Portugal Invaded by Kettle of Hawks
· June 2017 may go down in history as the month central bank doves became hawks
· Canadian GDP meets expectations, supporting BoC’s rosy forecast
· USDCAD decline may be overdone and ripe for a correction
· Quiet week ahead until US nonfarm payrolls on Friday
The hawks were out in numbers this week. Photo: Shutterstock
By Michael O’Neill
USDCAD has dropped by more than 0.0500 points since the Bank of Canada’s U-turn on interest rate policy. It is a rather aggressive move in anticipation of a mere 0.25 basis points increase. The BoC didn’t say anything about the next rate hike being the first in a series. All it said was that it was time to “take the foot off the gas”.
Nevertheless, more than few bank economists have penciled in three rate increases by mid-2018. That is a huge swing considering that just two weeks ago most forecasters had the first Bank of Canada hike sometime in the first quarter of 2018.
Meanwhile, the problem of oil production exceeding demand has not gone away. Oil prices have risen in the past few days, but many believe the uptick came mostly from position adjustments ahead of month-end/quarter-end.
WTI crude oil climbed on Wednesday when the US Energy Information Administration reported a 100,000 barrel/day drop in US production in the previous week. Inventories increased slightly. Traders focused on the production decline while ignoring claims by some analysts that the drop was due to production disruptions caused by tropical storm Cindy.
Reuters reported that Libya is on course to reach 1 million barrel/d production “very soon” and is already producing between 935,000 and 950,000 b/d.
USDCAD has solid support in the 1.2950-65 area, which is the 61.8% Fibonacci retracement of the May 2016-June 2017 range. That level has survived many tests since September 2016.
The drop to 1.2960 from 1.3520 on the possibility of a 0.25 bps rate hike is excessive in a soft oil price environment. The week ahead will be quiet until Friday, suggesting that the time is ripe for a USDCAD corrective rally toward 1.3150.
Source: Saxo Bank
A kettle of hawks blow off steam
June 2017 may go down in history as the month central bank doves turned into hawks. It started with European Central Bank president Mario Draghi, a dove’s dove. On June 8, he came out of the closet as a hawk, or more accurately, an eyas*. He started whistling a positive tune about the outlook for the Eurozone economy and markets heard “rate increase.”
(* eyas: an unfledged bird; specifically a nestling hawk, Merriam-Webster Dictionary).
Then it was Fed chief Janet Yellen’s turn. She hiked rates. It is rather difficult to still be a dove when you are cranking up interest rates. Not only that, the door is still open for a third US hike in 2017.
On June 19, the Bank of Canada announced the end of monetary stimulus, saying it was time to “take the foot off the gas”. Governor Stephen Poloz, who in January said “rate cuts were on the table”, proclaimed on June 20 that “rate cuts have done their work”. His Dr. Jekyll and Mr. Hyde transformation was complete.
Bank of England Governor Mark “Flip-flop” Carney may have felt like he missed the bus. Once described by the chancellor as the “outstanding banker of his generation”, he may have felt that crown being usurped by the ECB’s Draghi. Not being British, he couldn’t keep a stiff upper lip, so he did the next best thing: he changed sides. On June 20, he said “now is not the time to raise rates.” Eight days later he told an audience in Sintra, Portugal that higher rates will be necessary.
The era of easy money is over. Or is it? Are regional economies booming to such an extent that they won’t be disrupted by higher borrowing costs? Has the risk of deflation been beaten into submission?
Global equity markets are at record — or near record — levels and have been steadily rising since 2008. Nothing lasts forever. Perhaps the central bankers’ desire to raise rates, and quickly, is to allow them room to cut when the stinky stuff comes into contact with the whirling blades.
Pena National Palace, Sintra, Portugal. Photo: Shutterstock
The week ahead
It will be a short week in the US and Canada, but the short week will finish with a bang thanks to Friday’s US employment report.
