Rue Britannia 28Jun16

Rue Britannia

Michael O’Neill

FX Consultant / IFXA Ltd


· Month-end mayhem may have already begun

· Oil and loonie rangebound together

· US data disappoints-again


By Michael O’Neill

It has only been five days since UK voters rejected prime minister David Cameron and his enthusiastic support for the European Union. Brexit supporters, led by Boris Johnson, are euphoric. The rest of the world? Perhaps not so much.

The collapse of GBPUSD on a Leave win was not unexpected but the magnitude of the plunge (nearly 0.1900 points or 12.6%) caught more than a few players flat-footed. And the effects of the decision have spread like the plague across the globe.

Cameron’s decision to allow a referendum on EU membership was reportedly a vanity ploy and meant to shore up his position within his own party. It didn’t work. UK voters have chosen to leave the largest economy in the world to go it alone in an environment where new trading blocs are emerging, not disintegrating. The TransPacific Partnership is one such bloc, consisting of 12 Pacific Rim nations including Canada, USA, Japan, Australia and New Zealand.

Cameron has handed in his notice but he still has his hands on the reins of power, theoretically allowing him to make more bone-headed decisions. Where is the monarchy when you need it? Wasn’t the Tower of London built to deal with these kinds of miscreants?

From Downing Street to down in here. Photo: iStock

US dollar holds (most) of its gains

FX markets have yet to recover. The US dollar has managed to keep a healthy chunk of the post-Brexit gains as markets and policymakers attempt to determine the ramifications for the global economy.

Currency gain/loss versus G10 (June 23 at 2200 GMT to June 28 at 1430 GMT):

Source: IFXA/Saxo Bank

Cautious Fed even more cautious

Federal Reserve chair Janet Yellen is a cautious lady. She said that it was appropriate to “proceed cautiously” in her speech to the New York Economic club at the end of May. She said it again in her testimony to the Senate banking committee last week. The Brexit vote validated her concerns.

The US interest rate hike was expected in June, in part because that is what numerous Fed speakers told markets would happen. It failed to materialise. That was because of Brexit uncertainty. There is no longer any uncertainty about the Brexit, however – it happened. Now, the uncertainty is not “when will the Fed hike interest rates again in 2016" but "will the Fed hike rates in 2016”?

There is even a faction that believes the Fed could cut rates.

CME FedWatch Tool:

Source: CME Group

More drama ahead

The FX volatility of the past few days isn’t going away any time soon. In addition to the looming risk of renewed GBPUSD weakness, FX traders have to deal with month-end, quarter-end, and half-year end portfolio rebalancing flows today through Thursday which may lead to US dollar selling.

Those flows, as much as anything else, may have contributed to today’s mild “risk-on” environment.

USDCAD rangebound but with a bid

The Canadian dollar, like the Aussie and kiwi, has been tossed about like a small boat in a big sea, while maintaining the integrity of the month-old trading range. Canadian dollar weakness will come from soft commodity prices and risk-aversion trading due to Brexit.

At the same time, the Canadian dollar will benefit from GBPCAD selling in the event of a renewed GBPUSD selloff. In addition, the prospect that the Fed is not just on hold for the balance of the year but may even be considering a rate cut will temper the market’s enthusiasm for dollars.

Could the Brexit story end on a CAD-boosting note? Photo: iStock

Stable oil prices are also keeping USDCAD contained in the range. Oil demand is expected to rebound in Q4 while US crude storage declines. The WTI range of roughly $45-$52/barrel as coincided with the 1.2500-1.3200 range seen in USDCAD for the past month.

Furthermore, if global investors plan to flee the UK/EU turmoil, Canada – with its stable banking system, moderately growing economy, huge natural resources, and status as an equal partner in the North America Free Trade agreement – would look pretty attractive.

