Month-end mayhem sends US dollar on a joyride 29Jul16


Month-end mayhem sends US dollar on a joyride

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

· US and Canadian GDP miss forecasts

· Month-end portfolio rebalancing flows add to US dollar’s woes

· It’s the RBA and the BoE’s turn to disappoint

Weaker oil prices and a slowing US economy should keep USDCAD in demand. Photo: iStock.

By Michael O’Neill

The US dollar went for a joyride today, fueled by month-end flows, stop losses and disappointing data. The weaker-than-expected US GDP data certainly reduced the prospect of a US rate hike in September.

The Disappointment Duo

The Federal Open Market Committee and the Bank of Japan yanked the rug out from under markets when they failed to live up to advanced billing.

The FOMC got the ball rolling. Prior to the meeting, various Fed officials had made comments that referenced improving data, the rebound in the employment report and diminished Brexit fallout, leading to the belief that Wednesday’s FOMC statement would lean toward hawkish. Instead, the statement was ambiguous, giving something to everyone and satisfying no one.

The hawks liked the reference to the labour market strengthening, and the increase in labour utilisation. They also like the nod to increased household spending and were thrilled with the line "Near-term risks to the economic outlook have diminished”. “Hawk” the herald angels sang.

“Coo” said the doves. This statement is not a whole lot different from the June statement, and that was doveish. The Committee barely altered their concerns stating, “Business fixed investment has been soft, inflation has continued to run below the Committee’s 2% low run objective” and “market measures of inflation compensation remain low."

FX Traders voted with their wallets and sold US dollars. That move was validated on Friday, when US Q2 GDP grew at a disappointing 1.2%, well below the 2.6% forecast. It shouldn’t have come as a surprise. Yesterday, the Atlanta Fed’s GDPNow indicator was updated to show Q2 GDP was only 1.8%.

Today’s US dollar selling may have had more to do with month-end portfolio rebalancing than anything else.

The Bank of Japan is the other half of the disappointment duo. FX markets had expected the BoJ to announce a cut in interest rates and an expansion in bond purchases. Instead, they announced a review. The BoJ governor, Haruhiko Kuroda, said that they will review prior activities to determine why easing hasn’t boosted inflation.

USDJPY dropped from 105.57 to 102.62, which will give Mr. Kuroda something more to think about. Intervention, perhaps?

Loonie behaving loony

Fans of Sesame Street know that Kermit sang that it wasn’t easy being green. It’s not easy being the Loonie either.

Earlier in the week, the road map for the Canadian dollar was pretty clear. Falling oil prices would drive USDCAD through resistance at 1.3250 and extend those gains to 1.3400.

Then today happened. USDCAD dropped from 1.3184 after the US and Canadian data was released and hit 1.3078, while WTI was languishing below $41.00/barrel.

Month-end Canadian dollar demand for portfolio rebalancing contributed to the USDCAD plunge, as did diminished US rate hike expectations following their soft GDP report.

Looking ahead, the WTI downtrend from June 27 remains intact while trading below $43.30, which is being guarded by an intraday down trendline that comes into play at $41.50. As long as prices are below these levels, the 50% Fibonacci retracement level of $38.72 is a viable target.

Meanwhile, the USDCAD uptrend from June 23 remains intact while trading above 1.3000. A break back above 1.3185 would suggest that today’s move was merely corrective.

The prospect of weaker oil prices and a slowing US economy will keep USDCAD in demand.

USDCAD 4-hour

Source: Saxo Bank

The week ahead

There are two central bank meetings scheduled, so two opportunities for markets to get disappointed.

There is a 50/50 chance that the Reserve Bank of Australia will cut rates on Tuesday, in part because of last week’s CPI report. In the UK, a Reuters poll had 46 out of 49 economists surveyed, expecting that the Bank of England would cut rates by 25 bps on August 4.

Data wise, it is a nonfarm payrolls week. The consensus forecast is for a gain of 170,000 which is well down from June’s 287,000 gain.

China PMI data will lead off a slew of PMI data reports for Europe and the United States, while Canadians (most of them, anyway) have a holiday on Monday.

The week that was

It was a big week for big central banks. The FOMC interest rate statement and the Bank of Japan policy statement were highly anticipated. They both disappointed.

Monday was boring. The G20 statement was the usual blather. The US dollar was reasonably firm although yen showed signs that it wanted to move higher. EURUSD bounced within a 1.0950-1.0990 range until the New York close. Traders were unimpressed with slightly better IFO data and there wasn’t any US data of note. Oil prices declined throughout the day and as it turned out, throughout the entire week.

Tuesday, Japan stole the show. The rumour of Japan’s soon-to-be announced fiscal stimulus program of 20 trillion yen was pared back to a mere 6 trillion. USDJPY tanked, the Nikkei sank and long kiwi and Aussie positions were money in the bank.

