Oil rally fuels relentless US dollar selling
FX Consultant / IFXA Ltd
- 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.
Source: Saxo Bank
– Edited by Clare MacCarthy