USDCAD (four-hour chart):

Create your own charts with SaxoTraderGO click hereto learn more

Source: Saxo Bank

— Edited by Michael McKenna

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Britain bids AdiEU 24June16

Britain bids AdiEU

Michael O’Neill

FX Consultant / IFXA Ltd



· US soars in risk-aversion frenzy

· GBPCAD selling may slow USDCAD gains

· Month-end portfolio rebalancing drama up next week

The Brexit vote saw the UK reassert a national future for itself after 43 years as an EU member. Photo: iStock

By Michael O’Neill

Currencies have recovered from the worst levels seen overnight on the back of profit-taking. There is speculation that central banks may have been actively providing liquidity, but no one has confirmed it. The Brexit vote was expected to be close but Remain was supposed to prevail.

It didn’t.

Brexit is the beginning, not the end

The UK’s disruption of the FX markets is far from over. In fact, it may just be starting. The UK government appears fractured and is a bit of a lame duck until it sorts out its leadership. The leader of the Scottish National Party, Nicola Sturgeon, is fishing for another independence vote.

Are there any disgruntled EU members who may follow the UK’s lead?

The Brexit vote sparked another round of risk-aversion trading which is coming at a time when Russia and Nato/USA tensions are at elevated levels, the Eurozone refugee crisis still has a full head of steam, China is still trying to manage a “soft landing”, and the Federal Reserve is still warning of higher interest rates.

The US presidential election, of course, is yet another wild card. In the context of those risks, FX volatility will be the norm.

It isn’t the first time that there has been a “sterling crisis”, and it won’t be the last. GBPUSD hit a low of 1.0520 on March 29, 1985 – the result of the Plaza Accord agreement to devalue the US dollar. Maybe that’s where we are headed.

GBPUSD quarterly from March 31, 1971 until today:

Create your own charts with SaxoTraderGO click hereto learn more

Source: Bloomberg

Not seeing the forest because of the trees

Like all the G10 currencies, USDCAD got caught up in the Brexit firestorm and managed to trade almost its entire June range in the span of five hours. For the next few days or even a week, UK issues and GBPUSD/GBPCAD flows will dominate trading and distort FX trading.

The reality is that, for Canada, even though the UK is our third-largest trading partner, that trade represents a mere 3.1% of the Canada/United States amount. Even if it is disrupted while the UK adjusts to its new world order, the impact on Canada will be minimal. It’s not like the UK will stop trading.

Oil prices appear to have stabilised within a $45-$52/barrel range which provides a degree of support to the Canadian dollar. The Bank of Canada, although cautious, expects the domestic economy to rebound in the second half of the year .

Additional range trading within a 1.2700-1.3100 band is likely with GBPCAD helping to limit USDCAD gains.

GBPCAD looking heavy

GBPCAD has been in a steep downtrend since January and today broke below 1.8080, the 50% Fibonacci retracement level of the May 2013-January 2016 range which re-targets the 38.2% retracement level at 1.7410 and the overnight low of 1.7263.

In the short term, GBPCAD has lots of room to bounce but gains should be capped at 1.8000 and 1.8350.

GBPCAD one-year with Fibonacci:

Source: Saxo Bank

The week ahead

This coming week will lack the drama of last week, but the fallout from the UK’s decision to abandon the European Union will keep traders on their toes all week. In addition, the vote has injected an element of political uncertainty into the equation, aside from the Conservative party upheaval. Scotland is already making noises that it wants another referendum to leave the UK.

GDP is the marquee US data release next week but it will be overshadowed by UK developments as will the other economic releases. The last Federal Open market Committeestatement, which was cautiously dovish, is too fresh to change the outlook and the next FOMC meeting is too far away for this week’s data to matter much.

UK news, developments and data will get closer scrutiny and is likely to be the major driver of G10 FX moves.

Thursday promises to be a very active day thanks to portfolio rebalancing flows for month-end, quarter-end, and half-year end.

The week that was

“Sunday, Bloody Sunday” was the opening track for U2’s 1983 album, War. “Brexit, Bloody Brexit” was the on the lips of scores of FX traders around the globe, for this entire week.