EURUSD cracked above 1.1000 and hit 1.1030, but couldn’t hold the gains. GBPUSD was undermined when an MPC member, Martin Weale, appeared to support a Bank of England rate cut. US new Home Sales jumped 3.5% in June, back to pre-crisis levels. Surely the FOMC would be impressed (they weren’t).

Wednesday was lively. Japan’s Prime Minister, Shinzo Abe, trashed the rumour of a ¥ 6 trillion stimulus plan when he said it would be ¥28 trillion. USDJPY soared to 106.60 from 105.10. Then traders had second thoughts, and those thoughts included “what about the BoJ? Will they cut rates?”

USDJPY retreated back to the 105.50 area. US Durable goods proved to be not so durable, but the news didn’t have much impact on FX. Meanwhile, WTI prices were attempting to stage a recovery and had climbed back to $43.17 from $42.50/b. The EIA spoiled that rally when they reported another rise in crude oil stocks. WTI closed in New York around $41.70/b.

The New York session ended with markets trying to make sense out of the FOMC statement. Rates were left unchanged and the statement was rather ambiguous. EURUSD traders thought it was doveish and drove the single currency to 1.1075 from 1.0980. Sterling traders drove cable to 1.3245 from 1.3095. USDJPY traders didn’t really care, and were more concerned with the pending Bank of Japan announcement.

Thursday, EURUSD managed to extend its post FOMC gains to 1.1119 before consolidating and spending the entire day in a 1.0960-1.1115 range. USDJPY was offered ahead of the BoJ meeting and sterling was undermined by BoE easing concerns.

Oil was a major focus in New York with WTI on track for July to be the worst month in a year. The Atlanta Fed GDPNow indicator for Q2 GDP was downgraded to 1.8% from 2.2 % on Wednesday. The day ended in New York with traders awaiting the BoJ announcement.

Friday, the BoJ left policy and rates unchanged and USDJPY went on a wild ride . By the time European traders were getting ready to head out the door for the weekend, USDJPY was below the overnight low and EURUSD was in the mid 1.11’s.

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USDCAD: Oil is in the driver’s seat while the Fed co-pilots 27Jul16


USDCAD: Oil is in the driver’s seat while the Fed co-pilots

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

·

·

· FX traders are suffering from pre-FOMC jitters

· US data does not preclude a hawkish FOMC statement

· Falling oil and a rising dollar is a bad combination for the loonie

By Michael O’Neill

It has been a sweltering couple of weeks over large swathes of the northern hemisphere and we haven’t even hit the half-way mark of summer. WebMD lists dizziness, rapid heartbeat and behavioural changes such as confusion as symptoms of heat stroke.

Who’s flying this plane? When it comes to the loonie, oil is in charge. Photo: iStock

Those same symptoms have been seen in FX markets, with USDJPY in particular. Two weeks ago, USDJPY was probing support in the 100.00 area. The big question was how far it could fall before it triggered Bank of Japan intervention. That changed with Japan’s Upper House election. Prime Minister Shinzo Abe’s Coalition won a “super majority” and he immediately announced a new round of fiscal stimulus measures. USDJPY embarked on a nine-day rally that ended at 107.50 helped by stories of bigger-than-expected spending.

And then, heatstroke. USDJPY plunged. Dollar bulls apparently remembered how the FX market reacted in January when the Bank of Japan announced negative rates and feared that the expected next round of BoJ stimulus would have the same result.

Oil traders were out in the sun as well. Weekly draw-downs of crude stocks as reported by the Energy Information Administration had many believing that the earlier price declines were merely position adjustments and not evidence that the supply/demand imbalance was still an issue. That belief is evidence of heatstroke considering that WTI is currently sitting at $42.56/barrel.

The loonie is not the master of its destiny

There is a lot to like about the Canadian dollar but you wouldn’t know it from the recent price action. If USDCAD traders were to be believed, the only thing that Canada has going for it is oil and since oil is dropping, so should the Canadian dollar.

Those traders are wrong. There is more to Canada than oil.

Aside from the oil patch, the Canadian economy is more than holding its own. The improving outlook for the US economy, the destination of close to 75% of all Canadian exports, bodes well for the domestic economy. The Bank of Canada is forecasting 3.6% Q3 GDP growth and last week the province of Ontario (largest by population) reported 3% GDP growth.

Consumers are spending. May retail sales rose 0.2%, slightly above expectations. Inflation gained as well. The ever-present housing market bubble concerns may alleviate, to a degree, thanks to a new foreign buyers’ tax that kicks in August 2. Foreign buyers of residential real estate in the Greater Vancouver area will be levied an additional 15% property transfer tax.

But it doesn’t matter. Oil is in the driver’s seat and the Fed is its co-pilot.

