPY and the Nikkei into a free-fall.

Yen and yen crosses dominated the European session while the euro was a sideshow and sterling went nowhere. The US dollar was on the defensive for most of the New York session undermined by a weak GDP report. Oil prices rallied and WTI printed $46.12/b before drifting lower at the close.

Friday was fairly choppy due to month-end portfolio rebalancing flows while economic data failed to deliver much of an impact.

What’s next for the stubbornly earthbound US dollar? Photo: iStock

— Edited by Michael McKenna

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Loonie’s feathers may get plucked 26Apr16


Loonie’s feathers may get plucked

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Weak Durable Goods data undermines US dollar
  • "Voodoo" chart points to USDCAD rally
  • Canada data overdue to disappoint

If history is anything to go by, this bird is in for a plucking. Image: iStock

By Michael O’Neill

The US dollar is heading into tomorrow’s Federal Open Market Committee meeting on the defensive. This morning’s weak durable goods data is helping to dispel any notion that the FOMC statement will hint at a June interest rate increase. Meanwhile, USDCAD continues to drift lower but if history is any indication, the market’s love affair with the Loonie may be at risk.

Too good to last

The USDCAD decline following the January Bank of Canada meeting has been fast and furious due to a neutral BoC, a rebound in oil prices, surprisingly strong and domestic data. The downgrade of US rate hike expectations from four moves in 2016 to just two rate increases, turbo-charged the move due to wide-spread US dollar weakness.

The problem is “that was then; this is now”. Arguably, all the good news for the Canadian dollar is out and it is reflected in the price.

Oil prices have rebounded from the low of $26.10 to $44.05 this week, a 70% increase and very little has been done to curb the over-supply/reduced demand issue. The Doha, Qatar meeting failed because Iran had zero interest in participating in a production cap. Last week’s US crude stocks reports showed that inventories remained at very high levels.

The International Monetary Fund and the Organisation for Economic Cooperation and Development have downgraded their global growth outlooks which suggests that the oil imbalance issue will continue for some time.

Canadian data releases have been surprisingly strong and helped drive the Canadian dollar higher. Canada is due for some payback.

Last week’s retail sales report was solid but were Canadians really spending more money in January and February than they did over Christmas? The data says “Yes”; logic says “No”.

The last Canadian employment report was very strong but the details were a tad dubious. Stats Canada would have you believe that Alberta, still reeling from the energy market collapse gained 19,000 jobs. Still, the headline gave the Loonie a lift.

Even the Bank of Canada is starting to take notice. Apparently BoC Governor Stephen Poloz took off his rose coloured glasses in a Q and A session following a speech in New York this morning. Bloomberg headlines reflect a more dovish stance with comments like" Neutral rates could be even lower if headwinds persist", "neutral rates will be lower for a very long period" and "another year to get to full capacity".

Red ink stink

Alberta, the oil capital of Canada and a major part of Canada’s economic growth engine blew a gasket. Moody’s announced that Alberta’s long term debt has been downgraded to AA1 from AAA following the 2016 budget posting a $10.4-billion-dollar deficit. That rating is still better than Ontario’s AA2 rating since Ontario boasts a net debt of $296.0 billion. The Federal government’s new spending initiatives will give them a $30 billion budget deficit in 2016/17.

None of these deficit announcements even made a ripple in FX markets even though it is evidence that perhaps the BoC’s optimistic outlook for a H2 economic rebound may be misplaced.

FOMC counting down to lift-off

The Canadian dollar, along with its G10 peers, benefited greatly from the diminishing rate hike expectations in the US. Last December, the FOMC led the world to believe that rates would rise four times in 2016. Today, there is a large contingent in the market that believes the Fed will be hard pressed to increase rates even once. And that’s because a gaggle of Fed speakers including Janet Yellen, are telling them that.

In the past few days’ there has been a lot speculation that Wednesday’s FOMC statement will allude to the possibility of a hike at the June meeting. This morning’s Durable Goods report goes a long way in dispelling that notion. March Durable Goods orders came in at 0.8% for March, well below the 1.9% that was forecasted.

Despite all that, US rates will be going up in 2016. As time decays toward year end, the probability of a rate move will increase which will provide support for the US dollar and USDCAD by default.