On Monday, following a three-day hiatus from Brexit campaigning due to the murder of an MP, a fresh poll gave the “Remain” side the lead which kicked of a bout of risk-seeking trading. The commodity currency bloc rallied, as did sterling and oil. Gold prices got spanked. If only they had known…

Tuesday, GBPUSD continued its climb and peaked at 1.4780 just before the New York open. EURUSD squeaked out a small gain helped by better ZEW data but for the most part, Brexit overshadowed data releases everywhere. GBPUSD didn’t fare well in New York after another poll reported that the Remain lead was shrinking. Sterling tanked.

The first day of Janet Yellen’s semi-annual testimony to Congress was uneventful as she was as dovish as expected. Oil rose in after hours trading when the API Crude stocks data showed a 5.4-million-barrel drawdown.

Wednesday may have been the eye of the hurricane. USDJPY drifted lower in Asia and then flat lined the rest of the day. EURUSD drifted higher until the end of the day in New York. Oil prices declined when the weekly EIA report disappointed, which lifted USDCAD

Thursday never ended for many traders in Europe, the UK and North America as they worked around the clock. EURUSD drifted higher in Asia and Europe and then spiked higher on the New York open. That move didn’t last and EURUSD retreated but rallied into the close. GBPUSD drifted higher but lacked the enthusiasm of USDJPY, which climbed robustly throughout the session

Friday,(actually very late on Thursday) the Gong Show that was Brexit really got going. At 2200 GMT, YOUGov released a quasi-exit poll giving Remain the lead. GBPUSD rallied but it was short-lived. When the votes were tallied and Leave was proclaimed the winner, the US dollar and the yen were the only two G10 currencies left standing.

All the others were lying battered and bruised in the wake of the GBPUSD selling frenzy.

At least the rain has stopped. Photo: iStock

— Edited by Michael McKenna

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Loonie views 24Jun2016

UK Bails on EU-Sterling Crushed

USDCAD Open (6:00 am) 1.2994-97 Overnight Range 1.2716-1.3097

NOTE: The following chart represents the gain (or loss) of G10 currencies against the US dollar from NY close (4pm) to NY Open (6 am)

They called it a historic vote and it was. Whether or not it was the right decision remains to be seen. The United Kingdom voted to leave the European Union in a very close vote that made 51.9% of Brits, happy and the other 48.1% sad.

FX traders scrambled to bail out of sterling and bail they did. After rising to 1.5015 following a quasi-exit poll by YouGov that gave the “Remain” side the lead, just after 2200 GMT yesterday, GBPUSD messed the bed. By 0400 GMT when it was apparent that “Leave” would win, GBPUSD hit 1.3230. Sterling has since bounced back to 1.3810 on profit taking.

The Brexit referendum became a full-blow “risk-off” event. The US dollar soared against the balance of the G10 currencies except Yen. USDJPY collapsed to 99.03 from 105.81. It has also bounced, likely aided by a lingering fear of intervention by the Bank of Japan. British Prime Minister David Cameron has resigned but will hang around as leader until October. Technically he hasn’t resigned but merely given notice. Speaking of notice, Bank of England governor put financial markets on alert stating that the “bank is ready to provide more than £250 billion of additional capital to its normal operations. The Bank of England is also able to provide substantial liquidity in foreign currency”.

The Canadian dollar was collateral damage. USDCAD visited both sides of its entire range in June and did it in less than 5 hours.

FX markets will be very choppy today driven by Sterling. US Durable Goods and the Michigan Consumer Sentiment Index data could add to the turmoil if they surprise to the upside.

USDCAD technical outlook

The intraday USDCAD technicals are bullish following the break of the 1.2820-40 area representing the downtrend line from the mid-June peak. The subsequent break of resistance in the 1.2950-80 area should lead to additional probes of resistance in the 1.3100-1.3200 resistance area. The 100 day moving average is at 1.3092 while the 200 day moving average is at 1.3322. For today, USDCAD support is at 1.2980 and 1.2900. Resistance is at 1.3080, 1.3120 and 1.3160.

