Weaker oil sinks loonie, geopolitical risks reappear 1Apr16


Weaker oil sinks loonie, geopolitical risks reappear

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Oil falls on Saudi comments undermining production freeze
  • Falling oil and strong US jobs report add to loonie’s woes
  • Geopolitical tensions keep simmering on back burner
  • USD ended Q1 down against all G10 currencies except GBP

Saudi Arabia’s Kingdom Tower. Saudi remarks undermined the chances of an oil production freeze, dealing oil prices another blow. Photo: iStock

By Michael O’Neill

The US dollar finished the first quarter down against all the G10 currencies except sterling. Sterling only weakened because of Brexit fears and not because of USD strength. And today, robust US nonfarm payrolls gave the US dollar a boost even though the data may not cause Fed chief Janet Yellen to alter her dovish stance.

Potential oil deal springs leaks

The much ballyhooed Russia/Opec production cap deal that was going to be announced later this month appears to be in jeopardy. Saudi Deputy Crown Prince Mohammed bin Salman said, “the country will only freeze output if Iran and other major producers do so.” That got the attention of oil traders. WTI has dropped from $38.42 to $36.77/barrel and broke the March uptrend line at $37.50, in the process. That break may extend losses to $35.84/b which is the 38.2% Fibonacci retracement level of the February-March range.

A steeper drop in oil prices would confirm one of Yellen’s economic risks and justify her reluctance for near-term rate hikes. On Tuesday, Yellen said that if oil prices were to fall again, it could have adverse spillover effects to the global economy. This would be due to the risk of a negative impact on producer government spending as well as financial strains and increased layoffs at energy firms.

Canadian dollar outlook

The drop in oil prices has already knocked the loonie from its lofty perch. USDCAD bounced hard off Thursday’s 1.2855 low, which was just above major support in the 1.2820-40 area.

Today’s stellar US nonfarm payrolls report has given US dollar bulls, if not a new lease on life, a stay of execution. Combined with the fact that the Federal Open Market Committee’s dot-plot still has two rate increases penciled in for 2016 today’s data may temper bearish US dollar sentiment, but that may not be enough to limit USDCAD losses.

However, there is a fair bit of Canadian data due next week. An upbeat business outlook survey on Monday combined with better-than-expected data throughout the week would keep the USDCAD downtrend below 1.3230 unless oil prices continue to drop.

USDCAD technical outlook

The intraday USDCAD technicals are bullish while trading above 1.3020, supported by the break above the 1.3050-60 area. A move above 1.3130 would suggest that a short-term bottom is in place (at 1.2855) and target the short-term downtrend area between 1.3240 and 1.3480

USDCAD 4-hour chart. Technicals bullish above 1.3020

Source: Saxo Bank

Geopolitical tensions simmering

FX markets haven’t had to deal with rising geopolitical tensions this year, and any that exist have been ignored. This morning, South Korea said that North Korea fired a missile into the sea. Earlier, North Korea’s reigning nut-bar Kim Jong-un released a video depicting a North Korean nuclear strike on Washington DC. Americans were furious and didn’t find the video funny. However, they have laughed uproariously at American films ("Team America: World Police", "The Interview") that show attacks on North Korea. Perhaps, traders see Kim Jong-un as South Korea’s and China’s problem and not really a global threat.

China is at the center of the South China Sea dispute, openly and aggressively claiming territory much to the chagrin of its neighbours. Indonesia caught a Chinese fishing vessel in its waters off the coast of Natuna. They detained the crew and, as they were towing the vessel, a Chinese coast guard shipped rammed the Chinese boat in an effort to set it free. Indonesia reportedly upped the ante today by announcing that it is deploying five F-16 fighter jets to the area.

China’s ambitions in South China Sea

Source: Bloomberg

Earlier this week, Japan announced it was opening a radar installation in the East China Sea, greatly irritating China. At the same time, Japan is extremely irked with Russia’s plans to build a naval base on an island claimed by Tokyo.

Iran, recently welcomed back into the fraternity of nations, is not being contrite. Supreme leader Ayatollah Khamenei announced that the “those who say the future is in negotiations, not missiles, are either ignorant or traitors”. …the rockets’ red glare…

President Barack Obama is baiting Russia President Vladimir Putin by announcing that the US military will keep three heavy army brigades in Europe to combat Russian aggression. What will be Russia’s response?

Global tensions have not disappeared. They are merely simmering on a back burner with a flare-up likely to cause a bout of FX risk-aversion.

The week ahead

The coming week should lack the drama and excitement of recent weeks, though there are still a few items worth noting. AUDUSD traders will eagerly await Tuesday’s Reserve Bank of Australia interest-rate decision and statement. A rate cut cannot be ruled out due to the recent AUDUSD strength. Eurozone PPI data is due at the beginning of the week, and the UK dumps a load of data at the end of the week.

The FOMC minutes are due to be released Wednesday, and they are likely to be as dovish as Yellen’s latest speeches. Yellen is slated to speak again on Thursday, but I wouldn’t bet that she would deviate from the March 26 script. All and all, a slightly more subdued week, interspersed with bouts of excitement.

The week that was

Easter Monday holidays in large swathes of the globe put a damper on FX trading at the start of the week, but month-end portfolio rebalancing flows made up for it on Thursday.

On Monday, USDJPY made a bit of noise in Asia when the Nikkei newspaper reported the Japanese prime minister was planning a stimulus package before the G7 meeting in May. Later on, the US released some soft economic data which helped lower the Atlanta Fed’s GDPNow indicator to 0.6% from 1.4%. That put some downward pressure on the US dollar.

Tuesday, Asia, carried over the soft USD theme from New York. USDJPY was a little lively on news that the Japanese PM would hold a press conference. He did, but nothing came of it. The European session was sluggish as traders fretted about Yellen’s speech later in the day. The market anticipated a slightly hawkish speech from Yellen because several Fed officials had suggested post-FOMC that rate hikes were closer than the market expected. Traders were fooled again as Yellen was at her dovish best in her New York speech, and the dollar tanked.

The post-Yellen USD selloff persisted on Wednesday during the Asian session, with both the Aussie and kiwi rallying strongly. The USD weakness was evident in early European trading but it didn’t last. USDJPY bounced from its lows in the 112.00 area, while EURUSD gains stalled ahead of resistance in the 1.1330-80 area. The New York session was relatively subdued. The dollar remained offered, and ADP employment data was ignored.

Thursday was month-end, quarter-end and year-end (for Japan), and the dollar was offered. Rumours of sizeable USD selling to satisfy portfolio rebalancing requirements proved true. EURUSD was bid in Europe. It ignored slightly higher Eurozone inflation data and tested strong resistance at 1.1380 (That level broke in New York). GBPUSD sellers in Asia were GBPUSD buyers in Europe thanks to a dose of healthy data, in addition to month-end demand. USDCAD sank in the New York morning, but rallied hard after the fix, recouping all its losses and then some.

Friday’s US nonfarm payrolls report surpassed forecasts and gave the US dollar a bid though it probably wasn’t enough to move Yellen from her dovish stance.

Known as the loonie, the Canadian dollar flies or sinks with oil prices. Image: iStock

— Edited by John Acher

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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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