USDCAD chart says rally coming soon

The high flying Loonie may soon get is feathers plucked if recent history can be a guide. For 5 out of the last 6 years, USDCAD weakness from January through April has reverted to USDCAD strength in May.

This phenomenon is explained away as “seasonal” Canadian dollar strength although the catalysts for the strength are as vague as is the term “seasonal”.

Nevertheless, the charts don’t not lie and as the following daily chart clearly shows, USDCAD could start to rebound as early as next week.

Chart: USDCAD from January 2010

Source: Saxo Bank

– Edited by Clare MacCarthy

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Big week ahead with three central bank deciders


Big week ahead with three central bank deciders

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

Recommend

  • Strong Canadian data gives Loonie wings
  • FOMC meeting will disappoint
  • BoJ may fill the excitement void

Week ahead: The BoJ might yet borrow the ECB’s bazooka. Photo: iStock

By Michael O’Neill

The US dollar is ending the week in the red against all the majors except for the Swiss franc and the Japanese yen. A steep decline in polling numbers for the Brexit Exit side has helped GBPUSD end the week as the best performing currency, handily beating the Canadian dollar which has gained on rising oil prices.

It’s not alive, it’s not alive

Dr. Frankenstein famously shouted “It’s alive, it’s alive” in the 1931 movie Frankenstein. Various Fed speakers, from Janet Yellen on down, have parroted Mr. Frankenstein with reference to the April Federal Open Market Committee meeting. On March 16, Yellen said “.. I say again, every meeting is a live. April remains a live meeting”.

That statement may only be accurate in the sense that there is a meeting and FOMC members will attend in person. Yellen was pretty clear in her speech to the Economic Club of New York on March 29, that rates would only rise gradually. She would be hard pressed to defend a rate hike next week and even in June.

Such being the case, if Dr. Frankenstein was on the FOMC committee for the April meeting, he would be yelling “It’s not alive, it’s not alive”.

The BoJ is alive

The Bank of Japan may fill the “excitement” void left by the FOMC. Expectations for additional stimulus action by the BoJ rose considerably this morning with a Bloomberg story “BoJ officials are said to eye possible negative rate on loans”. That changes the negative interest rate dynamic. The immediate response was that USDJPY spiked to 110.70 from 109.30.

Since New York walked in, it has added to those gains and currently USDJPY sits at 111.30 (as of 1515 GMT). In addition, BoJ Governor, Haruhiko Kuroda, has been in the press a couple of times in recent days, making veiled threats of intervention.

USDJPY may stay bid ahead of Thursday’s meeting while reacting (in either direction) to additional “leaks”. Nevertheless, the BoJ may need to borrow European Central Bank chief Mario Draghi’s bazooka (and hope it works better for them than it did him) to break the downtrend that has existed since February when support in the 116.20-30 area gave way.

I’m loving it

Meanwhile, back in Canada, what better way to describe the FX market attitude to the Loonie than by borrowing McDonald’s slogan, “I’m loving it”, although that would change quickly if it really was a loon in between the buns. But I digress.

Today’s Canadian Retail Sales and CPI data capped a month of mostly better than expected domestic data that turbo-charged the Canadian dollar which was already soaring on the recovery in oil prices. It helps that the US dollar has been mostly on the defensive this week and that the other commodity bloc currencies have gained.

And speaking of using corporate slogans, the Bank of Canada appears to have co-opted the Google (now Alphabet) mantra of “Do no harm”. Governor Stephen Poloz was at his ambiguous best during last week’s press conference and didn’t say anything to hurt (or help) the currency.

At the same time, the Canadian data is merely a sideshow to global developments. The Loonie is still vulnerable to the ebbs and flows of oil prices and overall sentiment. Russia and Saudi Arabia are threatening to boost oil production on the back of the Doha meeting failure. Goldman Sachs analysts believe that the current bullish rally in oil is unsustainable as the fundamentals do not support the current price level. Remember, prices jumped because recent US crude inventory increases were less than expected, not because inventories declined. A drop in WTI prices would quickly curtail USDCAD losses.

US dollar sentiment is the other major driver. At the moment, FX markets are of the mind that the Fed is on hold until December 2016 and even then the CME FedWatch only assigns a 69% probability of a move. Anything that occurs that suggests the Fed will move sooner rather than later will give the US dollar a big boost and have a nasty impact on the Canadian dollar.

