FX markets get early start on dog days of summer 10May16


FX markets get early start on dog days of summer

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • FX traders chasing their tails as broad currency ranges hold
  • Top-tier data void lasts until Friday’s US retail sales
  • Oil prices at risk of sliding if Saudi Arabia counters Iran’s price-cutting

Isn’t it too early for the sultry dog days of summer? Photo: iStock

By Michael O’Neill

The first two days of this week haven’t provided much direction to the markets, and that is unlikely to change until Friday’s US retail sales report. And the retail sales data on its own probably won’t be very insightful. Further oil price declines may get things going, especially if Saudi Arabia counters Iran’s price-cutting moves.

Dog days of summer — in May?

The calendar says May 10, not August 10, yet the big three in FX are trading like it is the depths of a summer heat-wave.

EURUSD is a prime example. This cross has been trapped within a trading band of 1.1350-1.1450 since Thursday, unperturbed by renewed Greek requests for debt concessions and mediocre economic data.

Even sterling volatility has decreased. The UK referendum is still 44 days away, but calm has returned to GBPUSD as it chops around in a 1.4370-1.4520 band. Data (strong or weak) is overshadowed by Brexit poll results, which continue to indicate that the UK’s vote on its future in Europe may be close.

USDJPY has been a breath of fresh air for stagnant FX markets in the past few days, but that may simply be due to resumption of trading after Japan’s five-day Golden Week holidays. Japanese politicians have reverted to verbal intervention to stem the sale of USDJPY that occurred when the Bank of Japan disappointed markets at the end of April. Still, USDJPY is trading where it was before the BoJ meeting.

Commodity currency bloc barking

The Big 3 may be trading like it’s the dog days of summer, but the commodity bloc currencies are trading like dogs — and barking mad ones at that.

AUDUSD, the must-have currency in March and April, has become the mustn’t-have currency since the beginning of May. A surprise rate cut and a dovish central bank statement will do that to a currency.

Kiwi basked in the same glow as Australia. NZDUSD was in demand due to interest rate differentials and a positive economic outlook. But Australia’s rate cut has given rise to speculation that the Reserve Bank of New Zealand will follow suit and cut rates in June.

The Canadian dollar was a hot-ticket in March and April. USDCAD selling was fueled by fuel, specifically rising oil prices with a dash of decent domestic economic data thrown into the mix. That all changed at the beginning of May when WTI found a ceiling in the $46.00/barrel area and weak data turned USDCAD bears into bulls.

A common theme of the commodity currency bloc reversals is that the earlier rallies may have got too far ahead of themselves. That may be just as true for the latest declines as well. Those moves appear to have run out of steam. The AUDUSD decline stalled at the 0.7300 area, which has been both support and resistance in 2016. The NZDUSD drop halted in the 0.6710-20 support/resistance zone from February and March. The USDCAD rally stalled at 1.3020, the mid- April resistance area.

Today’s New Zealand financial stability review could ignite another leg lower in NZDUSD, but if the report is benign, there’s nothing until next week’s Federal Open Market Committee meeting minutes for traders to feed on. The same holds true for Aussie dollar and the loonie. AUDUSD may get bothered by next Tuesday’s release of the Reserve Bank of Australia minutes, while USDCAD is hostage to WTI price swings.

If WTI stays rangebound, the lack of upside momentum and the risk of a correction from oversold positions may limit additional commodity bloc losses until next week.

WTI 4-hour chart with broken uptrend line

Source: Saxo Bank

Dogs of war baring teeth

Uncle Sam seems to be unsatisfied with antagonising Russia and now has added China to the mix. The US, along with Vietnam, Philippines and Taiwan are unhappy with China’s claim of large swathes of the South China Sea. The US sent a guided missile destroyer (the USS William P Lawrence) close to a disputed reef, just to say "hello", and China scrambled fighter jets. To say that China is annoyed is an understatement.

Meanwhile, the Syria conflict rages on despite the US claiming that Syria crossed a “red line” in June 2013. Russia is on the side of the Syrian government which is battling rebels and ISIS. The US is also battling ISIS but supporting the rebels. Today, the US and Russia have promised to “redouble” efforts to end the civil war.

Neither of these events have attracted the attention of FX traders other than as interesting diversions in slow markets, mostly because they have been dragging on for ages.

The removal of oil minister Ali al-Niemi marks a major shakeup in Saudi government and the whole world of oil. Photo: iStock

Out with the old dogs

Saudi deputy crown prince Mohammed Bin Salman solidified his control on the Kingdom’s economy by removing 80-year-old oil minister Ali al-Naimi and replacing him with the former head of Saudi Aramco, Khalid al-Falih.

It was the deputy crown prince who gutted the plans for a production freeze in April when he declared that there would be no deal if Iran didn’t participate. The prince is also spearheading the long-term Saudi Vision 2030 economic plan to wean the Kingdom from its total reliance on oil revenues.

Meanwhile, Iran is going after market share aggressively. Reuters reported this morning, that Iran is selling its heavier crude that is sold to Asia at the biggest discounts to Saudi and Iraqi oil since 2007.

It is easy to believe that the Saudi prince Salman will not take kindly to Iran’s price-cutting actions and respond in kind and perhaps even by increasing production. If so, it suggests that risk/reward favours lower oil prices.

— 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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