Aside from oil, the other major driver of USDCAD direction is the US interest rate outlook. Wednesday will provide more clues when the Federal Open Market Committee statement is released. An MNI news article recapped comments from various Fed members since the last meeting which suggests a rather undecided committee. A June rate hike appeared to be a ”done deal” until Brexit and a lousy labour report derailed the view. Since then, the June nonfarm payrolls report completely erased the taint of the May report and the immediate Brexit fallout has been contained.

A hawkish FOMC statement in the present environment of declining oil prices warns of a much higher USDCAD.

USDCAD technicals-highway to the danger zone

Oil prices are threatening to break below key support at $42.35, which would lead to a test of $40.0 while USDCAD is probing resistance in the 1.3240 area. That’s a dangerous mix for the loonie. In addition, 1.3285 is setting up to be the line in the sand. A break above that level suggests additional gains with 1.3650 as a stretch target. Only a move below 1.3065 would negate the topside pressure.

USDCAD and oil

Source Saxo Bank. Create your own charts with SaxoTrader; click here to learn more

– Edited by Gayle Bryant

Is the loonie circling the drain? 22Jul16


Is the loonie circling the drain?

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

·

· Oil price slide lifts USDCAD

· Strong Canadian data provides only "blink-of-an-eye" relief to Canadian dollar

· Beware a hawkish FOMC statement next week

By Michael O’Neill

USDCAD may have dodged a bullet on Friday. The dynamite was primed for a top-side blow-out. Oil prices were mushy and short-term and intraday technicals were bullish. All that was needed was a dose of weak data with CPI and Retail Sales to light the fuse.

That’s not what happened. Retail Sales and CPI handily beat the forecasts and provided a bit of an endorsement to last week’s rosy Bank of Canada outlook. Unfortunately, the euphoria didn’t last.

Retail Sales and CPI

Sources: Statistics Canada

A line in the oil sands

Oil prices are the “sword of Damocles” dangling over the loonie. The Canadian economy has shown evidence that it’s rebounding, and today’s data reinforces the view. The Bank of Canada is on board. Even the rebounding US economy is doing its part to drag additional growth out of its neighbor. Yet, despite all those positives, the loonie is suffering from a lack of energy, specifically energy price support.

Pumping up more oil – excessive US inventories haven’t been kind to the loonie. Photo: iStock

WTI prices have declined steadily throughout the month and breached, very briefly, key support in the $44.00 area. There is a school of thought that the down move was exaggerated by the monthly contract maturities on the IMM. If true, the rebound should have been more aggressive. The major concern is that US inventories are at excessive levels and the persistence of these stockpiles turned June’s bulls into bears.

On the other hand, the alphabet of oil interests, OPEC, EIA, and IEA expect the supply/demand equation to rebalance in Q3 and Q4, which should help to put a floor on WTI. A break below $42.35 would extend losses to 1.3950.

USOIL 4 hour

Source: Saxo Bank

Who pulled the plug?

USDCAD has already shrugged off the positive sentiment stemming from today’s better-than-expected Canadian data. USDCAD has recouped the post-data losses and is currently trading at levels not seen since May. It appears that traders are content to ignore all the Canadian dollar positives and focus only on oil prices.

Everyone is well aware of the perils of catching falling knives or standing in front of a train. There is another appropriate cliché and that is ”USDCAD always looks bid at the top and offered at the bottom”. It isn’t unreasonable to believe that until 1.3200 is decisively broken, the current 1.2700-1.3200 range is intact.

If so, then USDCAD may be in the twilight zone, but it is also in the sell zone.

USDCAD 4 hour

Source: Saxo Bank

The week ahead

Any week with an FOMC meeting in it is usually a wonky week for FX markets. This week will be no exception.

Wednesday’s FOMC statement has the potential to trigger an upward shift in US September rate hike expectations. You will recall that Janet Yellen and various committee members actively primed the pump for a June rate increase, only to be derailed by a weak nonfarm payrolls report and Brexit. Since then, the June NFP report blew the roof off, totally erasing the May disappointment, and a financial calamity from Brexit failed to materialise.

Furthermore, the US data since the last FOMC meeting has been on the strong side. A hawkish-sounding statement may catch traders off guard and send the US dollar soaring.

And the FOMC meeting isn’t the only game in town. The highly anticipated Bank of Japan policy meeting is scheduled for Thursday. The debate is still raging about a stimulus package. If there is one, will it be a shot-gun or a pop-gun? Prior to that, Reserve Bank of New Zealand governor Graeme Wheeler may use his speech on Monday to talk down the kiwi.

There is also a lot of data including US Durable Goods orders. This week has all the ingredients needed to ensure a volatile, choppy FX market.

The week that was

Measured against the previous four weeks, this week was rather mundane.

Monday opened with a snore. Japan was closed for Marine Day, which sucked a lot of liquidity out of the market. The failed coup in Turkey and the Nice terrorist attack dominated the chatter. Safe haven flows that drove USDJPY lower were reversed. The kiwi came under pressure due to soft inflation data. Oil prices were leaking lower.