Chart: Canada CPI and retail sales:

Source: Stats Canada

The week ahead

It’s show time! Three central bank meetings are on the docket, the FOMC, BoJ and the RBNZ. The BoJ may announce additional stimulus, the RBNZ could cut rates and the FOMC statement could sound hawkish.

Unfortunately, all that action starts in the New York afternoon on Wednesday.
The previous two days may be rather boring, especially Monday with Australia and New Zealand closed for Anzac day.

The end of the week should be as lively as the beginning of the week is dull. There is a lot of major data from various centres and the usual month-end rebalancing flows to provide the icing on the cake.

The week ahead

The Opec meeting in Doha should have kicked off an extremely volatile week of FX trading. It did, but only if the week was just Monday.

Monday opened with oil tanking, Nokkie and the Loon gapping lower and Japan tremoring from a couple of earthquakes. USDJPY dived to 107.81 and the Nikkei shed 3.4%. But that was Asia. It was a different FX world when Europe opened. European traders bought oil and prices rose rapidly supported by news of an oil workers’ strike in Kuwait that cut daily production by over 50%. USDJPY rebounded to above 108.80. When New York finished their session WTI was over $40.00/b and traders were in a risk on mode.

The risk on mode continued on Tuesday in Asia helping to drive equities into the green throughout the region. The Bank of Japan’s Kuroda was making veiled intervention threats, in a Wall Street Journal interview. AUDUSD traders dismissed the Reserve Bank of Australia minutes and pushed the currency to a 10 month high at 0.7803. European and New York traders followed Asia’s lead, selling US dollar across the board. EURUSD was making the first of three attempts in the week to break above 1.1400-they all failed.

Wednesday, the slide in oil prices which began on Tuesday worsened on news that the Kuwait strike had ended. Things were looking grim until the US Energy Information Administration reported a smaller build in weekly crude inventories. Add fresh rumours of another oil meeting, this time in Russia, and suddenly everyone wanted oil. WTI rose 4% by the close in New York. The looming European Central Bank (ECB)meeting the next day led to a bout of profit taking in FX and by the New York close, the US dollar was up across the board.

Thursday was very quiet in Asia and in the European morning. That all changed when the ECB meeting ended. There was a flurry of action. EURUSD spiked higher but quickly retraced all those gains and ended the day where it started. Draghi was dovish but not aggressively so, which left traders no better informed than they were before the press conference. WTI prices slipped from the highs which for lack of a better reason, gave USDCAD traders and excuse to buy. The day finished with the sad news of the end of the reign of the purple prince.

Friday, the BoJ put the cat among the pigeons with a leak of possible interest rate cuts at next Thursday’s meeting. USDJPY soared.

– Edited by Clare MacCarthy

Michael O’Neill is an FX consultant at IFXA Ltd

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Oil rally fuels relentless US dollar selling 19Apr16


Oil rally fuels relentless US dollar selling

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Oil rally lifts commodity currencies
  • Soft US data ignored
  • Loonie at nine month high

By Michael O’Neill

The US dollar is unwanted and unloved. The failure of the Doha Opec meeting has sparked a new round of positive sentiment in FX markets and powered the commodity currency bloc higher with the US dollar breaching key technical support levels in many currency pairs.

“Give me fuel, give me fire, it’s the not the dollar we desire”

That headline is what the opening line to Metallica’s 1997 hit, “Fuel” would be if Messer’s Hetfield, Ulrich, Hammett and Trujillo were FX traders. But they aren’t and it isn’t. What is true is that oil is in demand and the dollar, not so much.

At the beginning of the year, being long dollars was the popular trading theme for 2016. EURUSD was going to head south due to policy divergence and USDJPY would be heading north for the same reason. China’s rebalancing efforts were expected to have a negative impact on the commodity currency bloc.

It was a no-brainer. Unfortunately, had you adhered to these views, it would be you with the “no-brains”, having left them on the trading room floor.

The US dollar has been a big loser against all the G10 currencies, except for Sterling, for the past 30 days and sterling is trading in a Brexit world, uninhabited by the other majors. The US dollar has been sold in part, because the Fed is expected to raise rates only twice in 2016, not the four hikes previously anticipated.

