Has William Dudley made the right call? 16Aug16

Has William Dudley made the right call?

Michael O’Neill

FX Consultant / IFXA Ltd


· US dollar still rangebound vs. the majors

· US data contradicts William Dudley

· Loonie may have more upside

By Michael O’Neill

As you stare at your computer screens for hours on end, day in and a day out, it is easy to get complacent and think that there is “nothing going on” in FX markets. And for long term, macroeconomic traders, there really isn’t.

It is a different story for day and short-term traders. There is enough chop and churn to keep them entertained.

Shadow dancing

For the past week, the top tier economic data cupboard looked very similar to Old Mother Hubbard’s when she went to fetch her poor dog a bone. Sure, the Reserve Bank of New Zealand cut interest rates, but that was expected. Even Eurozone GDP data was mostly ignored because the European Central Bank meeting is still a month away.

The US retail sales data was considered weak and in the absence of any other offsetting major economic reports, empowered US dollar bears.

This morning’s US CPI data was the headliner for US data this week. It wasn’t much. July CPI, month over month was flat while core CPI edged higher by 0.1%. That news puts another wet blanket on September rate hike prospects and should have kept the downward pressure on the dollar.

However, New York Fed President, William Dudley didn’t see it that way, or didn’t care. He declared “Bear Hunting Season” open when he told FOX Business Network that “it’s possible to hike rates at a mid-September policy meeting” and added “we’ll have to see where the data falls (and also watch) the broad supports for the economy”.

EURUSD plunged from 1.1320 to 1.1250 and USDJPY bounced from 99.55 to 100.45.

The reality is that the majors have been locked in well-defined ranges since June. Even GBPUSD has been in a range, post Brexit. Federal Open Market Committee indecision may have cast a shadow across the FX spectrum but day and short term traders are dancing up a storm in those shadows.

FX majors locked in ranges

Source: Saxo Bank

Dudley Do-right of the Fed

Dudley Do-Right, is described in Wikipedia as a dim-witted, but conscientious and cheerful Canadian Mountie. Those words would not describe New York Fed President William Dudley. He is obviously a very accomplished, well-educated individual with a wealth of market experience.

So why is he deliberating injecting additional uncertainty into markets? Fed chief Janet Yellen has been harping about a data dependent Fed since she was named chair. Last week, former Fed Chair, Ben Bernanke wrote that markets should pay less attention to Fed speakers and more attention to data.

His comments this morning suggesting a September rate hike, caused a bump in the September rate hike probability to 18% from 9%, according to the CME FEDWatch tool. Today’s US data doesn’t support a move.

In the run-up to the June FOMC meeting, various Fed speakers, including Dudley set the stage for a rate increase. It didn’t happen. Why should markets believe him now?

Loonie got new wings

It was only a week ago that FX traders and analysts were looking for USDCAD to break above 1.3200 and head to 1.3300-1.3400 area. Oil prices were in a bear market and the nonfarm payrolls report had visions of rate hikes dancing through their heads.

And just like in February, the doom and gloom turned to sunshine and unicorns. A report that Saudi Arabia was encouraging a dialogue at an informal meeting in Algiers on September 26-27 sparked a rally in WTI from a low of $39.15 on August 3, to $46.17 on August 16.

USDCAD broke major support in the 1.3090-1.3100 area and then again at 1.2990. The rally was on. This morning, Canadian Manufacturing Sales data surpassed forecasts which provides support to the Bank of Canada’s 3.7% GDP forecast in Q3. Unfortunately, Dudley’s comments overshadowed this report.

Nevertheless, the USDCAD rally halted well below the intraday downtrend line at 1.2910 and while that line remains intact, additional USDCAD weakness is likely.

USDCAD technical outlook

The intraday USDCAD technicals are bearish while trading below 1.2910 supported by today’s move through 1.2855, representing the 50% Fibonacci retracement of the May-July range which now targets the 61.8% Fibonacci level at 1.2760

Chart: USDCAD 4 hour with Fibonacci

Source: Saxo Bank

– Edited by Clare MacCarthy

Michael O’Neillis an FX consultant at IFXA Ltd

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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