Chart: USDCAD 4 hours

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Loonie settling in for a summer siesta 21Jun16

Loonie settling in for a summer siesta

Michael O’Neill

FX Consultant / IFXA Ltd


  • UK referendum polls driving G10 trading
  • US election bigger FX risk than Brexit
  • USDCAD will remain rangebound with oil

By Michael O’Neill

Today is the first full day of summer and markets are still waiting for the lazy, hazy, crazy days of summer that Nat King Cole sang about in 1963.

Fortunately, the UK has most of it covered. FX traders will be pretty lazy while they wait for the British to vote on Brexit; the poll results are still very hazy; and the aftermath will be crazy.

The only sure thing is that when the vote is tabulated, GBPUSD will not be where it is sitting now.

We expect the charts to be less "rolling hills of England" and more "Zhangjiajie National Forest". Photo: iStock

Picking your poison

What is more destabilising? A European Union without the UK or the USA with President Donald Trump? For Brits, it is obviously the former as leaving the EU will have repercussions that they will have to deal with for years, both good and bad. For all others, President Trump has to be seen as a nightmare from a stability perspective.

For starters, Trump wants to build a wall between the US and Mexico and make Mexico pay for it. Mexico, of course, is part of the North American Free Trade Agreement, or NAFTA, as is Canada – and it is rather difficult to see how building a wall promotes free trade.

Further field? Well, put up your dukes, China, as Trump will pick a fight with Beijing by declaring the country a currency manipulator which would allow him to impose countervailing duties on all Chinese imports.

He will also demand that China put an end to intellectual property theft or face “robust and unequivocal responses”. He plans on telling China to raise its labour and environmental standards.

One thing I am sure of is that China will not sit back and say “Whatever you want, Mr. President”

And that’s how it plays out, from my perspective. The UK leaving the EU has both pros and cons for both sides, while the idea of president Donald Trump is just plain bad. He’s bad for global prosperity and he’s bad for geopolitical stability.

USDCAD in focus

The loonie had its turn in the spotlight twice this year. The first time was when oil prices were plunging and WTI hit $26.02/barrel in February, and the second time was when oil probed resistance at $51.80/b two weeks ago.

That spotlight has burned out and a search is on for a replacement bulb. Until then, USDCAD will be an afterthought for global traders, providing WTI remains rangebound and that range appears to be $45-51/b. If true, it reinforces the floor and ceiling on USDCAD, which currently appear to be 1.25 and 1.31.

Bank of Canada governor Stephen Poloz delivered a fairly upbeat assessment on the economy last week. He scaled back the forecast for the impact of the Alberta wildfires on GDP and expects a decent pickup in growth in the second half of the year, in part due to the government’s fiscal stimulus plan.

A lot of the H2 growth is tied to expectations that the US economy will continue to grow. A stronger US economy leads to higher exports for Canada. The risks to his outlook were from a slowing of consumer spending and reduced spending in the energy sector.

There is nothing in his remarks that would lead to USDCAD breaking out of the range.

Looking south: The relatively sunny Canadian forecast depends rather heavily on US cooperation. Photo: iStock

Technically speaking

The intraday USDCAD technicals turned bullish with this morning’s breach of the minor downtrend channel at 1.2790. The break points to additional gains to 1.2870 which represents the 50% retracement level of the June 1.2652-1.3082 range.

The bullish sentiment is supported by the rejection of USDCAD losses below the 1.2750-60 area which represents the base of the uptrend line from the June 8 low.

Longer term, the uptrend line from the January 2015 BoC surprise rate cut day remains intact while prices are above 1.25-30, supporting the argument that USDCAD is locked in a 1.25-1.31 trading band for the time being

The 1.2860 area will act as a pivot; above targets 1.3100 while below keeps 1.2500 in play.

USDCAD (one-hour chart):

Create your own charts with SaxoTraderGO click here to learn more

Source: Saxo Bank

— Edited by Michael McKenna

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In the eye of the Brexit hurricane 17Jun16

In the eye of the Brexit hurricane

Michael O’Neill

FX Consultant / IFXA Ltd


· Canadian CPI declines but Loonie unfazed

· FX markets trying to forget Thursday

· Brexit storm clouds brewing

Get to those desks lads, it’s going to be a busy week. Photo: iStock

By Michael O’Neill

FX traders have only one-thing on their minds (well two, if you count after work drinks) and that is Brexit. The apparent unwinding of bearish Brexit trades following the awful murder of a pro-Remain politician, may just be wishful thinking. Volatility will return as soon as fresh polls become available especially if the Leave side is ahead.