A paradox is not two informative films

Paradox 1. A side effect from announcements of new stimulus packages and deeper negative interest rate should normally have resulted in a weaker currency. This year isn’t normal. Both the Bank of Japan and the European Central Bank announced new and improved stimulus plans and the respective currencies strengthened.

Paradox 2. The Canadian dollar and other commodity currencies rise on anticipation of a production cap/freeze agreement by Opec and non-Opec participants at the Doha, Qatar meeting on April 16-17. The meeting ends without an agreement. The Canadian dollar and other commodity currencies, after a very brief dip, rally aggressively.

None of the moves make any sense from a traditional FX perspective. Negative interest rates should lead to outflows into higher yielding currencies. The current over-supply/reduced demand profile of the oil market should depress prices not boost them and the petro-currencies should sink not rise.

…Soon someone will lose an eye

Children across the globe are very familiar with being told to stop an activity due to the risk of an accident. “Stop throwing rocks or someone will lose an eye” is a common refrain. Maybe traders should be told “stop selling USDCAD or someone will lose their shirt”.

Admittedly, selling USDCAD has been a very lucrative trade since January but like all good things, it may be coming to an end. The FX market appears to be just as bearish USDCAD today as they were bullish USDCAD on January 18th.

The bearish USDCAD camp is focused on; a) general US dollar weakness across the majors. b) improving domestic data spurred on by the Federal governments stimulus plans. c) a neutral central bank content to sit on the sidelines. d) diminished expectations for rising US rates in the short term. e) stabilized to rising oil prices.

The bullish USDCAD camp, a dwindling side to be sure, is; a) leery as to the sustainability of current oil prices due to expected increased production from Iran and Libya as well as a sudden end to the Kuwait oil workers’ strike. b) the negative impact of the decimation of the Canadian energy industry on the economy. c) the negative impact of the surging Loonie on exports. d) the potential for a negative surprise from China as they continue to re-balance their economy.

The problem with both the bullish and bearish views is that they are as stale as last week’s donuts. USDCAD traders are merely following the ebbs and flows of the “risk de jour” exacerbated for the past two weeks by a lack of meaningful US economic data.

Unfortunately, barring a nasty geopolitical event, there isn’t anything on the horizon to change the market sentiment until the approach to the June FOMC meeting. Any indication that US rates are going higher at that meeting could be the catalyst for a big move higher. Until then, the USDCAD technicals will rule and they are bearish.

USDCAD technical outlook

The intraday technicals are bearish while trading below 1.2770 with this morning’s break below minor support at 1.2705 indicating further losses to 1.2550, the 76.4% Fibonacci retracement level of the May 2015-January 2016 range. If that level gives way, it opens the door to a drop to 1.1900. Only a move above 1.3020 negates the down trend.

Chart: USDCAD daily with Fibonacci retracement levels

Source: Saxo Bank

– Edited by Clare MacCarthy

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Doha may be a Homer Simpson moment 15Apr16


Doha may be a Homer Simpson moment

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Soft US data leads to dollar selling
  • Oil prices decline ahead of Doha
  • Bank of Canada message was mixed

By Michael O’Neill

The US dollar has taken a turn for the worse this morning but is ending the week mixed. The commodity currency bloc, led by the Australian dollar, are the big winners while the Swiss franc leads Euro and Yen lower.

The dollar didn’t find a friend with today’s US data releases. The Michigan Consumer Sentiment index slipped to 89.7 from 91.0 while both the current conditions and expectations index fell. The Industrial Production data was also disappointing which help spur dollar sales.

Doha or DOH-eh!

Oil prices have been on a tear since reports started trickling out that a production cap freeze or some sort of price support agreement would be announced at the Opec/non-Opec meeting in Doha, Qatar on April 16-17.

Since the beginning of April, WTI has climbed from $35.26/b and peaked at $42.40 on Wednesday as production cap rumours and news leaks filtered into the market.

Prices started drifting lower following the Energy Information Administration data reporting that Crude Stocks rose 6.634 million barrels over the previous week. Headlines warning that a “Doha Deal” may be meaningless led to additional WTI selling. WTI prices have returned to Monday’s levels.

