- Loonie sinks as oil declines
- Don't buy the oil hype
- Bank of England will provide next week's drama
Blink, and you'll miss it. Trickery is as old as the hills. Pic: iStock
By Michael O'Neill
USDCAD is comfortably above 1.3000 again, supported by softer oil prices and weaker antipodean currencies. Canada posted a gain of 26,200 jobs in August and the unemployment rate ticked higher to 7%. As usual, the devil is in the details. According to TD economists, although full-time employment was up by 52,000 jobs, on a year over year basis, part-time employment has been entirely responsible for job gains.
The crude oil con
Three Card Monte is a con game. Three cards are moved around rapidly and the “mark” or “sucker” bets that he/she can find the “money card”.
The oil market is playing a version of that game. Instead of three cards you have Russia, Opec and the EIA.
WTI oil prices have rallied 25% since August 1. On August 8, with oil hovering around $40.00/barrel, Opec said that it would hold an “informal” meeting in Algiers on September 27-28. Russia said that it would join in. On September 5, Russia and Saudi Arabia signed an agreement to work together to address global challenges. What does that even mean? Oil prices rallied.
The latest Energy Information Administration (EIA) crude stocks change report showed a huge decline in US inventories. Oil prices rallied.
Meanwhile, there isn’t a whole lot of evidence to suggest that the oil oversupply/falling demand issue that precipitated the oil price free fall in November 2014 has been addressed.
Saudi Arabia and Russia were pumping oil at record volumes. The Saudi’s pumped 10.63 million barrels of crude in August, the second highest amount ever. (July’s 10.67 million barrels set the record) Russia hit a 25-year high.
The 15.51-million-barrel decline in US crude stocks as of September 2 may be a record but is it an anomaly? The US has plenty of oil and they have plenty of oil on hand. Even with the decline, US crude stocks are still 111 million barrels higher than they have been at any time since 1982.
Traders buying into the illusion that Russia and Opec will be able to single-handedly engineer higher prices because they have an agreement to cooperate with each other or that US inventories are rapidly declining are the "suckers" in this con.
Chart: US Crude Stocks since 1982
The week ahead
The week ahead will be hit and miss. Occasional bouts of drama will be interspersed between long periods of boredom. That’s because Fed speakers are gagged ahead of the September 21 FOMC meeting and there isn’t a much in the way of top tier data. Wednesday has retail sales and Friday is inflation. And that is it.
Thursday may be the most volatile day in FX, at least for sterling. The Bank of England interest decision follows a tonne of UK and Eurozone data. The day will start with the Australia employment report.
The week that was
This week had a lot of potential for FX fireworks due to fallout from the nonfarm payrolls report, the conclusion of the G20 meeting in Hangzhou, China and three central bank meetings. It underwhelmed.
Monday, Asia traders walked into the end of the G20 meeting in China and the hangover from Friday’s weak US nonfarm payrolls report. In addition, there was a slew of comments from Bank of Japan governor Kuroda which gave the yen a small lift. Still, the FX action was understated.
The European session was dull although sterling had a moment in the sunshine following better than expected services PMI. Oil prices rallied on a report that Russia and Saudi Arabia had agreed to some sort of production cap. Scepticism about the story caused most of the gains to be unwound. The US and Canada were closed for Labour Day.
Tuesday, the Reserve Bank of Australia left interest rates unchanged. Aussie current account data led to AUDUSD demand and NZDUSD followed Aussie higher. In Europe, EURUSD drifted lower within a narrow band, USDJPY was steady and GBPUSD was slightly bid. Oil prices were back under pressure.
It was a different story in New York. A weaker-than-expected ISM Non-Manufacturing report sent the US dollar tumbling as September rate hike expectations faded. EURUSD jumped to 1.1260 from 1.1150 lows while USDJPY plummeted to 101.80 from 103.40. The US dollar ended the day at session lows.
Wednesday, better than expected New Zealand data propelled NZDUSD to a 16-month high which helped lift AUSUSD and USDCAD, in the process. EURUSD and USDJPY flatlined for the entire day as traders were content to wait for the next day’s ECB policy statement and press conference. Sterling traders didn’t get the memo. GBPUSD tanked on worse than expected UK data that hinted at possible problems from the Brexit decision. The Bank of Canada left rates unchanged and delivered a somewhat dovish statement which drove USDCAD higher. The day ended with a surprisingly large draw down in US crude stocks as reported by API.
Thursday, China trade data beat expectations and Aussie and Kiwi moved higher. The majors went nowhere until the ECB meeting. The ECB left policy unchanged and Mr. Draghi was viewed as somewhat “not dovish”. And the degree of dovish differed depending upon the analyst.
EURUSD rallied on the initial news but completely reversed itself by the European close. No so for USDJPY. It rallied from 101.50 to 102.60 and never looked back. GBPUSD fell to 1.3315 from 1.3370. Oil was front and center at mid-morning in New York.
The EIA reported a huge 15.51 million barrel drop in crude inventories and oil prices soared. Oddly enough, Loonie traders appeared to ignore this development and USDCAD was back to where it started the week.
Friday, markets were disconcerted with news that North Korea set off another Nuclear bomb test. It worked. The US dollar is ending the week on a strong note, with gains across the G10 spectrum helped by hawkish comments from Boston Fed President, Eric Rosengren advocating gradual tightening.
– Edited by Clare MacCarthy
Michael O’Neill is an FX consultant at IFXA Ltd