Monday is Manufacturing PMI day. The data could have an outsized impact in the UK and Eurozone thanks to fresh hawkish interest-rate developments and give US rate hike chatter a boost. Canada is closed.
On Tuesday, the American 4th of July holiday will put a damper on global FX trading. AUDUSD traders will be focused on the Reserve Bank of Australia’s interest-rate decision and policy statement. No change in rates is expected, but will the RBA follow the lead of other central banks and give a hawkish spin? GBPUSD traders will contend with Inflation Report hearings.
Wednesday, NZDUSD will react to the global dairy trade auction results, while traders elsewhere and in Europe react to Markit services PMI data. Americans will return to the fray and await the release of the Federal Open Market Committee meeting minutes.
Thursday, AUDUSD is back at centre-stage with the trade report. The rest of the day will be quiet, with traders across the globe waiting for Friday’s US nonfarm payrolls.
On Friday, the US employment report is expected to show a gain of 185,000 nonfarm jobs in June. The Canadian forecast is for a gain of 5,000.
The week that was
Expectations for quiet FX markets until the end of the week proved mistaken, thanks to a blast of hot air from central bankers.
On Monday, a sleepy Asia session gave way to a muddled and messy European session, particularly for EURUSD and gold traders. EURUSD rallied on better-than-expected German IFO data and then sank on news of a right-wing victory in Italian mayoral elections. That was the messy. The muddle came from a “flash-crash" in gold prices.
Apparently a “muppet” got confused between ounces and lots, resulting in lots of gold lots being sold. XAUUSD dropped to 1236.45 from 1253.88 in minutes. Durable goods data was the highlight of the New York session and, as far as highlights go, it wasn’t. It was weaker than expected, but after the usual drama around the data, the rest of the session was anticlimactic. The US dollar ended the day virtually unchanged.
On Tuesday, the antipodeans had a strong start in Asia, but couldn’t keep up the pace in Europe. AUDUSD finished in New York where it started in Asia, while NZDUSD was lower. EUR and GBP demand undermined the pair. USDJPY was choppy, but with a bid tone supported by expectations of hawkish remarks from Yellen during the New York session.
EURUSD roared to life in Europe, rising to 1.1263 from 1.1182 in seconds, after the ECB’s Draghi appeared to change sides. The renowned dove, champion of massive monetary stimulus and deflation foe is now a hawk. Or at least, he is dressing that way. The EURUSD rally accelerated in New York, sinking USDJPY in the process. Oil prices climbed due to month-end position adjustment, supported by USD weakness, which gave USDCAD a lift.
Wednesday, Asia traders keyed in on the delay in the US healthcare bill vote and Draghi’s non-dovish remarks. USDJPY was whippy inside a 111.84-112.40 range and, despite all the chop, opened in New York unchanged from the close.
EURUSD traded sideways in Asia and drifted higher in Europe. It got more exciting when New York opened. A Bloomberg headline suggesting that Draghi’s remarks on Tuesday, were misinterpreted, which sent EURUSD plunging by 0.0085 points to 1.1295. The move was reversed by the end of the day.
USDCAD plunged after a CNBC interview with Bank of Canada governor Poloz, falling to 1.3015 from 1.3140.
The Bank of England’s Mark Carney executed a “patented” flip-flop on interest rates. On June 20, he said it was “too soon to raise rates”. In Portugal, he said “some removal of stimulus may be necessary". GBPUSD rallied to 1.2970 from 1.2820.
Oil traders jumped on the rally bandwagon after the weekly EIA report showed that US crude production dropped by 100,000 barrels per day.
On Thursday, the US dollar drifted lower in orderly Asia and European markets. AUDUSD popped to a three-month peak on rising iron ore prices, A surprise rise in German inflation gave EURUSD a lift, and that trend continued until the New York close. Wall Street finished in the red after a tech stock selloff.
On Friday, FX markets were finishing the week with a whimper. The US PCE inflation data was close enough to forecasts to be ignored, leaving FX ranges intact.
— Edited by John Acher