Any announcement of a production cap or freeze or any price support mechanism that doesn’t include Iran, Western producers including the US, Canada, Norway, Britain and France, will be as effective as a screen door on a submarine. WTI will head south of $35.00/b

If so, Monday may be a Homer Simpson moment for Canadian oil price bulls. Instead of celebrating a Doha oil agreement, they may be shouting DOH-eh!

BoC straddles the fence.

Ronald Reagan, former President of the United States, was described as “The Great Communicator”. Mr. Poloz, Governor of the Bank of Canada, can be described as “The Great Obfuscator” and he was in fine form on Wednesday.

The Bank of Canada left interest rates unchanged at Wednesday’s meeting and released the quarterly Monetary Policy Report.

The interest rate statement was either mildly doveish or modestly hawkish, depending upon your bias. The report was riddled with positive points being off-set by negative points.

For the most part, four Canadian Bank economist reactions to the interest rate statement mirrored the message delivered by the BoC.

Two banks appeared to be of the opinion that the message was mildly upbeat with one specifically noting that the message was wrapped in such a way as to avoid appreciating the Canadian dollar.

A third bank felt that the Bank delivered a very mixed message and failed to add any clarity to the outlook. The fourth bank suggested that the Banks reference to the Canadian dollar was a deliberate attempt to remind markets that the rising Loonie would have a negative impact non-energy exports. Homer Simpson, Ronald Reagan – these days let one think of the most famous Americans. Photo: iStock

USDCAD traders appear to have agreed with fourth banks conclusion. Initial USDCAD selling bumped into support at 1.2740 and the currency pair is comfortable above 1.2800. However, that rally may have more to do with rising caution ahead of this weekend’s Opec meeting in Doha, than the BoC statement.

USDCAD Outlook

The outlook for USDCAD next week remains tied to oil price movements and general sentiment toward the US dollar. At the beginning of the week it will be all about oil and the results of the Doha meeting. If the Doha meeting disappoints and WTI prices drop, USDCAD will probe resistance in the 1.3000 area. That is an easy call as a drop in oil prices would also lead to renewed risk aversion and additional US dollar strength, as we have seen often this year.

There isn’t much in the way of Canadian data next week until Friday and that data will have minimal impact coming so close on the heels of the April 13, BoC meeting.

USDCAD technical outlook

The intraday technicals are in an uptrend while trading above 1.2810 supported by the break of resistance at 1.2860 which now target a break of resistance at 1.2920 to extend gains to the1.3000-20 area. A move above 1.3020 would target the downtrend line from February which comes into play in the 1.3050-70 zone. A move below 1.2740 sets up a test of long term support in the 1.2550 area.

USDCAD 4 hour

Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more

The week ahead

The results of the highly anticipated Doha, Qatar Opec and non-Opec meeting should set the tone for trading with the commodity currency bloc exposed. Other than that, for this week, the needle points to “bland” on the excitement meter.

The week that was

There were enough regional events scheduled this week that should have led to a prolonged period of volatility. They didn’t.

Monday started with China data not being a big deal and USDJPY heading lower, making a fresh 2016 low of 107.62, which raised fears of BoJ intervention. By the end of the New York session nothing was resolved. EURUSD was very choppy around 1.1400 while rising oil prices undermined the US dollar vs. G10 currencies.

Tuesday, AUDUSD was the star performer in Asia on the back of firmer commodity prices, including oil, and improving risk sentiment. Yen traders were fretting about intervention, although none occurred. GBPUSD rallied in Europe despite Brexit issues, supported by a better-than expected inflation report and EURUSD just traded sideways. By the end of the New York day, US equities were up around 1.0%, USDJPY was down and oil was bid on a report that Russia and Saudi Arabia had reached a production freeze deal.

Australia’s labour market report was simply.. intergalactic, ehm.. stellar. Photo: iStock

Wednesday, China Trade data gave AUDUSD a bid of a bid. USDJPY rallied on a rising Nikkei. In Europe, traders decided to buy US dollars due to a dip in oil prices and ahead of US Retail Sales. EURUSD finally broke out of the 1.1340-1.1460 range with a move below 1.1320. The dollar unwind lasted throughout the New York session. Retail Sales missed the forecast. The Energy Information Administration (EIA) confirmed the American Petroleum data of a large build in weekly Crude Oil stocks and the WTI rally was capped at $42.40

Thursday, a stellar Australian labour report gave AUDUSD a bid. Elsewhere, the Monetary Authority of Singapore’s (MAS) decided to set the rate of SGD appreciation to zero. Europe saw a bout of position adjustment ahead of the US inflation report which ended up being soft. The Bank of England meeting was expected to be a non-event and it was. The US dollar ended the New York session consolidating its recent moves.

