Oil and Loonie together 10Mar17

Oil and loonie together again

Michael O’Neill

FX Trade Strategist / www.Loonieviews.net



· US dollar retreats in pre-FOMC correction

· Nonfarm payrolls report is a "non-event" for FOMC meeting

· USDCAD bulls knocked for a loop

The Federal Reserve is to decide upon rates on march 15. Photo: Shutterstock

By Michael O’Neill

USDCAD and WTI appear to have resumed their relationship. Oil price declines usually led to USDCAD gains and vice-versa but that hasn’t been the case since the middle of February. WTI prices fluctuated within a $52.55-$54.95/barrel band during that period while USDCAD steadily climbed higher. Oil traders appeared to be oblivious to a dovish Bank of Canada statement, hawkish Fed rhetoric and even repeated increases in US crude inventories.

That changed on Tuesday. Rumours that the American Petroleum Institute would report a large increase in US inventories knocked WTI from $53.75/b to $53.03/b. Confirmation of the rumour pushed WTI to $52.68/b. When the Energy Information Administration (EIA) reported a large build in crude inventories, it was the proverbial “straw that broke the camel’s back.”

WTI blasted below support at $52.20/b and the first wave of stop-loss sellers emerged. The break below $50.00/b triggered more stops and the rout paused at $48.56/b. The post payrolls US dollar retreat helped boost WTI to $50.09/b.

As oil prices were plummeting, USDCAD took off and appeared poised to press above the 2017 peak of 1.3596. That view changed on Friday.

Better-than-expected Canadian employment data combined with the broad US dollar retreat caught USDCAD traders “long and wrong” and USDCAD plunged to 1.3423.

Now what?

The Canadian dollar may not get much support from oil prices. It seems that $55.00/b will cap WTI. There isn’t any guarantee that the Opec production cuts will be extended past the six-month deadline. According toReuters, Saudi Arabia Energy Minister Khalid al-Fahid, speaking in Houston, said that there would be “no free rides” for US shale producers. He said that US producers should not automatically assume that Opec will extend the cuts. If true, a steeper decline in WTI will certainly put a floor under USDCAD.

USDCAD plunged following the strong domestic employment report (Actual 15,300 vs. forecast 2,500) in a move fueled by broad US dollar selling vs. the majors.

A tiny miss in the average hourly wage component of the US nonfarm payrolls report gave traders all the excuse they needed to trim long dollar positions ahead of Wednesday’s FOMC meeting. That selling exaggerated the USDCAD decline.

The reality is that for the Canadian dollar nothing has changed. There is still a lot of slack in the domestic economy. Canadian interest rates are staying where they are and the outlook is dovish thanks to the BoC repeatedly warning that rate cuts are being discussed. US interest rates are going higher and the pace of increases could be faster than what the markets have priced in. The details of President Trump’s infrastructure spending and tax cut plans are still unknown.

The short term USDCAD technicals are bullish while prices are above 1.3420 with more support in the 1.3380 area. A break below 1.3380 would negate the topside pressure and suggest USDCAD consolidation within a 1.3250-1.3520 band.

USDCAD hourly chart

Source: Saxo Bank

The week ahead

The week will begin with FX traders in Canada and the US feeling sleep deprived due to the switch to daylight savings time. It will end with traders dressed in green, acting silly and toasting St. Patrick. In between, traders will be waiting for and then dealing with the fall-out from the Federal Open Market Committee meeting on Wednesday and a mess of central bank policy meetings on Thursday.

Monday is likely to be a quiet day due to a lack of top tier data and the countdown to the FOMC meeting. Markets will be looking to see if Mario Draghi gives any insight to the subtle shift in his monetary policy outlook.

Tuesday, the ZEW data in Europe could cause EURUSD to wobble more than likely this day will be a sleeper as well.

Wednesday, March 15, things should heat up and the Dutch election is just one of the things on the burner. US Retail Sales and CPI data could lead to some FX volatility, pre-FOMC. The afternoon will be choppy. Traders are expecting a hawkish statement following news of a ¼ point rate increase. Disappointment may lead to long US dollar positions being unwound.

Thursday, should be very busy. Traders will react to the FOMC news, Australia’s employment report and interest rate decisions from the Bank of Japan, the Swiss National Bank, and the Bank of England.

Friday, the week may end with a whimper. St Patrick’s Day will give traders all the excuse they need to wind down from will likely have been a frantic two days of action.

The week that was

The FX price action was expected to be disappointing and it lived up to that expectation, until Friday.

Monday, Asia opened with a mildly risk averse session. Traders had some event risk to worry about but that wasn’t until the end of the week. North Korea sent missiles splashing into the Sea of Japan which annoyed Japan and sent USDDJPY to session lows. AUDUSD and NZDUSD moved lower as well, encouraged by China’s lower 2017 GDP forecast. Risk aversion sentiment dissipated in Europe. French political polls showed the leading right wing candidate losing ground which helped EURUSD rally. GBPUSD was smacked on weak services PMI data. In New York, more French political headlines and strong US data knocked EURUSD back to the day’s low. US rate hike concerns undermined the commodity currency bloc.

Tuesday, the Reserve Bank of Australia left rates unchanged and delivered a reasonably positive economic outlook which helped AUDUSD eke out small gains in an otherwise dull session. In Europe, GBPUSD came under further selling pressure after weak housing price data and the Brexit vote in the House of Lords. The New York session ended with the US dollar posting modest gains against most of the G10 currencies. Sterling popped in the afternoon helped by news that the House of Lords voted against the government. Oil prices dropped because of a steep rise in US crude inventories

Wednesday, NZDUSD was smashed following the results of the global dairy trade auction that were released during the earlier New York session. Poor China trade data undermined the greenback during the Asia session but all was forgiven when Europe opened. US Treasury Yields rose which underpinned the US dollar. A ”super-strong” ADP employment report gave more fuel to US dollar bulls. Oil prices got whacked again when the EIA reported an 8.2-million-barrel increase in crude inventories which lifted USDCAD.

Thursday’s Asia and European sessions were mostly uneventful. Weaker than expected China CPI data undermined the antipodeans while USDJPY was bid. It got more exciting during the ECB press conference. The ECB left rates unchanged but a dovish Mario Draghi was missing in action. He wasn’t especially hawkish but he did suggest that the “cyclical recovery may be gaining momentum”. That lifted EURUSD off the overnight lows. New York closed with the US dollar a little worse for wear except against USDJPY.

Friday, US nonfarm payrolls beat expectations but the US dollar sank in a pre-weekend, pre-FOMC meeting, profit taking move.

— Edited by Clemens Bomsdorf

icon-envelope-tick-round-orange-animated-no-repeat-v1.gif Virus-free. www.avast.com
Categories FX, Foreign Exchange, Currency, Canadian Dollar

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