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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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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