Friday, the highly anticipated China data (IP, Retail Sales and GDP) failed to ignite any fireworks. For the most part the data was strong which gave NZDUSD a lift. Traders having second thoughts as to the success of the Doha agreement drove WTI prices down and weak US data undermined the US dollar.

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Loonie crosses raise warning flags


Loonie crosses raise warning flags

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Commodity currencies hold on to most of their recent gains
  • Lack of data leaves trading void
  • Oil rally drives risk-on sentiment

Avalanche or other danger — it doesn’t pay to disregard warning flags. Photo: iStock

By Michael O’Neill

FX markets have enjoyed a few days of "risk-seeking" sentiment, led by higher equity prices and a rally in oil, but already there are signs that the move is getting tired. The US dollar has clawed back some losses against the yen and European currencies this morning. Commodity currencies are still up but retreating.

Loonie crosses raise warning signs

USDCAD probed major support in the 1.2830-50 area, representing a series of multi-bottoms and multi-tops going back to May 2015, in addition to Fibonacci retracement support, but has since pulled back. EURCAD, GBPCAD and CADJPY charts suggest that a break of the 1.2830-50 zone is not a sure thing, although the level should see some serious tests.

EURCAD is in a well-defined downtrend since failing to extend gains above 1.5025 last week. That downtrend remains intact while trading below 1.4730. At the same time, there is significant support in the 1.4540-90 area. A break above 1.4730 would negate the immediate risk that USDCAD 1.2830 breaks.

EURCAD 4-hour chart displays well-defined downtrend

Source: Saxo Bank

GBPCAD is much like EURCAD, but the downtrend is less steep and therefore harder to break. The GBPCAD downtrend remains intact while trading below 1.8610, which is guarded by an intraday downtrend at 1.8460. However, support in the 1.8270 area saw thwarted downside probes twice in the past week. A break above 1.8610 would suggest that USDCAD support at 1.2830 is out of danger.

GBPCAD 4-hour chart shows more gradual downtrend than EURCAD, so harder to break

Source: Saxo Bank

CADJPY tells a story similar to both EURCAD and GBPCAD — that Canadian dollar upside may be running out of steam. CADJPY is in a steep uptrend while trading above 83.70, but the rally has stalled against good resistance in the 84.30-50 area. If this resistance are holds, the risk of a USDCAD move below 1.2830 diminishes.

CADJPY 4-hour chart. The pair has stalled against good resistance

Source: Saxo Bank

Viewed as a whole, the “big three” crosses, EURCAD, GBPCAD and CADJPY warn that USDCAD may be due for a correction higher, in the short term. It doesn’t mean that the USDCAD selloff is over, just delayed.

G20 dollar devaluation-— reality or myth?

The G20 finance ministers and central bank governors met in Shanghai on February 26-27, 2016 and the US dollar has been under pressure ever since.

EURUSD has risen to 1.1462 as of today from 1.0900 to 1.1462. USDJPY has plunged to 107.66 from 114.00, and sterling, despite all the Brexit concerns, has rallied to 1.4510 from 1.3840. Aussie, kiwi and the Canadian dollar have all made impressive gains in the same time frame. The US dollar index sums up the moves nicely. USDX has dropped to 93.62 as of today from 98.58. It is hard to refute the conclusion that the G20 agreed to a weaker dollar based on the evidence of the currency moves of the past 45 days.

US dollar index shows steep slump

Source Saxo Bank

At issue is the G20 itself. The official communique of February 27, 2016 included this statement: "We will carefully calibrate and clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty, minimize negative spillovers and promote transparency.” If that statement is true, then it would be fair to expect that the G20 would have said something to the effect of encouraging a weaker dollar. On the other hand, they may have learned from past experiences like the Plaza Accord in September 1985 and the Louvre Accord of 1987 to name just two.

