Dollar pares gains at end of short week (for some) 25Nov16


Dollar pares gains at end of short week (for some)

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

· Just as in the shops, the US dollar is also a bargain today

· The dollar’s pause may be the start of an overdue correction

· A USDX failure to break above 102.16 would suggest consolidation

By Michael O’Neill

A fistfull of dollars on the biggest shopping day of the year? Pic: iStock

Dollar rally may pause

Today is Black Friday in America. It is a post-Thanksgiving tradition that has Americans lining up in front of stores in stores, almost immediately after dessert is served, in hopes of snagging a bargain.

It appears that the US dollar is also a bargain today and although the decline is fairly shallow, there is some evidence that it could be the start of an overdue correction. The US dollar has had a good November. Sterling is the only G10 currency to have gained and that’s because the UK is in its own Brexit universe. The Japanese yen has declined 7.5% since the beginning of the month while the euro has shed 3.65% in the same period.

The bulk of the moves occurred following Donald Trump’s election victory. His campaign promises to quit the TransPacific Partnership on Day 1 of taking office, his threat to label China a currency manipulator, proposed tax cuts and infrastructure spending plans have shredded analyst forecasts for the US dollar, world-wide.

The US dollar index (USDX) is at levels last seen in April 2003. It hit 95.89 during the US election as the results were coming in. It has since roared ahead to 102.12 on Thursday. That price is just below (102.16) the 61.8% Fibonacci retracement level of the entire 2001-2008 range. A failure to break above 102.16 would suggest a period of consolidation is likely. Intraday, a move below 101.30 would extend losses to 100.67 and then 99.75.

Chart USDX monthly

Source: Saxo Bank

EURUSD bears may disagree

On the other hand, EURUSD, which makes up 57.6% of the USDX weighting may tell a different story.

Today’s EURUSD rally may be a selling opportunity. The pending Italian referendum has some pundits believing it would be the end of the Eurozone. Others point out, if not Italy, perhaps the 2017 French and Dutch elections would do the trick. Meanwhile, Turkey is blackmailing the European Union with threats of allowing hundreds of thousands of new migrants into Europe. Turkey officials are irate because the EU held a non-binding vote to freeze EU membership talks for Turkey following the president’s reaction to this summer’s coup attempt. Eurozone political squabbling and dire forecasts are reason enough to fade a EURUSD rally.

Furthermore, the ECB is likely to extend bond buying beyond their March deadline. With all these risks on the horizon, it is hard to see EURUSD making any sustainable gains.

Chart: EURUSD 4-hour

Source: Macro

The week ahead

If the previous week was slow and plodding, this week will more than make up for it. It is chock full of major data, speeches from central bankers, and a month end portfolio rebalancing day. The 171st (ordinary) Opec Meeting on November 30 is poised to be a big deal, especially if the members can agree to meaningful production cuts. If that is not enough, the Italian referendum on December 4 will loom over euro trading all week.

Monday may be the quietest day of the week. There aren’t any data releases in Asia and a speech by European Central Bank president Mario Draghi is the only item of interest in Europe. Draghi’s speech will be parsed for clues as to the ECB’s intentions at the December 8 policy meeting.

Tuesday, Japan retail trade and employment data will be the key event in Asia. There is also a lot of data from the Eurozone and the US.

Wednesday should be very busy due to Opec news, data and month end portfolio rebalancing.

Thursday kicks off the final month of the year with a rash of PMI reports from around the world.

Friday is nonfarm payrolls day. An exceptionally poor May nonfarm payrolls (38,000 vs. forecast 162,000) released June 3, derailed what was expected to be a June rate hike in the US. Could it happen again?

The week that was

It was a short week for American and Japanese traders. It was mostly a boring one for traders everywhere else.

Monday started on a subdued note but not for long. AUDUSD traded softer as did Kiwi but not for long. Profit-takers emerged and the greenback gave back some of the previous week’s gains. EURUSD drifted lower in Asia but bounced in Europe, repeating the pattern during the New York session. Traders were mildly concerned about Wednesday’s Federal Open Market Committee meeting minutes and durable goods data. Sterling got a boost from talk of fiscal stimulus by the UK prime minister. Oil prices spurted higher on rumours that Russia, Iran and Iraq were all making nice, leading to speculation that Opec would reach a production cut agreement. A large earthquake in Japan sent USDJPY lower.