On Tuesday, the aussie and kiwi were the stars of the Asia show. The RBA minutes were slightly more doveish than expected and AUDUSD sank. NZDUSD got spanked on new housing measures which gave rise to rate cut speculation. The day closed in New York with oil prices down on rising inventories and strong US housing data giving the dollar a bid.

Wednesday was pretty tame. Risk sentiment improved and global equities were higher, and the US dollar was modestly lower. EURUSD traded sideways ahead of Thursday’s ECB meeting. GBPUSD rallied after a Bank of England report said that there was no clear evidence of a Brexit hit. USDJPY was drifting toward 107.00 on anticipation of new Bank of Japan stimulus.

Thursday’s Asia session started with the kiwi being beaten like the proverbial red-headed step-child. The RBNZ’s economic assessment lowered the inflation outlook, warned that additional easing was needed and complained about the high level of the currency. EURUSD was choppy heading into the ECB meeting, and USDJPY was well above 107.00 in Europe.

Then it got exciting. BoJ Governor Kuroda reportedly ruled out ‘helicopter money’ in a BBC interview and USDJPY went into freefall. Mario Draghi didn’t unveil any surprises at his post-ECB meeting press conference, but reminded markets that the ECB is “ready, willing and able to act.” EURUSD was very choppy within a 1.0980-1.1060 range, but closed unchanged on the day. Oil prices continued to slide.

Friday is ending with the US dollar in demand across the G10 spectrum.

— Edited by D. Deacon

Geography lessons and ‘what ifs’ 19Jul16


Geography lessons and ‘what ifs’

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

· US housing data ticks another box in rate-hike debate

· Commonwealth currencies under pressure

· AUD, NZD and CAD sank together though the CAD is not an antipodean currency

· Soft oil prices weigh on Canadian dollar

· Hawkish Fed will boost USD; USDCAD will retest resistance at 1.3200

FX markets seem to be confused about Canada’s situation on the globe. Image: iStock

By Michael O’Neill

The US dollar got a fairly strong start to the day supported by housing data that flaunts the strength of the US economy in a world where many central banks are contemplating new stimulus measures.The US dollar has gained across the G10 spectrum.

Geography lesson: Canada’s dollar is not an antipodean currency

Some days FX traders need a geography lesson. Today is one of them. In FX markets, the antipodean currencies are the Australian and New Zealand dollars. According to Oxford Dictionaries, antipodean is an “adjective relating to Australia or New Zealand" and a noun used to describe a person from either of those countries. It doesn’t refer to Canada at all.

Except that overnight it did. The Australian dollar, New Zealand dollar and Canadian dollar sank together.

NZDUSD was hammered due to increased speculation of a rate cut in August precipitated by the Reserve Bank of New Zealand’s issuance of a bulletin about financial risks from housing market cycles.

AUDUSD dropped after the Reserve Bank of Australia published the minutes of its July meeting. The minutes didn’t offer any fresh insight but left rate-cut speculation intact.

The rationale for the Canadian dollar’s weakness wasn’t readily apparent. There isn’t even a whiff of a rate cut in the Canadian air. Apparently, the CAD sank because of low oil prices. That’s a dubious conclusion considering that WTI crude oil prices remained well within last week’s trading range.

The loonie sank even after the Bank of Canada issued an upbeat third-quarter economic forecast just last week. It fell despite evidence that Canada’s largest trading partner’s (USA) economy is rebounding to such an extent that rate hikes are being contemplated. It sank because it is a "Commonwealth" currency.

Make no mistake, these fine New Zealand sheep would get very tired swimming all the way to China. Photo: iStock

Canada, Australia and New Zealand share a lot of similarities. They all speak English (sort of), they are members of the Commonwealth of Nations, and they have images of Queen Elizabeth ll on their money.

The biggest difference is geography. Ninety percent of all Canadians live within 160 kilometres (99 miles) of the US border, the largest economy on the planet (in terms of nominal GDP). It is a short drive. One hundred and sixty kilometres from the Australian or New Zealand borders is nothing but shark-infested salt water.

One of Canada’s major exports to the US is energy. It is far easier to build a crude oil or natural gas pipeline to the USA then it is for Australia to pump iron ore 7,470 plus miles to China. New Zealand doesn’t fare any better. Canadian ranchers can still arrange a cattle drive to US markets. New Zealand’s sheep would be very tired after their 11,160 plus miles swim to China.

Still, you can’t dismiss the fact that AUDUSD and USDCAD trade very closely together although the link fractured in the latter part of June up to and including yesterday. Apparently all is forgiven, today. AUDUSD plunged while USDCAD rose.

USDCAD and AUDUSD daily chart showing the divergent directions of those crosses

Source: Saxo Bank

What if…?