Traders know what to expect if the Remain camp wins, but no one knows what will happen if the UK elects to leave the EU. To say that GBPUSD will decline is a no-brainer but what about the collateral damage? Will the remaining EU nations lock arms in solidarity or will some use the crisis to negotiate a better deal for themselves?

One thing is for sure and that is liquid capital will seek safe havens. Canada, anyone?

Conscious uncoupling

Gwyneth Paltrow described ending her marriage to Coldplay’s Chris Martin, as conscious uncoupling, which is a gobbley-goop term that means divorce. The Loonie and WTI are experiencing their own version of conscious uncoupling. USDCAD has collapsed hand in hand with plummeting WTI prices. That is a rare occurrence and unlikely to be sustained.

Then again, maybe not.

If the June 16 Canadian dollar and WTI price swings are viewed as an anomaly, today’s price action points to a relationship that is back in harmony. WTI prices have risen from an overnight low of $45.82/barrel to $47.30/b, coinciding with a USDCAD decline from 1.2966 to a low of 1.2875.

It is a bit of a stretch but if the June 16 price action is ignored, the WTI floor of $47.00/b remains intact as does the USDCAD cap at 1.2960.

Unfortunately, next week’s UK referendum will put the boots to this theory. If the Leave side wins, it will be nasty. If the Remain side prevails, all the price action of the past couple of weeks will be meaningless and USDCAD and oil markets will revert to being concerned about supply/demand and the Federal Reserve.

USDCAD and oil noting uncoupling and recoupling

Source: Saxo Bank

VIX index climbs – no surprise there

The VIX index (Volatility Index) which is the Chicago Board Options Exchange measure of expectations of 30-day volatility had been extremely sedate since mid-March. Last week, it awoke from its slumber, coinciding with both Janet Yellen’s speech assuring markets that a rate hike may be appropriate in “coming months and Brexit polls giving the Leave side a lead.

The VIX gapped higher, rising from 12.66 on June 6 to 22.80 Friday morning but has since drifted lower. The move above the 16.80-17.0 suggests that further gains to the January peak of 32.11 are possible. A Brexit Leave win could put the August 24, 2015 peak of 53.34 in play which occurred when China’s equity markets collapsed.

Volatility Index wakes from its slumber

Source: Saxo Bank

The week ahead

Normally, the sheer volatility and excitement seen this week would be hard to top in the following week. But these aren’t normal times. Next week, Brexit polls will ramp up the “fear quotient” which many traders will use as an excuse to head for the sidelines, in an effort to preserve capital.

In that environment, liquidity will become scarce and encourage wild price swings. Regional economic data releases may have a bit of impact but will be overshadowed by the 800 lb Brexit gorilla. There aren’t any top-tier economic data releases from the US.


The week that was

This week had it all; volatility, drama, mayhem and murder and that was just in the UK. The Federal Open Market Committee meeting results rippled across asset classes and oil prices collapsed.

Monday kicked off with the stench of the weak US nonfarm payrolls report overhanging FX markets, although Australia traders didn’t notice as they had the day off. Risk aversion sentiment picked up following China Industrial Production and Retail Sales data. USDJPY tanked.

In Europe, GBPUSD tanked on poll results showing the “leave” side with a commanding lead. FX trading was very choppy during the New York session. European dollar weakness turned into New York dollar strength but most of those gains were reversed by the end of the day. Oil prices road a roller-coaster but closed with a bearish bias.

Tuesday’s Asia session continued the risk-off theme. USDJPY traded modestly lower, in part due to safe-haven demand and in part because some traders believe that additional monetary policy stimulus could be announced at Thursday’s BoJ meeting. For the record, it wasn’t.