Tuesday saw mild US dollar selling pressure In Asia. AUDUSD and NZDUSD climbed, aided by a boost in commodity prices. USDJPY traded lower until tsunami fears from the earthquake abated. Then it recouped some of its losses. EURUSD was on a small roller-coaster rising, falling and then peaking at 106.57 in Europe. Those gains were erased by lunch time in New York on because of strong US housing data. Oil prices topped out at $49.20 just before the New York open and bottomed out at $47.12 by noontime in New York. Wall Street closed at a record high.

On Wednesday, range trading was the name of the game in Asia and Europe. Aussie and Kiwi drifted higher but the move was reversed during European hours. USDJPY traded choppily within a 110.30-111.30 band. EURUSD traded sideways in a 1.0600-45 range. Sterling traded with a negative bias. That changed in early New York trading. The UK Chancellor of the Exchequer delivered the Autumn Statement and the conclusion was that the new fiscal stimulus measures were good for sterling. Can you say short squeeze? GBPUSD rallied from 1.2360-1.2470 before slipping into the New York close. A far better than expected US durable goods report and strong consumer confidence was like Red Bull to the greenback. (It gave the dollar wings).

The FOMC meeting minutes were released in the afternoon. The reaction was extremely subdued. That was partly because they didn’t provide any fresh information but mainly because most traders had left for their Thanksgiving holiday.

Thursday, the US was closed for Thanksgiving. In Asia, the dollar edged higher due to the strong data seen earlier, during the US session although with lighter than usual volumes. USDJPY climbed from 112.30 to 113.55 but backed off into the European open. It spent the rest of the day drifting slightly higher. EURUSD chopped around within a 1.0540-85 range. Sterling kept a bullish bias while consolidating Wednesday’s gains. Oil prices flat-lined.

Friday, the US dollar gave back some gains on profit-taking ahead of the weekend. US markets operated with a skeleton crew due to the Thanksgiving holiday and their equity markets closed at 1:00 pm EST.

– Edited by Clare MacCarthy

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A litany of woes weigh on the Loonie and Trump is just one 11Nov16


A litany of woes weigh on the Loonie and Trump is just one

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

· Sterling outperforms in week of strong US dollar gains

· USDCAD technicals are bullish but beware a correction

· Election fallout will overshadow data next week

· Trump has an aggressive energy policy and wants to make US energy independent

· Shale production is set to increase

· Russia and Opec already producing crude at record volumes, world is awash in oil

US president elect Donald Trump promised to unite his country. We’ll see. Photo: iStock

By Michael O’Neill

The Loonies feathers are being plucked one by one. The bird is not quite bald but it is sporting a “mohawk” .

The Canadian dollar is being buried under a blanket of negatives that have hung a target on 1.4000. The threat of NAFTA is real although there is a rising chorus that believes the threat is more real for Mexico than Canada. Granted, that chorus is composed largely of Canadian’s which may skew the bias.

More telling, is that, as of this writing, Donald Trump hasn’t bothered to call, text or even tweet to Canada’s Prime Minister, Justin Trudeau and Canada is America’s largest trading partner. (Justin called Donald to congratulate him on his victory)

That could be because, according to the Burrard Street Journal, Mr. Trump (who says he follows Canadian politics) called Justin Trudeau “Canada’s worst President yet” (Canada doesn’t have a president). He also called Mr. Trudeau “an embarrassment”.

“Worst President yet” Source: Burrard Street Journal

Mr. Trump has an aggressive energy policy. He wants to make America energy independent and declare American energy dominance a strategic economic and foreign policy goal.

The Energy Information Administrationsays that US crude oil production is 8.6 million barrels per day as of November 4. That volume will grow on continued Shale extraction technology advances.

Source: Energy Information Administration

Russia and Opec are already producing crude at record volumes and the world is awash in oil. The International Energy Agency (IEA) forecast that the 2017 oil market will be similar to the 2016 oil market. If accurate, WTI prices will remain soft and that is not good for the Canadian dollar

The Bank of Canada downgraded Canada’s economic growth outlook in October blaming slower exports and slower resale housing activity. Governor Stephen Poloz actively sought to weaken the Canadian dollar when he announced that at the policy meeting, “rate cuts were discussed”. He was successful. Economists and strategists have raised the odds for a BoC rate cut (they are still very low) which has boosted support for USDCAD.

USDCAD technical outlook

The short and medium term technicals are bullish. The USDCAD uptrend from the May low remains intact while prices are above. 1.2980. The September uptrend is valid above 1.3140 supported by the break of resistance at 1.3308 (38.2% Fibonacci retracement of 2016 range. The table is set for a return to 1.3835 (61.8%) Fibonacci level).