The CME FEDWatch tool shows a mere 12.9% probability of a US rate increase in September. What if the market has got it wrong? It wouldn’t be the first time.

The Janet Yellen Fed has a reputation for sending mixed or muddled messages. You don’t have to go far back in history to find proof — just May 2016. At that time, every Fed speaker on the circuit was pointing to improving economic data, falling unemployment and rising job gains as evidence to support a June rate hike. The debacle of the May employment data was dismissed as “just one data point”. When decision day arrived, the Brexit vote loomed and the “just one data point” proved to be an important point, and rates were left unchanged. Many analysts started questioning if US rates would increase at all in 2016.

Lately, that rhetoric has shifted slightly. TheWall Street Journalwarns that now that financial markets have stabilised after Brexit, the Wednesday July 27 Federal Open Market Committee’s statement could point out that the economy is on solid footing. It makes sense.

The rebound in June US employment, the string of decent economic reports, including today’s housing data, may have reset the FOMC back to May’s outlook, when a rate increase, sooner or later, was on the agenda.

Oil may undermine loonie

USDCAD will be heading into the FOMC meeting with a bullish bias exacerbated by soft oil prices. WTI has been declining steadily since peaking at $51.65/barrel in June. The downtrend accelerated with the move below $47.85/b and prices are currently testing support in the $44.70/b area. A move below $44.40/b puts a target on the $40.00/b area.

A bearish oil view is supported by a Reuters story today that said Iraq has been eating Saudi Arabia’s Indian lunch, and we are not talking about curry.

Iraq became India’s top supplier of crude in June by heavily discounting prices. Saudi Arabia kicked off the oil price meltdown in November 2014 in an effort to recoup lost market share. It is hard to believe that the Saudis will ignore Iraq’s blatant grab. The US has no shortage of supply. US crude stocks remain at elevated levels. The International Energy Agency’s July 13 oil market report warned that the “existence of very high oil stocks is a threat to the recent stability of oil prices”.

A hawkish FOMC, at a time when other central banks are contemplating fresh stimulus measures in a soft oil price environment will boost the US dollar and suggests that USDCAD will retest resistance at 1.3200.

Canadian stockmen could drive their cattle to market in the US, if they felt like it. Photo: iStock

— Edited by John Acher

Loonie outlook turns positive 15Jul16


Loonie outlook turns slightly positive

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

· US Retail Sales rise, rate hike expectations don’t

· Profit-taking forces USDCAD decline to pause

· The week ahead may lack drama

·

By Michael O’Neill

This morning’s US Retail Sales data surpassed expectations and bode well for stronger US growth for the balance of the year. Still, the uncertainty surrounding Brexit and the possibility of increased market volatility will keep the doves on the Federal Open Market Committee firmly in control and US rates anchored.

Bank of Canada bullish on economy

The outlook for the Canadian dollar was rather bleak at the end of last week. "Buy USDCAD" strategies were everywhere and the technicals were pointing to a break of resistance at 1.3050, putting 1.3400 in play. Once again, however, the 1.3145-80 area proved to be formidable resistance. FX sentiment switched to risk-seeking on Tuesday and USDCAD pulled back from the brink.

The retreat was viewed as merely a correction which appeared to be accurate ahead of what was expected to be a dovish Bank of Canada interest rate statement and Monetary Policy Report.

Surprise! The Bank of Canada painted a very rosy Q3 outlook, forecasting a whopping 3.6% gain in real GDP, a far cry from its April forecast of 2.2%.

The surprise outbreak of good news gave the CAD a bid, too. Photo: iStock

The economic impact from the Alberta wildfires is expected to be completely reversed in Q3 while the boost from the federal fiscal stimulus has yet to be felt.

The BoC expects solid US domestic demand to increase exports and be a major contributor to Canada’s growth. The solid US demand were not evident this morning. Canadian manufacturing shipments declined 1.0% which was not totally unexpected with some of the decline blamed on supply disruptions. At the same time, the decline in inventories is a positive.

Canada real exports:

Create your own charts with SaxoTraderGO click hereto learn more

Source: Bank of Canada MPR

USDCAD technicals getting bearish

The intraday USDCAD technicals are bearish while trading below 1.2920 and looking for a test of major support in the 1.2820-60 zone. That support is derived from the uptrend line from the May 1.2462 low, a double bottom at 1.2830 in July, and the 50% Fibonacci retracement level of the May range at 1.2822.

A daily close below 1.2820 would negate the uptrend and suggest that a revisit to the 1.2462 low is likely. A move back above 1.2980 would negate the downtrend and keep the focus on the 1.3080 resistance level.

USDCAD daily:

Source: Saxo Bank

The week ahead

The European Central Bank meeting on Thursday headlines what looks to be a fairly innocuous economic calendar, which should make for a dull week. The Bank of England didn’t adjust policy at its July 14 meeting and it is likely that the ECB will follow suit.