The myth of a dollar devaluation agreement is simple to explain. This G20 meeting, by definition, involved at least 20 finance ministers, 20 central bank governors and their entourages. If every attendee brought four assistants, that would mean over 160 people would have been aware of a deal.

Finance ministers are first and foremost politicians, and as politicians they want their constituents to see them as movers and shakers on the world stage. What better way to achieve that goal than to “leak” their participation in a major global initiative? The fact that not a single G20 participant or any of their aides have given any hint of a deal suggests that a coordinated US dollar devaluation is just a myth.

Benjamin Franklin famously said “three may keep a secret, if two of them are dead.”

A wise man was Ben Franklin. Photo: iStock

— Edited by John Acher

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Loonie churns in risk-on, risk-off climate 8Apr16


Loonie churns in risk-on, risk-off climate

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Loonie soars on strong employment report
  • Risk aversion fades into weekend
  • Next week’s China data could be explosive

It may have been a strong week for the Japanese yen but that has left its troubled decision makers at something of a Shibuya crossroads. Photo: iStock

By Michael O’Neill

The week is ending and despite today’s modest correction, the Japanese yen is the best performing G10 currency against the US dollar and by a long shot.

In the past 24 hours the yen has gained over 3.5% on the back of a bout of risk aversion and comments from Japanese officials. The Federal Open Market Committee minutes didn’t help matters, either.

Canada delivered a robust employment report and that news combined with a bump in oil prices and weekend profit taking has USDCAD under pressure.

Will Poloz read from Yellen’s playbook?

Federal Reserve Chair Janet Yellen used the press conference after the Federal Open Market Committee on March 15 and a speech to the Economics Club of New York on March 29 to keep US dollar bulls at bay. She appears to have deliberately downplayed the positive developments in the US economy to highlight the risks to US economic growth from a global slowdown, notably China and falling commodity prices.

Bank of Canada governor Stephen Poloz, has a similar dilemma. The Canadian economy is humming along on about six of eight cylinders, as confirmed by the blow-out GDP report.

The 0.6% gain in January GDP (forecast 0.3%) served to remove any remaining risk of a domestic rate hike off the table. So if rates aren’t going down, they must be heading up. When, is another story. The directional shift in the rate outlook is enough to provide the Loonie with a smidge of support.

The term “competitive devaluation” has popped up a couple of times this week. Japan’s Prime Minister Shinzo Abe used it on Tuesday and this morning the European Central Bank’s Yves Mersch used the same term in an interview with CNBC.

He said. “Everyone should be living up to promises (on) how the international monetary system is being run and that means there should not be a competitive devaluation, there should not be beggar-thy-neighbour policies”.

In a nutshell, the term means that nations should not take measures to weaken their currency to bolster their economy.

Poloz is likely acutely aware that the US Treasury complained to the IMF last September, stating, according the to the Australian Financial Review, the [Office of the US Executive Director at the IMF] expressed concern over the authorities’ public statements on the desired direction of the exchange rate," the US Treasury said.

Such being the case, Poloz is unlikely to mention the Canadian dollar at all. However, it is not beyond the realm of possibility that he too, will focus on the downside risks to the global economy and the risk of lower commodity prices. That approach is a tad subtler than Reserve Bank of Australia governor Graeme Steven’s approach, but the result would be the same — a weaker currency.

Jobs, jobs and more jobs

It is hard to find fault with this morning’s Canadian employment report. Canada gained 41,000 jobs and the unemployment rate dipped to 7.1%. 35,000 of the 41,000 jobs gained were in the full-time category. USDCAD dropped to 1.2995 from 1.3070 on the news.

Although the Canadian jobs report is known to be fickle, today’s data, combined with pre-weekend position-squaring/profit-taking should leave USDCAD under pressure for the balance of the day.

Canada unemployment rate

Source: Statistics Canada

USDCAD outlook

USDCAD direction has been driven by two key forces for the past couple of weeks, oil price movements and general US dollar sentiment vs. the majors. Position jockeying ahead of the BoC meeting on Wednesday may add another dimension to trading prior to the statement but any moves will be fleeting.

Weaker-than-expected China data could lead to another bout of risk-aversion trading like was seen this week and if so, USDCAD may drift toward the top of its two-week range. The other major catalyst will be rhetoric ahead of next weekend’s non-Opec/Opec meeting in Doha. WTI appears to be supported in the $35.00-20 area and as long as that level holds, USDCAD gains should be limited.

