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Article / 29 September 2016 at 7:36 GMT

FX Update: Oil pumps CAD, NOK, dumps JPY

Head of FX Strategy / Saxo Bank
Denmark
  • Risk appetite and petro-currencies pumped higher
  • Fed's credibility shattered, the market is in charge
  • Today’s close will be critical for USDJPY
By John J Hardy

The surprise agreement at the Algiers Opec summit to cut oil production between 500k–1 million barrels washed over the market, pumping risk appetite and the petro-currencies, including CAD, NOK and RUB. On the negative side, the selling was focused on the Japanese yen, as Japan imports virtually all of its energy and after the long period of indecision in USDJPY must have shaken those who put on fresh short positions after last week’s BoJ/FOMC meetings with no progress lower in sight since then. See comments on the USDJPY chart below. 

A cavalcade of Fed speakers was thoroughly ignored by the market late yesterday, with Fed chief Janet Yellen even vainly trying to prop up the likelihood of a December rate hike thoroughly ignored. The Fed has lost all credibility, a process that has been under way for years. It reminds me of the scene in the Captain Phillips movie in which the Somali pirate declares the “I am the captain now.” – the market is the captain now. 

The only way the Fed can regain any credibility is by hiking rates and to stop pretending that forward guidance has any relevance. The Fed is also finding itself in an increasingly hot seat politically, as Yellen faces direct criticism from presidential candidate Trump and now a Republican lawmaker is questioning Brainard’s political connections with Hillary Clinton.  

Draghi faced off against German lawmakers yesterday, countering German criticism of the negative effect of zero interest rates by criticizing Germany reliance on exports and not spending enough domestically. 

Chart: USDJPY
Today’s close looks critical for USDJPY, as the recent high coincides with the prior low around 101.25 and a close above there suggests an upside breakout and a neutralisation of the post-BoJ/FOMC move. But more eventful would be a progression from here above the Ichimoku cloud and through the descending trendline/descending triangle formation in coming sessions.
usdjpy
Source: SaxoTraderGO 

The G-10 rundown

USD – was weaker against commodity currencies late yesterday, but keeping a relatively even keel as the negative focus has been on the JPY after the oil rally. After all, the assumption is that US production responds strongly if oil prices are sustained above $50/barrel.

EUR – neither here nor there, as has been the case for a long time. The inability to rally much despite the easing of the systemic European banking risk meme suggests little conviction among EUR traders.

JPY – the most interesting development is the USDJPY removal of local resistance – watching this for potential for a waterfall of further implications if the pair progresses through the next layers of resistance.

GBP – sterling putting up a fight, as one would expect when risk appetite surges and the JPY is weak. 1.300 is quite the battle zone in GBPUSD, but sterling rallies has of yet been too modest for contrarians to have a technical angle for a rally.

CHF – the risk-on, commodity rally is CHF-negative at the margin. Otherwise, the franc remains a neglected currency and lacks a catalyst when interest rates refuse to budge higher.

AUD – modest contagion into the AUD from the CAD rally, but the key upside swing zone in AUDUSD from 0.7700-0.7750 remains in place for now.

CAD – a kneejerk surge in CAD on the Opec news, but would look for a reversal in USDCAD in coming sessions to indicate that the move does not have legs.

NZD – AUDNZD knocked back a tick after yesterday’s local highs – rally may be neutralised in anticipation of next week’s Reserve Bank of Australia meeting before it can resume.

SEK – with the risk-on bonanza, EURSEK looking a bit uncomfortable above 9.60 and the bears may descend on the pair if we close back below that level in the coming session or two.

NOK – EURNOK swooping all the way down toward the 9.00 area on the production news. With so much energy injected into the currency, we’ll likely need a continuation in oil prices higher to drive NOK stronger – $50/barrel being a possible hurdle.

Upcoming Economic Calendar Highlights (all times GMT)
  • 0755 – Germany Sep. Unemployment Change/Rate 
  • 0830 – UK Aug. Mortgage Approvals 
  • 0900 – Eurozone Economic/Business Climate/Industrial Confidence 
  • 0900 – Eurozone ECB’s Praet to speak 
  • 1200 – Germany Sep. Preliminary CPI 
  • 1230 – US Weekly Initial Jobless Claims 
  • 1400 – Eurozone ECB’s Constancio to speak 

– Edited by Clare MacCarthy

 

John J Hardy is head of FX strategy at Saxo Bank


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