Article / 07 June 2016 at 14:40 GMT

Central banks playing dice with world markets

FX Consultant / IFXA Ltd
  • Ivey PMI print undermines loonie
  • Yellen dismissive of payrolls report
  • Canadian employment data will be incomplete

By Michael O'Neill

George R.R. Martin’s Game of Thrones is an epic tale of war and intrigue among seven kingdoms, each vying for supremacy over one another. In the G10, however, we have seemingly embarked on a "game of throws" in which central bankers cast dice to determine policy actions.

This, it appears, will proceed until they crap out; at this point, we all lose but they get to keep playing.

Playing dice with the market
Nice work if you can get it. Photo: iStock

For the past month, Federal Reserve officials trotted across the land and the globe extolling the necessity of a rate hike “in the coming months”, all the while implying that market expectations for such a move were too low. Prior to that, they harped incessantly about rate hikes being “data-dependent”.  FX traders started to listen, trusting that perhaps this time the Fed wasn’t leading them astray.

Then the Fed crapped out. This time in the form of a nonfarm payrolls report that was just plain ugly. And to add insult to injury, the previous two reports were revised downwards. 

Even a drop in the unemployment rate was scoffed at, as the improvement was due to a decline in the participation rate...

Change in US employment:
Source: Federal Reserve Bank of St. Louis

After that report, it seemed reasonable for market participants to rule out a rate hike for June and even July...  not so fast. In the game of throws, when a central bank rolls “snake eyes”, it gets to roll again, and that is exactly what Fed chair Janet Yellen did on Monday.

In her speech to the World Affairs Council of Philadelphia, she seemed dismissive of the May employment report. She said. “Although this recent labour market report was, on balance, concerning, let me emphasise that one should never attach too much significance to any single monthly report. Other timely indicators from the labour market have been more positive”.

Yellen, by most accounts, delivered a fairly upbeat assessment of the US economy while in the City of Brotherly Love. She repeated that more gradual rate hikes were coming over time while noting that global headwinds were easing. Her sentiments were echoed by Atlanta Fed president Lockhart and Boston Fed president Rosengren on Monday and Cleveland Fed president Mester on the weekend. They all cautioned against reading “too much” into one data point.

Goldman Sachs analysts have bought into the Fed argument. According to Bloomberg, Goldman says that there is a 40% chance of a Fed rate hike in July. The CMC FedWatch tool, however, says it's only 25.8%.

FX traders have voted with their wallets and the US dollar has declined against the majors, led by the Aussie and CHF.

Change in USD v. majors; pre-NFP until  today (June 3, 1229 GMT to June 7, 1330 GMT):

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Source: Saxo Bank

Poloz and the dice

Bank of Canada governor Stephen Poloz is also at the craps table. His idea of rolling the dice is to stand and watch. The Bank of Canada’s mandate is “to promote the economic and financial welfare of Canada” and Poloz has apparently determined that the best way to accomplish those objectives is to wait and see how the economy heals itself after the Fort MacMurray wildfires. 

Stand and watch
Standing and watching, of course, is a time-honoured Canadian tradition. Photo: iStock

In his press conference on Saturday following a lecture at the University of Ottawa, Poloz said that it is hard to predict when the Canadian economy will rebound from the fires and forced evacuation.  

Those aren’t the words of a man ready to adjust monetary policy anytime soon.

Canadian employment report due Friday

Friday’s Canadian employment report should not be much of a factor for FX traders. If it is, the affect should be fleeting. 

The impact of the Fort MacMurray wildfires and city evacuation has created a ton of complications for Statistics Canada. Most economists suggest that they will just omit Fort MacMurray from the survey.  Regardless, the fact that the data are incomplete should make the results meaningless and therefore a non-event. 

For what it's worth (and it's not worth much), the forecast is for a gain of 3,800 jobs.

USDCAD technical outlook

The USDCAD technicals are bearish while trading below 1.2860 and we are looking for a move below 1.2738 (61.8% Fibonacci retracement level of May range) to extend losses back to the May low of 1.2462. 

A failure to break below 1.2730 should lead to 1.2730-1.2960 consolidation.

USDCAD hourly:
Source: Saxo Bank

— Edited by Michael McKenna

Michael O'Neill is an FX consultant at IFXA Ltd. Follow Mike or post your comment below to engage with Saxo Bank's social trading platform.
07 June
John Shaw John  Shaw
The Fort MacMurray wild fires are the perfect excuse cards for about 9 - 12 months on CDN data. LOL
07 June
John Roberti John Roberti
Michael, the market does not seem to attach any importance to Ivey PMI data despite the poor showing.. You seem also globally optimistic regarding the economic performances of Canada! Do you have any information regarding the restart of oil production in Alberta?
07 June
John Shaw John  Shaw
My 2 cents say the Alberta oil companies are happy to be down at this point in time. They are taking their sweet sweet time to get things restarted. That is for sure.
07 June
Michael O'Neill Michael O'Neill
Hi John. Ivey is notoriously volatile and therefore most mainstream economists dismiss it. I would as well except I have been flayed too many times on an offside print. However the reactions rarely last

As to oil, Suncor has been restarting production for a couple of weeks as have the others. Most oilsand facilities were untouched and can be run from camps on site.

Still it will be a tedious process to.get back 100% quickly
07 June
Michael O'Neill Michael O'Neill
Hi Mr. Shaw. I don't think the oilsands guys want to delay production any longer than they have to. The need the cash flow to service debt and overhead. BTW. Suncor says that oilsands operations will be back at full production by the end of June. I


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