Yields on core European bonds went for a slide yesterday as prices rose in response to the ECB's decision to leave its QE programme unchanged – for now at least. Elsewhere, the USD continues to make gains on its peers.
Article / 16 August 2016 at 14:48 GMT

Has William Dudley made the right call?

FX Consultant / IFXA Ltd
  • US dollar still rangebound vs. the majors
  • US data contradicts William Dudley
  • Loonie may have more upside
Hunting season has opened. Pic: iStock 

By Michael O'Neill

As you stare at your computer screens for hours on end, day in and a day out, it is easy to get complacent and think that there is “nothing going on” in FX markets. And for long-term, macroeconomic traders, there really isn’t.

It is a different story for day and short-term traders. There is enough chop and churn to keep them entertained.

Shadow dancing

For the past week, the top tier economic data cupboard looked very similar to Old Mother Hubbard’s when she went to fetch her poor dog a bone. Sure, the Reserve Bank of New Zealand cut interest rates, but that was expected. Even Eurozone GDP data was mostly ignored because the European Central Bank meeting is still a month away.

The US retail sales data was considered weak and in the absence of any other offsetting major economic reports,  empowered US dollar bears. 

This morning’s US CPI data was the headliner for US data this week. It wasn’t much. July CPI, month over month was flat while core CPI edged higher by 0.1%. That news puts another wet blanket on September rate hike prospects and should have kept the downward pressure on the dollar.

However, New York Fed President, William Dudley didn't see it that way, or didn't care.  He declared “Bear Hunting Season” open when he told FOX Business Network that “it’s possible to hike rates at a mid-September policy meeting” and added “we’ll have to see where the data falls (and also watch) the broad supports for the economy”.

EURUSD plunged from 1.1320 to 1.1250 and USDJPY bounced from 99.55 to 100.45.

The reality is that the majors have been locked in well-defined ranges since June. Even GBPUSD has been in a range, post Brexit. Federal Open Market Committee indecision may have cast a shadow across the FX spectrum but day and short term traders are dancing up a storm in those shadows.

FX majors locked in ranges
Source: Saxo Bank
Dudley Do-right of the Fed

Dudley Do-Right, is described in Wikipedia as a dim-witted, but conscientious and cheerful Canadian Mountie. Those words would not describe New York Fed President William Dudley. He is obviously a very accomplished, well-educated individual with a wealth of market experience.
So why is he deliberating injecting additional uncertainty into markets? Fed chief Janet Yellen has been harping about a data dependent Fed since she was named chair. Last week, former Fed Chair, Ben Bernanke wrote that markets should pay less attention to Fed speakers and more attention to data.

His comments this morning suggesting a September rate hike, caused a bump in the September rate hike probability to 18% from 9%, according to the CME FEDWatch tool. Today’s US data doesn’t support a move.

In the run-up to the June FOMC meeting, various Fed speakers, including Dudley set the stage for a rate increase. It didn’t happen. Why should markets believe him now?

Loonie got new wings

It was only a week ago that FX traders and analysts were looking for USDCAD to break above 1.3200 and head to 1.3300-1.3400 area. Oil prices were in a bear market and the nonfarm payrolls report had visions of rate hikes dancing through their heads.

And just like in February, the doom and gloom turned to sunshine and unicorns. A report that Saudi Arabia was encouraging a dialogue at an informal meeting in Algiers on September 26-27 sparked a rally in WTI from a low of $39.15 on August 3, to $46.17 on August 16.

USDCAD broke major support in the 1.3090-1.3100 area and then again at 1.2990. The rally was on. This morning, Canadian Manufacturing Sales data surpassed forecasts which provides support to the Bank of Canada’s 3.7% GDP forecast in Q3. Unfortunately, Dudley’s comments overshadowed this report.

Nevertheless, the USDCAD rally halted well below the intraday downtrend line at 1.2910 and while that line remains intact, additional USDCAD weakness is likely.

USDCAD technical outlook
The intraday USDCAD technicals are bearish while trading below 1.2910 supported by today’s move through 1.2855, representing the 50% Fibonacci retracement of the May-July range which now targets the 61.8% Fibonacci level at 1.2760

Chart: USDCAD 4 hour with Fibonacci
Source: Saxo Bank

– Edited by Clare MacCarthy


Michael O’Neill is an FX consultant at IFXA Ltd

16 August
John Shaw John  Shaw
Another well written piece Mike. Thanks for sharing.
Doubtful a rate hike that close to November. .25%................ big effin deal!!!!! they may raise it just to find they have to cut it again.
Look for more downcast numbers in Canada and the USA as autos stall and Europe remains deflationary.
I actually see CAD strengthening over the coming months unless of course a US hike does come in and there is the high chance of Canada cutting rates as we simply mire along.
All such factors will blow the needle the other way.
Those are my dice bud.
16 August
Michael O'Neill Michael O'Neill
!.2600-1.2900 is a likely range and we are very close to the exact middle.
16 August
Jim Earls Jim Earls
Just for the record-Not one 25bps increase this year through 5 meetings so far-the projection in 2015 was for 4 increases.
16 August
sam wightman sam wightman
Hi Michael
Can you pass on a message to Mr Dudley.
''It`s better to be regarded a fool than to open your mouth and remove all dought ''
16 August
Michael O'Neill Michael O'Neill
LOL: You better do it Sam. Being from Canada, President Trump might subject me to that "aggressive vetting" that he's talking about. I think he means waterboarding.
16 August
sam wightman sam wightman
16 August
sam wightman sam wightman
sorry about spelling mistake


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