FX noise distorts the direction 13May16


FX noise distorts the direction

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US Retail boosts US dollar-Michigan Sentiment keeps it that way
  • Expect minimal impact from next week’s Canada data
  • Despite the noise, US dollar direction is undecided

By Michael O’Neill

The USD is ending the week on a positive note and is bid across the board. The dollar’s demand started in Asia, continued in Europe and accelerated in New York supported by big gains in Retail Sales and Michigan Consumer Sentiment?

Strong Data, weak data, now strong data again.

US Retail Sales blew the consensus out of the water. The consumer is back! All hail the consumer! The US dollar soared as this data which has re-opened the door to a June rate hike back to where it was last Friday before a weak nonfarm report slammed it shut. The Michigan Consumer Sentiment index has opened the door a little wider.

And that is also the problem. FX traders have been jumping on and off the rate hike band-wagon like a fat man on a pogo stick. Sentiment shifts from bullish to bearish and today’s data has the bullish camp in the driver’s seat. Still there is no reason to believe that the pattern of strong data/weak data will change. There is still another employment report to come.

Today’s price action hasn’t done anything to break the FX majors out of their consolidation ranges. EURUSD is still within a 1.1200-1.1600 band, USDJPY (helped by intervention speculation) has bounced within a 105.50-112.00 band since mid-April and USDCAD is locked within a 1.2500-1.3000 range.

It is not much of a stretch to suggest that these ranges will remain intact until just ahead of the June FOMC meeting.

Dismissing Canadian data:

There is a lot of Canadian data to look forward to next week including Manufacturing Shipments, Retail Sales and CPI in addition to the quarterly Bank of Canada review on Monday. In normal times, this data would be closely scrutinized for clues as to the health of the economy and whether or not I would prompt action from the central bank. Alas, these are not normal times.

The federal stimulus program announced in the March budget is expected to add 0.5% to GDP in this fiscal year. The BoC noted that the stimulus program would have a positive effect on the economy, offsetting the negative effects from other domestic developments and global factors.

It has only been a month since that statement so it is unlikely that the next batch of Canadian data will have a material impact on the BoC’s outlook for the Canadian economy. If so, the impact of next week’s data should be minimal and fleeting.

WTI in driver’s seat

The Canadian dollar has been closely tracking WTI price movements all week and that is unlikely to change. The February uptrend remains intact while trading above $42.50 which is guarded by the intraday uptrend at $45.50. A break above resistance in the $47.00-20 area suggests further gains to $48.30-50. If that level goes, the $50.84-$51.00 becomes the next target. A move below $45.50, suggests additional $42.00/b-$47.00/b consolidation while a break below $42.00 puts $35.00 in play.

On the fundamental side, production increases combined with price cutting tactics by Iran may be met in kind by Saudi Arabia which will limit topside gains.

USDCAD and WTI (green line)

Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more

USDCAD technical outlook:

The short term outlook for USDCAD is bullish confirmed by Monday’s break of 1.2810 representing the downtrend line from January. The rally from the 1.2462 low stalled at 1.3000 and USDCAD has been consolidating above 1.2750 ever since.

A move above 1.3050 should extend gains to 1.3310 representing the 38.2% retracement level of the 2016 range.

Intraday, failure to break above the 1.3000-50 zone implies additional 1.2750-1.3050 consolidation.

USDCAD 4 hour with Fibonacci retracement levels.

Source: Saxo Bank

The week ahead:

There is nothing like a spate of holidays in Europe on a Monday to put a kind of a hush all over the FX world. Germany, France, Switzerland and Denmark are closed and there isn’t any major US data due.

Tuesday will be different. Asia will enjoy the RBA minutes and RBNZ inflation expectations. European traders will see a lot of UK data although Brexit issues have shunted data to the sidelines.

Wednesday’s release of the FOMC minutes will put the spot-light back on US data and the June 15 interest rate meeting.

Thursday, AUDUSD will be center-stage in Asia, with the employment report release. US data and the Fed’s William Dudley will garner attention in New York.

Friday, the BoJ minutes may stir the pot in Asia while European traders look at PPI data from Germany. The week ends with a slew of Canadian data ahead of a long weekend.

The week that was

This was expected to be a fairly quiet week in FX markets and for the most part it lived up to its advance billing.

Monday greeted Asia traders with weaker-than-expected China trade data, fall-out from the previous Friday’s US employment report, intervention threats by the Japanese Finance Minister and higher oil prices. European traders bought USDJPY in an otherwise quiet session. The US dollar closed the day in New York with a bid tone supported by a drop in oil prices and Fed speakers suggesting that a rate hike is possible in June.

Tuesday was a tad livelier than the previous day although the G10 price action was confined to inside the existing trading bands. USDJPY continued to make gains on repeated, but vague intervention warnings. Kiwi was under pressure ahead of the RBNZ’s Financial Stability Report while Aussie was the biggest gainer on the day.

Wednesday’s Asia session was described as “noisy”. It started with rising equities and a firm USDJPY. That changed. USDJPY dropped followed by AUDUSD, both for no apparent reason. NZDUSD rallied when the RBNZ’s FSR report delivered a less doveish message than expected. Oil prices were higher as well. In Europe, USDJPY recovered some losses, GBPUSD was offered and EURUSD traded sideways. Choppy range trading continued in New York. WTI prices rebounded on EIA data showing a sharp decline in US crude stocks which boosted the Canadian dollar.

Thursday was another quiet day in Asia. Traders turned a deaf ear to comments from the BoJ governor, Kuroda but not so in Europe. Traders there bought USDJPY. The Bank of England meeting ended with a unanimous decision to leave rates unchanged and a dire warning of the risks to the UK economy if the "Leave" side wins the Brexit referendum. New York reacted to weak Jobless Claims data and traders enjoyed a brief spike in volatility as the US dollar was sold. That move didn’t last and the US dollar finished the day with gains against 7 of the G10 currencies. USDCAD and USDNOK were modestly lower on a recovery in oil prices and GBPUSD was flat.

Friday, blow-out Retail Sales data powered an already bid US dollar to new heights

Kiwi under pressure. Photo: iStock

— Edited by Clemens Bomsdorf

Michael O’Neill an FX consultant at IFXA Ltd.

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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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