GBPUSD headed back to Monday’s lows when the UK’s biggest circulation tabloid announced support for the “Leave” camp. EURUSD which had flat-lined in Asia sank in Europe due to position adjustments ahead of Wednesday’s FOMC meeting. Better-than-expected US retail sales data only had a minimal and fleeting impact. WTI oil prices probed support at $48.00/b when the American Petroleum Institute reported a build in the weekly Crude Stocks change report.

Wednesday was all about the FOMC meeting. In Asia, AUDUSD rallied but those gains were given back ahead of the Fed. FX markets were mostly subdued until the Fed announced no change in rates and downgraded GDP and the rate hike outlook. Brexit concerns were cited as one factor in the decision. Yen traders shrugged while EURUSD had a short lived rally. WTI prices peaked pre-FOMC and then started to slide. By the end of the New York session, the dollar was lower vs the majors except for yen.

Thursday, the Bank of Japan kicked off a wild day in FX markets. The BoJ left rates unchanged, did not provide any stimulus measures and injected Brexit fears into the equation. Before you could say “safe-haven” USDJPY tanked and the US dollar soared as risk-aversion spread

Europe and New York. And that’s when it got silly. Around mid-morning, coinciding with the news of the murder of a Remain backing UK Labour MP, US dollar buyers became rabid US dollar sellers. When the dust had settled, the US dollar had lost all, and in some cases, even more of the earlier gains.

Friday, the US dollar continued to slide except against yen and sterling in a bout of position squaring ahead of the weekend.

Time to convert your yen into dollar if you’re planning that foreign trip. Photo: istock

– Edited by Martin O’Rourke

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Loonie tunes – dodgy data makes dollar dirt cheap 10Jun16

Loonie tunes – dodgy data makes dollar dirt cheap

Michael O’Neill

FX Consultant / IFXA Ltd


  • USDCAD recouping losses from employment report
  • Wait for FOMC meeting will keep traders sidelined
  • Sabre-rattling by US doesn’t rattle FX

Golden days for Canadian jobs or just dodgy statistics? Photo: iStock

By Michael O’Neill

USDCAD is recouping its post Canadian employment losses on the back of soft oil prices and position adjusting ahead of next Wednesday’s Federal Open Market Committee meeting.

Canada Employment data defies belief

Statistics Canada reported that Canada added 13,800 jobs in May and that the unemployment rate declined to 6.9%. They also offered up a bridge in Brooklyn. There weren’t any takers for the bridge deal but FX traders sure bought into the employment report.

Statistics Canada specifically addressed the Alberta wildfires issue and that the impact from not collecting the labour force data in the Fort MacMurray area was minimal.

In my opinion, this is a bogus report and will be forgotten by Monday. The USDCAD decline immediately following the report was likely more a factor of traders being long dollars going into the data and bailing out on the news.

USDCAD outlook

Yesterday, the Bank of Canada released the semi annual “Financial Stability Review”. Even with nothing going on, it failed to attract much attention. The BoC did note that the pace of housing prices gains in Vancouver and Toronto were “unlikely to be sustained” which Globe and Mail reporter, David Parkinson suggests is bank-speak for “bubble”. They did point out the “fragility of fixed-income market liquidity” suggesting that they have become less liquid due to regulatory reforms. That may be an issue worth watching.

The intraday WTI/USDCAD correlation deteriorated on Friday with USDCAD declining even as WTI prices slid. That appears to have been an anomaly due to the employment report which is beginning to correct.

Various Canadian economic data releases have managed to spark brief flurries of activity in USDCAD but those moves are short lived. Oil price movement and Fed rate hike sentiment continue to be the main drivers of the currency.

Chart: 30 minute WTI oil and USDCAD

Source: Saxo Bank

USDCAD technical outlook

The USDCAD downtrend from the January peak remains intact while prices are below 1.3000 which coincides with the break of the intraday May uptrend also at 1.3000.