More than likely, the BoC meeting will be a non-event and have a minimal impact on the currency. However, today’s Canadian employment report will keep the positive Canadian dollar sentiment intact and the focus on the downside. However, possible surprises from China data and Opec headlines may limit USDCAD losses.

Rhetoric next week running into Opec’s April 17

meeting in Doha could move CAD. Photo: iStock


USDCAD technical outlook

Short-term USDCAD technicals are in a downtrend while trading below 1.3160 looking for a break of the 1.2970-00 zone to extend gains to the 1.2850-1.2900 area which has contained downside moves since the middle of March. At the same time, the 1.3280-1.33 area has capped rallies. Such being the case it makes sense to assume that the existing trading band will remain intact next week.

USDCAD 4 hour with downtrend and trading band noted

Source: Saxo Bank

The week ahead

As we have seen lately, FX traders do not need a lot of top tier US data to get themselves in a lather. Volatility can arise from anywhere. And in the week ahead, the volatility may be made in China. China PPI and CPI data start the week. Trade data is in the middle and GDP data ends the week. A major surprise with any of these reports could light the fuse on the dynamite.

Oil prices may become extra volatile near the end of the week due to rhetoric ahead of the Doha Opec meeting.

There are two Central Bank meetings. On Wednesday, the Bank of Canada interest rate decision is due followed by the Bank of England interest rate decision on Thursday. Eurozone inflation data, also on Thursday, will compete with the BoE for attention.

In between, there is a trio of Fed speakers which includes, San Francisco Fed President John Williams, on Tuesday, Atlanta Fed President, Dennis Lockhart on Thursday and Chicago Federal Reserve President Charles Evans on Friday.

The week that was

There wasn’t a lot of anything scheduled this week that should have disconcerted markets but markets had a yen to be disconcerted and USDJPY delivered.

Monday opened up and the US dollar was offered. USDJPY hit a low in Asia at 111.32 which held through the New York session as well. It helped that trading was extra thin due to numerous national holidays in Asia.

AUDUSD dropped on weaker-than-expected retail sales data but the focus was on the next day’s RBA interest-rate meeting. US data releases (Durable Goods, and Factory Orders) fueled a negative US dollar bias although not a lot of actual US dollar selling.

Tuesday was busy, all over. The RBA left interest rates unchanged as expected and delivered a slightly hawkish statement. USDJPY dropped below 111.00 and the Nikkei was down over 2%.

Rumours that the Bank of Japan and the Ministry of Finance were meeting had little lasting effect although Abe’s comments against competitive currency devaluations appeared to green light USDJPY sales.

In Europe, EURUSD was probing support at 1.1340 and GBPUSD followed the single currency lower. Brexit concerns may have helped sterling’s decline. The risk-off shift continued throughout the New York session. USDJPY touched 109.94. USDCHF rallied and cable and the commodity currency bloc sank.

Wednesday was fairly subdued in Asia and Europe. A large draw down in API crude oil stocks reported at the end of Tuesday helped lift commodity bloc currencies. That data was later supported by the EIA Crude stocks report during the New York morning.

The New York session was choppy, perhaps due to pre-FOMC minutes position adjustment. GBPUSD was under pressure early, which was not sustained. However, selling pressure in USDJPY was sustained and that currency pair closed with a bearish technical setup. The FOMC minutes appeared to tell a different story than what Janet Yellen was telling for the past two weeks and the Fed outlook remains murky.

Thursday was a full-fledged risk aversion day. The FOMC minutes were seen by many as doveish and taken together with Abe’s comments on Tuesday, took USDJPY off at the knees. USDJPY hit 107.65 in New York. European and US equity indices were down leading to additional risk-off sentiment. Oil prices started to climb in the afternoon.

Friday saw a drift back towards risk-on trades or at least profit taking following the week’s risk-off moves. The Canadian dollar was the best performing currency thanks to a stellar employment report. USDJPY rallied due to position adjustment ahead of the weekend.

Markets will be well aware that there could be some distinctly spicy data emanating from China next week. Photo: iStock

— Edited by Martin O’Rourke

Michael O’Neill is an FX consultant at IFXA Ltd

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