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

icon-envelope-tick-round-orange-v1.png Virus-free. www.avast.com
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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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