US dollar bulls return with attitude 3May16


US dollar bulls return with attitude

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

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  • USDCAD rejects the low with a vengeance
  • US dollar finds its mojo
  • Oil prices slide on rising output

Watch out! The bulls are back. Photo: iStock

By Michael O’NeillThe US dollar sellers evident during the Asia and European sessions are in becoming an endangered species in New York. The US dollar has found its "mojo" and has recouped sizeable earlier losses.

“If you listen to fools, the mob rules”

Those words of wisdom are as true today as they were in 1981 when Black Sabbath released “Mob Rules”. The 2016 version is “If you listen to fools, the herd rules” which perfectly describes the FX market.

The “fools” in question are the major central banks with Yellen, Draghi and Kuroda all vying for the centre podium. All three of them are guilty of setting up the market to fail.

Prior to the Bank of Japan meeting on April 28, governor Kuroda emphasised to the Wall Street Journal that the BoJ was committed to fighting deflation and unhappy with the current level of USDJPY. That led to heightened expectations of additional monetary stimulus being announced at the April 28th meeting and the herd bought USDJPY. Didn’t happen.

The Federal Reserve Open Market Committee Meeting was held just a day before the BoJ meeting. Various Fed speakers, in speeches and interviews, had assured the “herd” that the meeting was “live". US employment data was extremely strong while other economic indicators were at worse, mixed. The US dollar started to rise ahead of the statement, although just tentatively, which proved fortuitous. The FOMC disappointed.

A week earlier, the European Central Bank was holding court. Expectations were low but traders had sold EURUSD ahead of the meeting in case Mr. Draghi reverted to the aggressively dovish demeanor he has become known for. He didn’t.

EURUSD sellers became buyers, USDJPY buyers became sellers and for the past month, the US dollar has tanked against the G10 currencies (except for Aussie). The herd rules.

Oil disconnect

Saudi Arabia continues to pump oil at near record levels. Russia oil exports jumped in April (Saxo contributor Nadia Kazakova’s article, Russian crude exports jump despite lull in output) Reuters reports that China’s “teapot” refineries are facing logistical bottlenecks, and rising crude inventories, forcing them to cut back on a surge in imports. Global economic forecasts have been downgraded by the OECD and IMF. The Reserve Bank of Australia cited lower global economic growth than forecast as one of their reasons for cutting the cash rate by 25 basis points today. US crude inventories continue to rise and traders should get additional confirmation again today with the release of the weekly API data.

Yet, oil prices continue to rise. WTI is in a well-defined uptrend since hitting the low in February and while prices remain above $40.50/barrel, the uptrend remains intact. And in the words of Canadian stand-up comedian, Russell Peters, “somebody gonna get a hurt real bad”.
It’s hard not to believe that the “somebody” will be oil bulls.

Saudi Arabia is in no hurry to reduce oil production and the heir apparent to the King, Crown Prince Mohammed Bin Salman appears to be controlling the pumps. He is also the man who said that there wouldn’t be any oil production cap or freeze without the participation of Iran. There wasn’t. He seems to have been given free rein to stir up the economy and doesn’t seem all that bothered with lower oil prices. The world remains awash in crude.

WTI prices have declined for the past two days and is currently testing minor support in the $43.50-60/barrel area. A break below would target the uptrend line from February which comes into play at $40.50. If this level breaks, $35.00/barrel would be a realistic target.

Chart WTI (OILUScontinuous) 4 hour

Source: Saxo Bank

USDCAD heading into orbit.

Has USDCAD entered into a consolidation phase? Maybe so. USDCAD made a new 2016 low of 1.2462 overnight and since then has surged over 0.0200 points. A decisive break of 1.2750 is significant. It would suggest that the bottom is in place at 1.2460 and a test of 1.3000 is waiting in the wings.

The catalyst could come Friday. A combination of another strong US nonfarm payrolls report and a very weak Canadian report would send USDCAD soaring.

Chart: USDCAD 4 hour

Source: Saxo Bank

– Edited by Clare MacCarthy

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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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