- Political theatre will be next week's hot ticket and that's not good for the dollar
- Wednesday's FOMC minutes are sure to disappoint those looking for fresh insight
- The May 25 Opec meeting will drive oil prices and USDCAD by default
- Rumoured ECB plan to end negative interest rates may be behind EURUSD upside
- Recent USDCAD upside could get boost from Trump's Nafta renegotiation
By Michael O'Neill
"We've Only Just Begun"
is a saccharine, gag-inducing love song released by The Carpenters in 1970 and played at millions of weddings ever since. It's also what EURUSD bulls are singing today.
EURUSD found its nadir in the waning days of December and early January of this year. Since then, two uptrends stalled, retreated and resumed. A third uptrend has begun and this one has legs.
The EURUSD correction turned into a trend change after round one of the French elections. The downtrend line from the 2014 peak of 1.3990-1.4000 area was broken on April 27 when EURUSD gapped higher, from 1.0775 to 1.0950. The gap has not been filled and in the meantime EURUSD punched above another downtrend line from May 2016 when it traded above 1.1035.
The 38.2% Fibonacci retracement target is 1.1740, suggesting EURUSD has plenty of upside.
In my opinion, a large part of the move can be attributed to the talk that the European Central Bank has reached the point where - whether they admit it or not - they are actively working on a stimulus reduction strategy and an end to negative interest rates.
ECB President Mario Draghi denied any talk about tapering at the April ECB meeting. He also said that there aren’t any plans to raise interest rates ahead of the end of the QE programme. The QE programme is supposed to end in December 2018 but many believe it will be extended.
However, Bundesbank President Jens Weidmann and other German officials are a tad less enamoured with QE and get a lot of the blame for the market's focus on the ECB version of tapering.
Forex traders are reactionary and the mere thought that tapering could become a reality sometime in 2017 spurred EURUSD buying.
EURUSD has also been supported by investment flows. The Dax has risen in concert with
EURUSD gains and with the increasing dysfunction of the White House.
Chart: Daily EURUSD and DAX
Source: Saxo Bank
Loonie, oil and Nafta
USDCAD has finally jumped on the bearish dollar bandwagon. And it is all because of oil. WTI dropped 18.5% in April as stubbornly high US crude inventories and rising shale production saw bullish bets on rising demand and shrinking supply scrapped.
This week’s news that Opec appears ready and willing to not just extend the production cut agreement until the March 2018, but also make bigger production cuts has boosted WTI 14% in May.
USDCAD traders finally took notice. USDCAD smashed support in the 1.3640-60 area and is currently probing major support in the 1.3560 area. If that level breaks, USDCAD could revisit the 1.3250-1.3350 area where there is major support from:
a) long term uptrend line at 1.3250 b) the 200-day moving average at 1.3288 c) the 100-day moving average at 1.3340.
However, US President Donald Trump is no longer interested in “tweaking” the Nafta agreement like he told Canada’s Prime Minister Justin Trudeau. He has set the table for a full-blown Nafta renegotiation, or Nafta ll. There should be plenty of USDCAD buyers at lower levels the closer we get to that date which will limit USDCAD losses.
Chart: Daily USDCAD
The week that will be
If you are hoping for a reprieve from the drama of the US political stink show next week, you won’t get it.
Monday, Asia markets will be vulnerable to any weekend press reports around Trump, the White House and Comey. Japan releases Merchandise Trade, and Leading indicators. After that, there isn’t much of anything. Canada is closed for Victoria Day.
Tuesday, Asia trading will start off slow. Activity will really pick up in Europe due to a deluge of data including German GDP, Markit Manufacturing PMI and the IFO survey. Elsewhere, Eurozone Manufacturing PMI and the UK Inflation report hearings. Markit PMI data and New Home Sales reports are due in New York.
Wednesday could be wild. New Zealand kicks things off with the Trade Report and then it gets dull until New York opens. US Politics will be center stage as former FBI Director James Comey is expected to testify before the House Oversight Committee.
The Federal Open Market Committee minutes from the May 3 meeting get released, but they could be disappointing. The Bank of Canada interest rate and policy statement is also on tap.
Thursday, Asia gets to deal with the fallout from the FOMC minutes and US politics. Kiwi traders will be focused on the domestic budget release. Europe will be quiet as large swathes of the Eurozone are closed for Ascension Day. Sterling may be extra volatile due to GDP data being released in a day with reduced liquidity. The US session will likely be subdued with traders sidelined awaiting Friday’s major data.
Friday, Japan inflation will be the focus in Asia while European traders will be waiting for the US data. US GDP, PCE, Durable Goods, and Michigan Consumer Sentiment could mean a big finish to the week.
The week that was
The lack of top tier US data this week suggested that FX trading would be choppy and rangebound. It was choppy; rangebound, not so much.
Monday started with the dollar hungover from the previous Friday’s less-than-stellar US Retail Sales and inflation reports. Another North Korea nuclear test was met with a shrug. Chinese economic data were mixed and a non-factor. The US dollar lost ground in Asia and Europe but recouped those losses in New York. EURUSD finished the day with a bit of a bid while USDJPY was offered.
Oil prices rallied on news that Russia and Saudi Arabia were considering extending production cuts until March 2018.
Tuesday, the Trump circus came to town. Again. This time there was an uproar over his alleged leaking of classified information to Russia. EURUSD rallied, cracking 1.1000 and then weak US data exacerbated the move. GBPUSD rode the CPI rollercoaster, rising into the data and diving after it was released. AUDUSD shrugged off minor disappointment from the RBA minutes and together with NZDUSD, bopped then weaved and finished the day in New York where they started.
Wednesday, the Trump circus came back for an encore and what an encore it was. Allegation’s that the president interfered in an FBI investigation, which may have played a role in the sacking of FBI Director Comey, roiled financial markets. Global equity indices tumbled,
EURUSD shattered the 1.1100 barrier and the floor fell out of USDJPY which dropped to 110.50. The Canadian and Australian dollars under performed and both currency pairs lost a little ground by the end of the day in New York.
Thursday, USDJPY hit 110.32 by the New York open and then rallied to 111.30 by the end of the day. EURUSD peaked at 1.1170 in Asia and dropped back to 1.1090 at the New York close. US economic data was firm and Cleveland Fed President Loretta Mester was at her hawkish best, giving some support to the greenback.
UK Retail Sales in April were a healthy 4.0% (forecast 2.0%) and GBPUSD soared from 1.2938 to 1.3045 on the news. GBPUSD plunged 0.0100 points in the New York afternoon. It may have been a delayed reaction to an ECB official’s comments about the viability of a Euro clearing center in a non-EU country.
Dollar buyers emerged after a video surfaced which reportedly has the former FBI director denying that he was pressured into ending his Russia investigation.
US dollar sellers returned in Europe and EURUSD hit 1.1187 supported by Eurozone data. USDJPY trade in a tight range. Sterling recouped all of Thursday's "flash-crash" losses. The WTI oil price rally stalled just above $50.00/barrel which also halted the USDCAD decline at 1.3555.
The seemingly never-ending carousel of scandals swirling around the US president - and his increasingly capricious responses to them - are likely to continue to influence the markets next week. Photo: Shutterstock
— Edited by Jack Davies