The intraday technicals are bearish while trading below the 1.2750-60 area, supported by the post-employment report move below 1.2690. A break below 1.2630 will lead back to the May low at 1.2462. A decisive break above 1.2770 will extend gains to 1.2900
Chart USDCAD daily

Source: Bank

Dogs of war have no bite

Russia is miffed at the US, again. (What else is new?) This time it is because the US Navy is cruising the Black Sea in a guided missile destroyer. Russia is about as happy as America would be if a Russian destroyer was sailing around the Florida Keys and have reportedly said it will respond, although not how.

The American’s aren’t just butting heads with Russia. They are irked at China for having the audacity to intercept an American reconnaissance plane in the East China Sea. The Americans say the intercept was unsafe but fail to explain why they felt the need to “seriously harm China’s maritime security”, which is how China’s Foreign Ministry sees it, according to CNN.

Obviously FX traders are bored or likely just don’t believe that the sabre-rattling between the three super-powers is anything to fear. Years ago, fighter jet interceptions of other fighter jets or warships sailing close to another nations territorial waters would have led to heightened safe haven demand. Today, after 16 years of constant war/terror attacks, its just another day at the office.

The week ahead

Wednesday’s FOMC meeting is the “elephant in the room” and no, the reference is not a shot at Janet Yellen. Much earlier expectations for a June rate hike have been diluted to such an extent, that even one hike by the end of the year is questionable. That will be enough reason for traders to stay on the sidelines until the afternoon in New York on Wednesday.

The FOMC meeting isn’t the only game in town. The Bank of England rate decision is on Thursday but the following week’s Brexit vote has stolen their thunder. The BoE result will be an understated affair and likely a non-event for Sterling.

Although the Central Bank meetings are the major events, there are enough regional data releases to keep traders entertained, beginning with China on Monday. Tuesday’s US Retail Sales data would need to be extraordinary strong to shift the rate hike dialogue to June or July.

The week that was

The week started with a bit of a hang-over with traders still feeling the ill-effects of the previous Friday’s nonfarm payrolls report. But that was ok as it was anticipated that “Nurse Janet” would provide the cure. If they had only known.

Monday, the FX majors opened in Asia trading near to where they closed on Friday. The US dollar managed to eke out some gains against GBP, JPY, AUD and NZD but Yellen’s speech during the New York lunch hour, was on everyone’s radar. US dollar strength continued during the European session. GBPUSD got smoked on Brexit polls showing the “Leave” side leading. The Yellen speech leaned toward “dovish” and the dollar erased its earlier gains,.

Tuesday, the Reserve Bank of Australia didn’t surprise many when it left rates unchanged but the lack of an easing bias in the statement clearly did. AUDUSD rallied. Meanwhile GBPUSD popped higher prior to the RBA announcement and traders were at a loss to explain “why”, eventually blaming the move on a “fat-finger” incident. Rising oil prices garnered a lot of attention which kept the commodity bloc currencies in demand and lifted equity markets.

The dollar wasn’t very popular on Wednesday. Traders seemed convinced that a June rate hike was just a pipe dream. China export data showed a pick-up in crude imports and oil rose, lifting the Loonie in the process. Japanese Q1 GDP was revised upwards and USDJPY headed lower. The European session was rather dull. Sterling moves continued to be driven by polls rather than data and was sold throughout the New York session.

Thursday started out with the Reserve Bank of New Zealand’s interest rate decision and statement. They left rates unchanged which surprised about 30% of the market and NZDUSD soared. USDJPY sank in line with a declining Nikkei which dropped nearly 1 percent. That move didn’t last. By mid-morning in Europe, USDJPY caught a bid and it never looked back, rising from 106.25 to 107.15 heading into the New York close. EURUSD followed suit but its rally was shallower and shorter lived. It gave back all of its gains by the hand-off to Asia. The major global equity markets were all lower on the day.

Friday saw a drift into risk aversion in Europe and Asia with the US dollar posting gains against the majors except for Swiss and yen.