There aren’t any top-tier data available from the US which keeps the trading focus on sterling and UK issues. Tuesday’s UK data may have limited impact due to expectations of August policy action by the Bank of England.

A holiday in Japan on Monday will put a damper on the Asia session although New Zealand CPI data may be extra important ahead of the reserve Bank of New Zealand economic outlook on Thursday. The week will start out slow and likely end the same way.

The week that was

Blow-out nonfarm payrolls numbers would normally be the main focus in Asia markets on the following Monday. But these aren’t normal times and NFP took a back seat to politics and central banks.

Monday, Asia traders forgot about US data and focused on Japanese politics. Prime minister Shinzo Abe secured a “supermajority” and his comments about accelerating Abenomics propelled USDJPY from 100.50 to 102.90 by the end of the New York session.

Not to be outdone, sterling took centre stage when Tory leadership candidate Andrea Leadsom bowed out of the contest leaving Theresa May to run unopposed. GBPUSD took off from 1.2854 and ended the day at 1.3010, and just to keep things interesting, the health of some Italian banks was keeping EURUSD traders on their toes.

The risk-on sentiment helped drive the S&P 500 to a record close despite oil prices hitting a two-month low.

Tuesday’s positive vibe from the rallying S&P 500 continued in Asia. AUDUSD headed higher on decent business confidence data. USDJPY added to Monday’s gains but the rally stalled in New York, at 104.97. Pokémon Go took the Nikkei by storm and raised Nintendo’s market cap by $7.9 billion in just two days.

Sterling continued to rally as markets warmed to the idea that there was no longer a risk of a prolonged and nasty Tory leadership race with rumours that Theresa May would be sworn in as Prime Minister on Wednesday. The rally continued throughout the New York session.

China’s claim on the South China Sea was ruled invalid; Beijing was irked but FX markets didn’t care.

Wednesday, the risk-on rally ran out of steam. USDJPY traded between 104.00-80 but could not crack 105.00. The GBPUSD rally petered out at 1.3335 and the currency pair traded sideways with a negative tone until the bottom fell out in NY trading, finishing the day at 1.3125.

The other story was a surprisingly optimistic Bank of Canada Monetary Policy report which led to a big selloff in USDCAD. WTI prices sank on an International Energy Agency report that said inventory levels were still extremely high. Later on, the EIA announced a 2.5 million-barrel drawdown in crude stocks but a build in other distillates sank WTI.

Thursday, the Asia session was very chaotic. A strong employment report boosted AUDUSD. NZDUSD got spanked on news of a RBNZ announcement of an economic update on July 21. It was a surprise and raised concerns of a looming interest rate cut. USDJPY finally cracked 105.00, came close to 106.00 and then settled at 105.20 by the end of the New York day.

European traders were waiting for the BoE interest rate decision with about 60% of the market expecting a rate cut. They didn’t get it. GBPUSD soared from 1.3208 to a spike high of 1.3475 before retreating back to the 1.3300 area where it spent most of the day.

EURUSD continued to chop around in a 1.1030-1.1130 band which contained moves for the week except for a brief spike to 1.1160 in European trading. The Fed’s Dennis Lockhart talked out of both sides of his mouth, saying that the Fed should remain cautious and patient regarding future interest rate hikes and then going on to say that it is still possible for the Fed to raise rates two times this year. FX traders ignored him.

Friday ended in Asia with USDJPY posting a three week high. Risk sentiment was upbeat on positive China economic data. News of another terror attack in France dominated the European session. Strong US data sparked a bout of pre-weekend profit-taking.

Another direct strike at Europe’s heart, this time in Nice, saw the risk-on trend

set against security fears in today’s session. Photo: iStock

— Edited by Michael McKenna

Risk aversion risks have only faded, not disappeared 12Jul16


Risk aversion risks have only faded, not disappeared

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

· Risk-off switched flipped to "on"

· WTI recoups all of yesterday’s losses

· USDCAD range remains intact

Don’t get complacent. The risks haven’t gone away. Photo: iStock

By Michael O’Neill

The pall of risk aversion sentiment that was draped over markets for the past few sessions has dissipated. In its place, a Pokemon GO fantasy world where traders believe central bankers like Kuroda, Carney and Draghi will open up the floodgates of new monetary stimulus and transform moribund economies into economic growth machines.

Like all fads, today’s positive risk bias will go the way of “Pet Rock”, Pogs, and “Mullets”. In a few days or weeks, traders will be saying “I can’t believe I fell for that”.

Risk aversion risks

The FX markets are rife with risk aversion risks, most of which are well known but have faded from consciousness for whatever reason. They are lurking just below the surface like a Great White off a Cape Cod beach and they are ready to take a bite out of complacent traders.