However, resistance at 1.3570 (50% Fibonacci level may prove sticky). USDCAD has climbed well above the short-term trend line at 1.3140 which leaves a lot of downside room for a correction while leaving the dominant trends intact.

USDCAD with Fibonacci

Source: Saxo Bank

The week ahead :

The US election results and chatter about Mr. Trump’s proposed cabinet will over-hang markets all week. Regional data may have a heightened importance depending upon how it’s future performance could be impacted by a new Trump government. To that note, China’s Retail Sales and Industrial Production data on Monday, could lead to some risk aversion trading if it is weaker than expected. A China/US trade war would exacerbate the situation.

There is a lot of key data releases around the globe.

German GDP data, Eurozone GDP and trade as well as a slew of UK data on Tuesday may shift the focus (temporarily) back to Brexit and the Eurozone. US data (retail sales) will keep US rate hike hopes alive.

UK employment and US data will provide the entertainment on Wednesday. Thursday is inflation day, first in the Eurozone and then in the US.

The week will end with a Mario Draghi speech

The week that was :

The UK vote to leave the European Union should have been the preeminent event of 2016. It won’t be. That story got trumped by Trump.

Monday started with US dollar buying on news that the FBI had cleared Hillary Clinton of any wrong-doing pertaining to her emails. The news boosted global stock markets and the Trump-win proxy, Mexican Peso. At the time, Hillary’s correspondence was a big deal. If we had only known.

EURUSD gapped down at the Asia open, falling from 1.1142 to 1.1038, bouncing back to 1.1100 and then spent the European and New York session drifting back to 1.1025. The USDJPYreaction was more subdued. It rallied from 103.30 to 103.70 and traded sideways. The commodity currency bloc initially rallied but retraced those gains quickly. Eurozone data was a tad soft but FX traders ignored it.

Tuesday was US election day. Everyone knew that Hillary Clinton would win. The New York Times, on Monday, reported that Mrs. Clinton had an 84% chance of becoming the first woman president of the United States. Talk about a Chicago Daily Tribune, “Dewey Defeats Truman” moment.

The US dollar drifted higher against JPY and EUR, but lost ground against the commodity currency bloc on improved risk seeking sentiment. US equity indices all closed with gains. API reported another rise in US crude inventories and oil traded lower, after New York had closed.

Wednesday. Surprise! Millions of Trump followers came out of the closet (metaphorically speaking). They had hidden from pollsters and their neighbours, perhaps too embarrassed by Donald’s bombastic. rhetoric, crude language and accusations of sexual abuse to openly support him. But they didn’t have any problem voting for him. Donald J. Trump became the 45th President of the United States.

Asia traders reacted and their first reaction proved wrong. USDJPY plunged from 105.45 to 101.20. EURUSD soared to 1.1300 from 1.0990. Sterling rallied to 1.2550 from 1.2350. The commodity currency bloc traded in similar fashion.

Suddenly, a Trump win wasn’t the end of the world. All the FX moves were reversed almost as quickly as they occurred. By the time New York traders got to work, European traders had started selling dollars again, perhaps on profit taking. The move was short lived and by the end of the day, EURUSD was down and USDJPY was flirting with 106.00. US equity markets soared, rising over 1.1% on the belief that Trump’s economic policies would be good for the US economy and inflation.

The Reserve Bank of New Zealand followed the road as expected. Photo: iStock

Thursday, much of the world was still stunned by the US election result. Kiwi traders may have been more stunned than most and the US election had nothing to do with it. The Reserve Bank of New Zealand chopped the OCR rate by a quarter of a percent in the very wee hours of the morning. It was expected, but a less dovish than expected statement propelled NZDUSD from 0.7260 to 0.7360. That move came to a screeching halt when traders realised that new US trade policies may have a negative impact in Asia. The gains were erased and NZDUSD dropped to 0.7175 before edging higher into the New York close.

AUDUSD suffered a similar fate. For the rest of the majors, Thursday was a day of consolidation. EURUSD hovered just above its recent lows while USDJPY closed just below 107.00

Friday,

The US dollar ended the week with large gains against the G10 currencies except for the British pound which is Brexit has put in a parallel universe.

— Edited by Clemens Bomsdorf

Donald and Hillary put markets on ice 4Nov16


Donald and Hillary put markets on ice

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

·

· Weak Canadian data skewer loonie

· US NFP mildly positive on hourly earnings bump

· US election concerns to dampen trading enthusiasm

The relationship here is closer than many like to think. Photo: iStock

By Michael O’Neill

The US election is only four days away. Fortunately, two of those days are the weekend. That means, for 48 hours beginning on Monday, FX traders will be doing everything but trading.