– Edited by Clare MacCarthy

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Central banks playing dice with world markets 7Jun16

Central banks playing dice with world markets

Michael O’Neill

FX Consultant / IFXA Ltd



  • Ivey PMI print undermines loonie
  • Yellen dismissive of payrolls report
  • Canadian employment data will be incomplete

By Michael O’Neill

George R.R. Martin’s Game of Thrones is an epic tale of war and intrigue among seven kingdoms, each vying for supremacy over one another. In the G10, however, we have seemingly embarked on a "game of throws" in which central bankers cast dice to determine policy actions.

This, it appears, will proceed until they crap out; at this point, we all lose but they get to keep playing.

Nice work if you can get it. Photo: iStock

For the past month, Federal Reserve officials trotted across the land and the globe extolling the necessity of a rate hike “in the coming months”, all the while implying that market expectations for such a move were too low. Prior to that, they harped incessantly about rate hikes being “data-dependent”. FX traders started to listen, trusting that perhaps this time the Fed wasn’t leading them astray.

Then the Fed crapped out. This time in the form of a nonfarm payrolls report that was just plain ugly. And to add insult to injury, the previous two reports were revised downwards.

Even a drop in the unemployment rate was scoffed at, as the improvement was due to a decline in the participation rate…

Change in US employment:

Source: Federal Reserve Bank of St. Louis

After that report, it seemed reasonable for market participants to rule out a rate hike for June and even July… not so fast. In the game of throws, when a central bank rolls “snake eyes”, it gets to roll again, and that is exactly what Fed chair Janet Yellen did on Monday.

In her speech to the World Affairs Council of Philadelphia, she seemed dismissive of the May employment report. She said. “Although this recent labour market report was, on balance, concerning, let me emphasise that one should never attach too much significance to any single monthly report. Other timely indicators from the labour market have been more positive”.

Yellen, by most accounts, delivered a fairly upbeat assessment of the US economy while in the City of Brotherly Love.She repeated that more gradual rate hikes were coming over time while noting that global headwinds were easing. Her sentiments were echoed by Atlanta Fed president Lockhart and Boston Fed president Rosengren on Monday and Cleveland Fed president Mester on the weekend. They all cautioned against reading “too much” into one data point.

Goldman Sachs analysts have bought into the Fed argument. According to Bloomberg, Goldman says that there is a 40% chance of a Fed rate hike in July. The CMC FedWatch tool, however, says it’s only 25.8%.

FX traders have voted with their wallets and the US dollar has declined against the majors, led by the Aussie and CHF.

Change in USD v. majors; pre-NFP until today (June 3, 1229 GMT to June 7, 1330 GMT):

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Source: Saxo Bank

Poloz and the dice

Bank of Canada governor Stephen Poloz is also at the craps table. His idea of rolling the dice is to stand and watch. The Bank of Canada’s mandate is “to promote the economic and financial welfare of Canada” and Poloz has apparently determined that the best way to accomplish those objectives is to wait and see how the economy heals itself after the Fort MacMurray wildfires.

Standing and watching, of course, is a time-honoured Canadian tradition. Photo: iStock

In his press conference on Saturday following a lecture at the University of Ottawa, Poloz said that it is hard to predict when the Canadian economy will rebound from the fires and forced evacuation.

Those aren’t the words of a man ready to adjust monetary policy anytime soon.

Canadian employment report due Friday

Friday’s Canadian employment report should not be much of a factor for FX traders. If it is, the affect should be fleeting.

The impact of the Fort MacMurray wildfires and city evacuation has created a ton of complications for Statistics Canada. Most economists suggest that they will just omit Fort MacMurray from the survey. Regardless, the fact that the data are incomplete should make the results meaningless and therefore a non-event.

For what it’s worth (and it’s not worth much), the forecast is for a gain of 3,800 jobs.

USDCAD technical outlook

The USDCAD technicals are bearish while trading below 1.2860 and we are looking for a move below 1.2738 (61.8% Fibonacci retracement level of May range) to extend losses back to the May low of 1.2462.

A failure to break below 1.2730 should lead to 1.2730-1.2960 consolidation.

USDCAD hourly:

Source: Saxo Bank

— Edited by Michael McKenna

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