China: China has been the source of major market turmoil more than a few times in the past year. The stock market is very vulnerable to sharp down swings. The government is attempting to manage a “soft landing” and economic growth is declining. Despite official claims to the contrary, the government appears to want a much weaker CNY.

China is aggressively expanding its claims in the South China Sea even though The Permanent Court of Arbitration in The Hague ruled today, that they do not have any historic rights to justify their claims. China is on record for saying that the arbitration is non-binding as far as they are concerned. So what happens if the UN tries to enforce the ruling?

Russia/NATO: This is another powder-keg. Summer weather may be hot and humid in parts of the Northern Hemisphere but in the Russia/NATO area, it is frosty and freezing. NATO is aggressively deploying troops and weapons on Russia’s borders, ostensibly as a show of force to curtail Russia aggression. What could go wrong?

Middle East: Syria, Yemen, Afghanistan, Iraq. These conflicts are seemingly never-ending and always on the verge of triggering an explosion into risk aversion. It was only a couple of years ago that, according to President Obama, “Syria has crossed a line”. If it was a threat, it was rather empty. Daesh and Al Qaeda have yet to be subdued and their actions can quickly destabilise markets.

North Korea: The US slapped sanctions on Kim Jong-un and other officials for human rights abuses and Kim retaliated by cutting off its diplomatic link to the US. North Korea launched a submarine based missile on July 9. It failed, as have the previous two tests but they may get it right soon. If so, it dispenses of the need for a long range missile that could strike the US mainland, when a submarine could sneak up into America’s back yard and fire at will.

Cautiously optimistic Opec

Opec appeared cautiously optimistic in their July Monthly Oil Market Report. In a nod to Brexit, they downgraded their world economic growth outlook for 2016 to 3.0% from 3.1%, but left oil demand forecast unchanged. They also expected a stronger contraction in non-Opec supply in 2016.

Whip-sawed oil traders

Yesterday, oil traders were scrambling to hit bids. The world was awash in oil, US crude oil stocks remained at very high levels and the technicals were bearish. Today, all those troubles seemed so far away. ( apologies to Paul McCartney) WTI has recouped all of yesterday’s losses and then some.

The intraday WTI technicals are bearish while trading below $46.75. The June downtrend line remains intact while trading below $48.40. A break below $44.40 would extend losses to $42.30 A move above $48.40 would snap the downtrend and extend gains to the June peak.

Chart: USOIL continuous 4-hour

Source: Saxo Bank

Loonie pulls back from brink

It wasn’t looking very good for the Canadian dollar, yesterday. The break of resistance at 1.3090 had USDCAD knocking on resistance in the 1.3145-50 area. That changed overnight. The shift into risk seeking trades triggered a rebound in oil prices and USDCAD has retraced all of its post-payrolls gains. Next up will be the results of the EIA crude stocks weekly change report. If, and it’s a big if, this report shows a larger draw-down than expected, USDCAD will be back to 1.2920, where it was when last week’s report was released.

Wednesday, the Bank of Canada will add its voice to the Loonie direction debate. The BoC is unanimously expected to leave interest rates unchanged however there is a debate as to the degree of dovishness that will be in the accompanying statement and/or press conference. The Monetary Policy Report is expected to show downgraded economic forecasts as well.

The reality is that USDCAD direction is in the hands of general US dollar sentiment and oil prices and not domestic issues.

USDCAD technical outlook

The intraday USDCAD technicals are bearish. The break below 1.3090 should lead to a test of support at 1.2980. If broken, further losses would result in a test of the June uptrend line that comes into play at 1.2950. A break of this support would lead back to 1.2750. To the top, a move above 1.3090 should result in another test of resistance in the 1.3145-80 zone.

Longer term, the well-defined 1.2550-1.3150 range remains intact.

Chart : USDCAD 4-hour

Source: Saxo Bank

– Edited by Clare MacCarthy

Brexit fallout still looms large over FX markets 8Jul16


Brexit fallout still looms large over FX markets

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

· US payrolls data surprise to the upside

· Canadian employment numbers mixed

· Brexit fears still in the driver’s seat for FX traders

By Michael O’Neill

FX markets should adopt Metallica’s 1991 tune “Nothing Else Matters as their official anthem for the post-Brexit and GBPUSD trades, because for the foreseeable future, it’s all Brexit, all the time.

The spotlight will be shining on Bank of England head Mark Carney on Thursday and he may be eager to reclaim the mantle of “rock star” central banker that has slipped from his shoulders after a few flip-flop performances. He hinted that he would cut rates earlier this week and the odds are reportedly as high as 78% that a rate cut will occur.

Why bother? FX markets have already reacted to the Brexit news. GBPUSD has shed over 22 big figures. The government is in disarray with and the major political parties are all trying to find a new leader.

For the UK, and markets in general, that is probably a good thing as it means that until the political partyies get their houses in order, the politicians can’t do any more damage then they already have.