And, why should they? Economic data releases, even top-tier ones, are meaningless due to the uncertainty of the outcome. Sure, a lot of polls say Hillary will win. The New York Times says Hillary has an 84% chance of becoming President! But FX markets are not convinced.

Brexit wasn’t going to happen, either… and then it did.

Source: New York Times

Election nerves derail USDX rally

The US dollar index has been grinding higher, albeit raggedly, the closer it gets to the December Federal Open Market Committee meeting. USDX has been in a steady uptrend since the beginning of May and that uptrend remains intact while prices are above 95.50.

The rally picked up steam in October and it had a test of 100.60 in its sights, but that move was derailed by last weekend’s news that the FBI was reopening the Clinton email investigation.

The break of 98.54 snapped the intraday uptrend and a further drop below 96.80 would lead to a test of the May uptrend.

USDX (daily):

Create your own charts with SaxoTraderGO click hereto learn more

Source: Saxo Bank

The week ahead

FX markets will get off to a slow start. The first two days will likely be very quiet due to the US election. Wednesday will start with Donald Trump proclaiming one of the following: “the election was rigged” or “isn’t democracy wonderful”.

Election fallout will dominate trading for the balance of the week…

Elsewhere, China releases key data (trade) on Monday and PPI and CPI prints on Wednesday.

The Reserve Bank of New Zealand Monetary Policy meeting is on Thursday where a 0.25% rate cut is expected.

The week that was

This was a rare week. The FOMC policy statement was upstaged as the Donald-and-Hillary show hogged the spotlight which led to a noticeable increase in safe-haven flows.

USDCHF dropped from 0.9905 to 0.9690 and USDJPY declined from 105.22 to 102.53 during the week.

The US dollar finished the week on a losing note against all the G7 currencies except for the Canadian dollar… and WTI oil prices

Currency gains/losses versus USD from Monday NY open to 1500 GMT Friday:

Source: IFXA/SaxoBank

Monday started with Donald Trump’s reportedly fading presidential campaign reinvigorated by a renewed FBI investigation into rival Clinton’s emails. The US dollar edged higher versus EUR, GBP, and JPY due to the looming FOMC meeting on Wednesday while ignoring Eurozone PMI reports.

AUDUSD climbed, supported by higher than expected inflation data. Month-end portfolio rebalancing flows only had a minor impact. News that Bank of England governor Mark Carney agreed to extend his term lifted GBPUSD. Oil price sentiment was negative and WTI declined steadily

Tuesday, The Reserve Bank of Australia left rates unchanged and omitted an easing bias. AUDUSD rallied and then got an added boost from strong China PMI data. Those gains were erased in New York.

USDJPY rose ahead of the Bank of Japan policy announcement. That proved to be a mistake. The BoJ left rates and policy unchanged and the gains quickly disappeared. The European data calendar was light and several centres were closed for a holiday.

EURUSD managed to rally with traders focused on the USD election outcome and not the FOMC meeting. A strong ISM PMI report was ignored. Oil prices dropped following a huge rise in inventories as reported by the American Petroleum Institute.

Wednesday, kiwi got off to a great start. NZDUSD extended gains made in New York following a robust GlobalDairyTrade auction and a strong domestic employment report.

The US dollar was on the defensive but managed to rally after the FOMC statement was released. The Fed left the door wide open to a December rate hike. Oil prices tanked again when the Energy Information Administration reported a 14.42- million-barrel increase in weekly crude stocks.

Thursday, the proximity of the US election encouraged traders to stay on the sidelines. AUDUSD gained in Asia on improved trade data but the move was short lived. USDJPY was soft on safe-haven demand.

In Europe, sterling was the star of the show. A UK court ruled that the Conservative government required parliamentary approval to trigger Article 50. Then, the Bank of England delivered a less doveish than expected interest rate policy statement, essentially removing the easing bias. GBPUSD soared to 1.2492 from 1.2325.

The US delivered a mixed bag of data including a weak ISM Services PMI. The US dollar and US equities closed in the red for the day.

Friday, FX traders marked time awaiting the US employment report. The headline number was a tad short of expectations but the 0.2% jump in average hourly earnings was adequate compensation, leaving the December rate hike odds unchanged at 71.5%.

Nothing, however, is certain until Americans decide on the Donald. Photo: iStock

— Edited by Michael McKenna