Fed speakers and US dollar at odds 23Aug16

Fed speakers and US dollar at odds

Michael O’Neill

FX Consultant / IFXA Ltd


· Soft US dollar contradicts Fed hawks

  • Oil and Loonie moving in the same direction
  • EURUSD approaching top of its range

If the market deems her Friday speech both relevant and hawkish EURUSD will tank. Pic: iStock

By Michael O’Neill

There hasn’t been any shortage of Fed speakers over the past few weeks and those speakers have delivered fairly hawkish statements implying that a September rate hike is a real possibility. Normally, those comments would send EURUSD into full retreat.

Not this time. FX traders, at least those not enjoying a summer vacation, have turned a deaf ear to the hawkish squawks. EURUSD has rallied from 1.1045 on August 5 to 1.1354 on August 22. Perhaps I may be getting senile but I don’t remember the last time the US dollar devalued when so many Fed speakers were championing rate increases at the next meeting.

Don’t fight the Fed

There is an old adage that says something like “Don’t fight the Fed”. There may be some truth to that statement, especially this time around. The current Federal Open Market Committee has been portrayed by the financial media and analysts as cautious and by one former Fed insider, as schizophrenic, due to contradictory statements by various Fed speakers. Others see them as clueless and inept.

It would not be a stretch to say that the FOMC members are less than enamoured by how they are portrayed in the media. And one sure way to change the markets view of them would be with a decisive stroke.

Maybe there is something to the chatter that a September rate hike is “possible” like New York Fed President William Dudley said last week.

If so, EURUSD bulls may suffer a fate similar to Canadian buffalo at Head-Smashed-In Buffalo Jump, now a UNESCO World Heritagesite. It won’t be pretty.

EURUSD has traded in a 1.0800-1.1500 range since mid-January. Numerous attempts to break through the top have failed and at the moment the single currency is within 0.0200 points of the top once again.

The Eurozone still has a myriad of issues to settle; from Greece to Turkey, the refugee crisis and the fallout from Brexit. European Central Bank interest rates are 0% to negative which is unlikely to trigger a stampede of foreign investors.

If, and it’s a big if, Janet Yellen’s Jackson Hole speech is deemed a) relevant and b) hawkish, EURUSD will revisit the bottom of the range, and in a hurry.

USDX remains bearish

The US dollar index is behaving as though Brexit was just a bad dream. After spiking to 96.71 from 94.04 on June 23, USDX consolidated and then peaked at 97.60 on July 24. Since then, it has declined, somewhat erratically, and is now within spitting distance of the 76.4% Fibonacci retracement level (94.11) of the June-July range.

The intraday USDX technicals are bearish while trading below 94.90 looking for a decisive break of 94.11 (76.4% Fibonacci retracement level) to extend losses to 93.02, the Brexit low. However, a move above 94.90 would negate the downside pressure and suggest further gains to 95.32 and then 95.97.

Longer term, the USDX downtrend from the December 2015 peak of 100.62 remains intact while prices are below 97.50. The break below 95.22 targets 93.95

Chart: USDX 4 hour

Source: Saxo Bank

Loonie bulls living dangerously

USDCAD traders have decided that the general bearish US dollar sentiment has precedence over declining oil prices, at least today. Both WTI and USDCAD have declined from Monday’s end of day price in New York. That relationship is unlikely to last – it never does and the victim will most likely be the Canadian dollar.

Oil prices continue to suffer from rising production and increased demand. There is evidence that the production sided of the equation has gotten worse. Baker Hughs reported on Friday that US rig counts rose to 491 from 481 the previous week which suggests increased US crude production. Saudi Arabia is reportedly on track to announce another production record in August.

The WTI technicals are bearish as well. The intraday uptrend from August 12 ended on Friday with the break below $47.60 which sets up a test of the uptrend line from the beginning of the month, currently at $44.70.

USDCAD has shrugged off the weak Retail Sales and CPI data on Friday but that data still warns that the expected Canadian domestic Q3 rebound may not be as strong as anticipated by the Bank of Canada.

USDCAD technical outlook

The intraday USDCAD technicals are bullish while trading above the 1.2880 area looking for another break of 1.2930 to extend gains back to 1.3000. A move above 1.3000 puts 1.3200 back in play. A break below 1.2880 risks a retest of 1.2750. Longer term, USDCAD remains in a 1.2600-1.3200 range.

Chart: USDCAD 1 hour

Source: Saxo Bank

– Edited by Clare MacCarthy

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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