USDX hints at further US dollar gains

The US dollar index may not be the most reliable measure of US dollar direction or sentiment due to its heavy weighting of EURUSD. Still, it is a widely viewed indicator so it cannot be dismissed.

The 93.00 area has provided decent support since January 2015 and the area has survived a couple of tests since May of this year. The USDX downtrend since the end of January had survived at least four attempts to break it. It didn’t survive the fifth one which occurred on June 23.

Daily trading since then has formed a bullish flag formation which looks for a break of 96.87 to extend gains to 97.81 and then 100.00. A move below 95.40 would negate the setup.

USDX daily:

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

Source: Saxo Bank

Bank of Canada on tap

The Bank of Canada Monetary Policy Report, interest rate decision and governor’s press conference is on Wednesday. The MPR will be closely scrutinised for changes in the bank’s current, upbeat outlook for the domestic economy. Other than that, there shouldn’t be any surprises.

Mr. Poloz could teach the Federal Open Market Committee members a lesson in “cautious”. The Brexit vote, a dovish Fed, and the wait for the impact of the federal fiscal stimulus programs to show up in economic data provide the BoC with all the justification it needs to do nothing, and what better time to do nothing than summer in Ottawa?

The Canadian capital has its charms, but it is not the most frenetic of world cities. Photo: iStock

USDCAD technical outlook

The USDCAD technicals are bullish. Everyone knows that USDCAD is going higher, except USDCAD. The intraday technicals are bullish while trading above 1.3010 and the short term uptrend from the May 2 low remains intact above 1.2820.

However, USDCAD has been unable to crack the 1.3100-80 resistance area that has contained all rallies since April 7. A break of 1.3180 suggests further gains to 1.3400. Until that happens USDCAD will see-saw within a 1.2850-1.3100 range.

USDCAD hourly:

Source: Saxo Bank

The week ahead

Those looking for the traditional “summer doldrums” in FX markets will be on a quest akin to Frodo’s trek to the Mountain of Doom to destroy the “one ring”. It will be a long, arduous process thanks to the UK and Brexit. The possibility of a UK or EU event issue upsetting sterling and FX markets will be lurking just below the surface every day for a while.

With that in mind, fallout (if any) from today’s nonfarm payrolls data and Chinese economic data releases will be the key focus in Asia on Monday. After that, the marquee event of the week will be Thursday’s BoE interest rate decision, Monetary Policy Report and Carney’s press conference.

The BoC interest rate decision is Wednesday but Brexit, the FOMC and the wait for more data from the March fiscal stimulus programme suggests a pretty tame outcome.

China GDP and Retail Sales data and a slew of US data releases will close out the week.

The week that was

This week looked like it had all the ingredients required for some FX fireworks which would have been fitting following on the heels of the American July 4 holiday. It did.

Monday was a very dull session after Europe closed for the day due to the US holiday, but it didn’t start out that way. Australian’s awoke to muddled election results. USDJPY and EURUSD drifted higher before Europe walked in while GBPUSD just traded sideways. The Nikkei was in positive territory. By mid-day in Europe, the leader of Britain’s UKIP party had resigned.

Tuesday started with traders talking about declining yields across most core government curves, questions about the health of the Italian banking industry and positive China services PMI data.

The RBA left interest rates unchanged but AUDUSD could not hang on to post statement gains. The Bank of England reduced the countercyclical capital buffer rate. The BoE said that the outlook for financial stability is “challenging” and said that some Brexit risks were starting to crystallise. That was all traders needed to hear and they whacked sterling. Later on, a UK property fund suspended trading. Can you say risk aversion?

Asian markets certainly could. Risk aversion was the core theme on Wednesday. Global bond yields continued to fall with the US 10-year yield hitting a record low of 1.33%. More UK commercial property funds suspended trading so more people sold GBPUSD and it hit 1.2797 in early Asia trading. (and this week’s low as well).

Elsewhere, Japan’s Ministry of Finance was making veiled intervention threats, telling all who would listen that they were “watching yen moves closely” and German 10-year bund yields were below minus 0.20%. Oil prices rallied and the FOMC minutes showed a somewhat divided committee that was cautious about Brexit risks.

Thursday’s Asia session started with news that S&P had cut Australia’s AAA credit rating. The initial AUDUSD fall to 0.7466 was reversed by mid-day in Europe. That move didn’t hold and AUDUSD closed in New York at 0.7490. USDJPY spend the entire day chopping around in a 100.60-101.20 range with traders waiting for Friday’s US employment report. The day ended in New York with oil prices down 5% on a disappointing EIA report, GBPUSD at 1.2850 and positive sentiment towards the US dollar on decent economic data reports.

The post-Brexit sterling rout and associated risk-off trend remain the dominant drivers of FX markets. Photo: iStock

— Edited by Michael McKenna