USDX and lack of data point to slow week ahead 23Jun17


USDX and lack of data point to slow week ahead

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net

Canada

· Soft Canada inflation report offsets robust Retail sales data

· A busy Friday will crown a boring weak due to a dearth of top tier data

· Oil prices at current levels have limited impact on Loonie

Bank of Canada Deputy Governor Carolyn Wilkins said that Canada has “moved past the adjustment to lower oil prices” in her June 12 speech. She appears to be right on.

West Texas Intermediate (WTI) has dropped 8.7 percent since her speech while the Canadian dollar rallied.

That doesn’t bode well for USDCAD bulls. If WTI support in the $41.20-$41.80 area holds, the Canadian dollar will be unshackled from the drag of soft oil prices. That will leave the Bank of Canada interest rate outlook exerting added downward pressure on USDCAD, if the economic data continues to improve.

The June 23 inflation report was a tad weaker than expected which erased part of the gains from the robust retail sales report a day earlier. Part of the inflation weakness is due to low oil prices which the Bank of Canada is well aware of.

Nevertheless, BoC Governor Poloz as a penchant for verbal intervention whenever the Canadian dollar shows signs of strength which could limit USDCAD losses.

USDCAD and WTI oil from June 12

Source: Saxo Bank

US dollar index

The low volatility and the lack of direction in the FX majors is clearly reflected in the US dollar index. The USDX topped out in January 2017 and has been in a choppy, downtrend channel ever since. The break below the 50% Fibonacci retracement level (97.82) on May 8 and the failure to extend losses below the 61.8% level, despite many attempts, ushered in a six-week (so far) period of consolidation.

Neither a slightly doveish ECB meeting or a slightly hawkish FOMC meeting could provide sufficient fuel to end the consolidation.

Unless the ECB deviates from the course of action outlined a few weeks ago, the July 9 meeting may be anti-climactic. The FOMC policy meeting isn’t until July 25. There isn’t a press conference which lowers the odds for a policy change announcement.

If those two events are benign, FX action in July and August won’t look much different than that of the past six weeks.

USDX daily

Source: Saxo Bank

The week ahead

If the week that just ended put traders to sleep, the coming week rouse them from their slumber, like a three am fire alarm but probably not until Thursday.

Monday, Asia is likely to get off to a slow start except for Kiwi traders. A better than expected New Zealand trade report may give NZDUSD a lift. Europe trading may be subdued unless German IFO data can drum up some excitement. US Durable Goods is the highlight in North America, which may not be a highlight at all.

Tuesday will be like Monday. There isn’t any data from Asia and the European data is all bottom of the barrel stuff. The UK inflation report hearings may offer some fodder for GBPUSD traders. The US data shouldn’t be much of a trading factor either

Wednesday will shape up like Tuesday. Traders will struggle to find direction from bottom tier data reports. The New York session will see a variety of data which if consistently strong, should give the greenback a boost.

Thursday, FX activity should increase. Japan Retail Trade data, Australia New Home Sales and New Zealand Business confidences will keep Asia busy. Eurozone traders will be focused on confidence and German Inflation data. Sterling traders will be focused on Mortgage Approval data.

US Q1 GDP, expected at 1.2%, will only be important if it misses the forecast.

Japan ushers in a busy Friday with a host of economic reports including Industrial production and employment. That is followed by China manufacturing PMI. There is a slew of Eurozone economic data as well. Sterling traders will key in on UK GDP and Current account reports.

New York will be very busy. CPI and Michigan consumer Sentiment will be up against month end, quarter end and half year end re-balancing flows which may make for a very sloppy session. Canada GDP will be key for USDCAD traders.

The week that was

Expectations were rather low for FX excitement this week. Those expectations were met.

Monday, GBPUSD dropped at the Asia open in part, because of the onset of the EU/UK Brexit negotiations. USDJPY opened with a bid. Weaker than expected Japanese Merchandise trade data provided some support. The European session was almost a complete write-off with traders sidelined ahead of New York Fed President Dudley’s speech.

Mr. Dudley, a well-known dove, talked like a hawk. He supported additional rate increases and gave an upbeat outlook for the US economy. EURUSD dropped from 1.1208 to finish the day at 1.1144.

New York Fed President William Dudley, a well-known dove,

talked like a hawk. Photo: Shutterstock

Tuesday, USDJPY peaked at 111.78 in Asia, then drifted lower in a choppy fashion, closing in New York at 111.42. AUDUSD was supported by the release of the RBA minutes which didn’t offer much to undermine the currency. EURUSD traded sideways until mid-morning in New York when it dropped from 1.1164 to 1.1118.

Sterling was the star of the show thanks to Mark Carney’ saying that it was “too soon” to raise interest rates. GBPUSD plunged from 1.2755 to 1.2605 and finished yin New York at 1.2610.

Oil took a nasty spill. WTI dropped from $44.38/b in Europe to $42.68 at mid-morning in New York. Prices recovered somewhat and WTI closed at $43.50

Wednesday, declining oil prices provided the excitement in an otherwise moribund FX market. A weak GlobalDairyTrade auction pressured NZDUSD in Asia but the losses were reversed in European trading.

USDJPY experienced a bout of risk aversion selling, in part due to the oil price drop but it found a bottom just as New York opened.

The New York open was livelier than usual thanks to hawkish comments from Bank of England Chief Economist Andy Haldane. His support of a rate hike, boosted GBPUSD to 1.2705 from 1.2592.

EURUSD dropped from 1.1162 to 1.1118 in the same period. A jump in existing home sales offered a tiny bit of support to the greenback. Oil prices soared and sank around the EIA weekly crude stocks data. WTI rose from $43.60/b to $44.10 and then it dropped to $42.05. Profit taking took it back to $42.52 by days’ end.

NZD rallied against the USD end of the week. Photo: Shutterstock

Thursday was much like Wednesday, except for Kiwi traders. The Reserve Bank of New Zealand left interest rates unchanged, and policy “accommodative.” NZDUSD rallied, gapping up from 0.7215 to 0.7270. It still had most of the gains when New York closed.

USDJPY came under renewed selling pressure dropping from 111.45 to 110.95 on a fresh bout of mild risk aversions stemming from low oil prices. Those losses were fully recovered during the New York day.

EURUSD topped out at 1.1175 in Asia, chopped around in a tight range in Europe and drifted lower in New York, closing at 1.1151. The Canadian dollar soared on a stronger than expected Retail Sales report. USDCAD dropped from 1.3315 to 1.3210. Oil prices finished off their best levels and WTI stayed in an intraday downtrend.

Friday, FX markets were quiet in Asia and Europe. Euro area and EU PMI data was mixed but had little impact on trading. The US dollar opened in New York slightly softer compare to Thursday’s close. However, for the week, the greenback posted gains against everything except for the Swiss franc and the New Zealand dollar.

— Edited by Clemens Bomsdorf

Michael O’Neill an FX consultant at IFXA Ltd.

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Author: Loonieviews

In the past 30+ years, I have been an FX interbank market making trader, a high performing FX and Derivatives Sales person, creator of simple and complex risk mitigation strategies and a manager of high performance FX teams. The Trade of the Day is a culmination of that experience. Retail FX traders have access to a well-crafted and carefully researched FX trade strategy designed to generate FX profits while mitigating losses.

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