‘Do you feel lucky?’
FX Consultant / IFXA Ltd
· Oil traders push WTI to week’s high ahead of meeting
· USDCAD approaching the ‘buy’ zone
· USDX technicals suggest a top is near
Just why is 1971 rogue detective flick ‘Dirty Harry’ so full of quotes
that seem relevant to the US dollar? Is it just us? Photo: iStock
By Michael O’Neill
In the 1971 movie Dirty Harry, the titular Inspector Harry Callahan asks a wounded thug reaching for his weapon, "do you feel lucky? well do you, punk?"
That is the same question that the US dollar index is asking US dollar bulls.
The USDX ripped higher following the election, rising from 95.88 to 102.13 on November 24. It then began a choppy downtrend which stalled inside a 99.88-100.68 range until the December 8 European Central Bank meeting.
The extension of the quantitative easing programme until the end of 2017 launched USDX to 101.48 within 24 hours.
The monthly USDX technicals are bullish while trading above 95.90 but need to break major resistance in the 101.60-80 zone representing the 61.8% retracement of the 2002-206 range. The long-term setup is bullish will a decisive break above 101.80 extending gains to 109.05.
However, the Janet Yellen-led Federal reserve is cautious. We know that because Yellen never fails to tell us so. Donald Trump’s election probably caught the entire Federal Open Market Committee off-guard, as well as half the nation. His infrastructure spending and tax cut promises provide the Fed with the perfect excuse to deliver a non-committal, "steady as she goes"-type statement.
If so, traders feeling lucky may come to regret their decisions.
Source: Saxo Bank
The USDCAD outlook
USDCAD has been declining steadily since Opec announced an agreement to reduce production by 1.2 million barrels/day. That move triggered stop-loss selling as key support levels at 1.3240 and 1.3190 gave way.
The December 9 break below the 1.3192 level representing the 100-day moving average exposes the 200-day moving average (1.3073) to a test.
A dovish FOMC meeting combined with a positive response to this weekend’s oil meetings could be the catalyst for additional USDCAD weakness.
However, the sustainability of such a move is questionable. The list of Canadian dollar negatives is long and includes: widening CAD/US interest rate differentials, Donald Trump and his trade war risks, and a dovish Bank of Canada.
I believe that if USDCAD breaks below the 1.3140 area, it enters the “buy” zone.
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Source: Saxo Bank
The week ahead
This week will likely mark the end of “normal” FX markets for the 2016 calendar year and it could be explosive. It has all the ingredients to be so, anyway.
There are major data releases from around the world including US Retail Sales, Eurozone inflation, and Australian employment. Then there are central bank policy meetings: the Bank of England and the FOMC.
It looks like it is a very volatile cocktail of risks but recent events have more than likely diluted their impact.
‘Tis the season to be jolly and all of that. The December 8 ECB decision suggests that any impact from next week’s Eurozone data will be minimal. It is simply too soon after the policy announcements.
The FOMC policy statement and press conference will be anticlimactic. A bevy of Committee members have all but confirmed that a 25 basis point rate increase will happen. They are unlikely to stir the pot much further ahead of all the uncertainties that Donald Trump’s presidency brings.
If so, the effects from this meeting will fade faster than the Italian referendum’s impact on EURUSD.
Remember Italy, EURUSD traders? Pizza? Pasta? Populist victories? Photo: iStock
The week that was
What a week. FX markets seemed alternately euphoric and despondent, lethargic and energetic, and often all of the above.
Monday started with Asia traders dealing with the results of what was billed as a near-seismic event; the Italian referendum. A ‘No’ vote would herald the end of the euro. Well, the ‘No’ vote won the day, and with a wide margin.
Traders crushed EURUSD and EUR crosses.
Then, traders came to their senses. “Wait a minute! It’s Italy. This is the same country that has had 64 governments since becoming a Republic in 1946. All the ‘No’ vote means is Italy has another domestic issue, at least for the foreseeable future.
The EURUSD sellers became EURUSD buyers and the Italian referendum was forgotten by the close in New York.
USDJPY was unperturbed by the referendum noise and climbed steadily. Eurozone economic data was ignored. A trio of Fed speakers appeared to be supporting a Fed rate hike on December 14, but their words had no impact on trading.
Tuesday, FX markets were rather lethargic. The Reserve Bank of Australia policy meeting statement didn’t provide anything out of the ordinary and whined about the level of the currency. AUDUSD drifted lower and kiwi fell in step. Opec reported record crude oil production in November. Better-than-expected US trade data were ignored and Wall Street posted record highs. Sterling tumbled from a two-month peak on renewed Brexit issues.
Source: Saxo Bank
On Wednesday, Aussie traders sold AUDUSD on soft Q3 GDP data but half the move was reversed by the time New York opened. Sterling extended Tuesday’s losses on we economic reports. The US dollar was on the defensive during a quiet New York session. The Bank of Canada policy statement was as expected and a non-event for USDCAD traders.
Thursday, the US dollar was on the defensive in Asia and during the European morning. A decent China Trade report only had a minimal impact due to the pending ECB policy statement and press conference. ECB president Draghi lit the fuse to a wild New York session. He announced an extension of the QE programme and tapering.
To be fair, he denies that reducing the amount of assets purchased each month is tapering. He calls it pragmatic risk management to deal with uncertainties. No matter, Traders saw “extension” and EURUSD tanked, falling a post statement, knee-jerk reaction high of 1.0877 to 1.0600 area at the end of the day. The US dollar closed the day in New York with gains across the G10 spectrum, except against the Loonie.
Friday, USDJPY powered to 115.26, a level last seen in February. The Canadian dollar moved higher underpinned by on firm oil prices and expectations for additional oil production cuts by non-Opec members. EURUSD traded heavily, suffering from the aftereffects of the ECB QE extension.
Back onto easing street. Photo: iStock
— Edited by Michael McKenna