Article / 11 August 2017 at 15:12 GMT

In FX, if it hurts, you're losing

FX Trade Strategist / www.Loonieviews.net
Canada
  • Trump's quarrel with North Korea turned the week into a lively affair
  • US CPI marginally misses forecasts
  • Inflation-fueled FX trading flurry fades rapidly
  • 'Pain trade' for USDCAD is a break of 1.2770
  • Plenty of economic data and FOMC minutes in the week ahead
Weightlifter
 'No pain, no gain,' they say. But in forex markets, 
pain is unwelcome. Photo: Shutterstock

By Michael O'Neill

This morning's US inflation data did nothing to help clarify the outlook for US interest rates. The US Federal Reserve has indicated that inflation readings would be temporarily soft. They got that right. But the definition of "temporary" is unclear.  The US dollar retreated rapidly on the data, but the losses have been pared back substantially, leaving traders no better off than they were before the release.

The pain trade 

Fitness buffs like to say "no pain-no gain" about their training regimen, The phrase needs to be altered to apply to FX trading. Because if it hurts, you’re losing. And USDCAD traders may be about to experience that phenomenon.

The Bank of Canada announced a shift to tightening mode on June 12 and followed up the news with a rate increase a month later. USDCAD was at 1.3465 on June 12. 

At the time, the Commitment of Traders report for the week to June 6 showed that speculators were net short 94,500 CAD contracts. WTI crude oil prices were trading at $45.25/barrel. This week, the COT report for the week to August 1, showed speculators were net long 40,600 CAD contracts. On Aug. 1, WTI was trading at $49.00/b. USDCAD hit 1.2415 on July 26.

After bottoming out at 1.2415, USDCAD has rallied steadily and tested resistance at 1.2750 on August 10, which held.

It didn’t rally in a vacuum.  Aussie, kiwi, Swiss franc and sterling all lost ground, as did WTI prices even after the Fed in mid-June raised rates for a second time in 2017. The Fed has a third rate increase penciled in for 2017, but the August 11 inflation data didn’t do it any favours.

USDCAD traders are ignoring the soft US dollar profile. USDCAD has been consolidating recent 
gains within a 1.2650-1.2750 range, but with an upward bias. Arguably, the speculative community is still short USDCAD, and stop losses lurk above 1.2770.

The "pain trade" for USDCAD is a break of 1.2770. The daily chart shows a clear "inverted triangle" formation. The distance from top to bottom is 0.0345 points (1.2415-1.2750). Theoretically, a break above 1.2750 implies a 0.0345-point rally, which would lead to 1.3095. Something to think about.

USDCAD daily chart highlighting "inverted triangle"
rates
 
Source: Saxo Bank

The week ahead

There will be plenty of top-tier economic data releases in the coming week to add some fundamental rationale to currency moves, and that may temper the impact of the Trump-North Korea spat. The week is also prime vacation time for traders, which hurts liquidity.

On Monday, Asia could be busy. On the roster are New Zealand retail sales, a speech by Reserve Bank of Australia assistant governor Christopher Kent followed by the RBA policy meeting minutes, Japan second-quarter GDP and China retail sales and industrial production figures. There isn’t any meaningful data from Europe and the US.

On Tuesday, Asia will be quiet and Europe not much better, with only German GDP due. The UK will be centre stage, releasing retail sales, PPI, home prices and CPI. It’s a big day in the US. The US dollar can catch a bid if retail sales are higher than expected (forecast +0.4%). 

Wednesday, Eurozone GDP (forecast 0.6%) and UK employment (unemployment rate forecast unchanged at 4.5%) will dominate the European session. US housing data will be overshadowed by the release of the Federal Open Market Committee meeting minutes in the afternoon.

On Thursday, the antipodeans will be busy with New Zealand PPI data and the Australia employment report job (gains forecast 20,000). USDJPY traders will key in on Japan trade data. Europe will get UK retail sales followed by Eurozone inflation and trade data. US data includes capacity utilisation and industrial production.

Friday should be quiet in Asia and Europe. US data include the labour market conditions index and University of Michigan consumer sentiment survey. Canadian CPI will likely be flat.

The week that was

All of Monday was on the quiet side. Reserve Bank of New Zealand inflation data failed to have a lasting impact on kiwi, and both NZDUSD and AUDUSD traded in narrow bands. USDJPY barely budged. Sterling was a little livelier. GBPUSD spent the Asian and European sessions in a 1.3030-58 range, supported by housing data, and the New York session in a 1.3015-35 band when the housing data support faded. EURUSD trading was a nonevent. Canada was closed for a holiday, but USDCAD was bid despite rising oil prices. Fed officials James Bullard and Neel Kashkari struck dovish notes in speeches, as usual. The Dow Jones Industrial Average finished with its ninth consecutive record close.

On Tuesday, Asian and Europe trading was even quieter than on Monday. Upbeat Australian business confidence and business conditions data lifted AUDUSD. China posted weaker-than-expected trade data, which didn’t cause much of a stir. In Europe, EURUSD stayed bid while ignoring a dip in German exports. Sterling was kept on the defensive by a resurgence of Brexit headlines. New York traders were jolted awake by the Job Openings and Labor Turnover Survey (JOLTS) report. A 416,000 gain sparked a bit of a USD rally that lasted the rest of the day. The Dow finished with a loss, ending its nine-day winning streak. President Trump started taunting North Korean leader Kim Jong-Un when he threatened North Korea with "fire and fury".

Wednesday, the antipodeans dipped after China CPI was a tic lower than forecast, but the move was reversed by the start of New York trading. The big movers were the Japanese yen and Swiss franc. Trump’s "fire and fury" warning was followed by North Korea naming Guam, which is a US Pacific territory, a "preemptive strike" target.  

USDJPY dropped to 109.55 from 110.40 at the New York open. USDCHF sank to 0.9615 from 0.9750 in the same period. EURUSD was rangebound, and sterling was in its own world. During the New York session, US secretary of state Rex Tillerson soothed market fears about imminent nuclear war when he said words to the effect that nothing has changed, Americans can sleep soundly. Oil prices bounced in a $48.85-$49.75/barrel band between Tuesday and Wednesday, torn between declining US crude inventories and concerns about higher production elsewhere. The USD finished the day mixed and near its opening levels.

On Thursday, Asia opened with the Reserve Bank of New Zealand leaving its overnight cash rate unchanged at 1.75%. The RBNZ's outlook for rates wasn’t as dovish as expected. Then the assistant governor John McDermott warned that NZDUSD needed to adjust lower. It did. NZDUSD fell to 0.7255 from 0.7365 in Europe, but drifted back to 0.7284 by the close of New York trading.

The rest of the overnight session was far less exciting. USDJPY reluctantly recouped some of 
the risk-aversion losses, but struggled to stay above 110.00. USDCHF traded up to 0.9675 by the New York open and then started to slip, closing at 0.9630. New York got entertaining. More inflammatory comments from Trump about North Korea spooked equity markets. The Nasdaq dropped more than 2% and the S&P 500 was down 1.45%. Oil prices broke above $50.00/b, but finished down over 3% on fresh oversupply concerns and falling equity prices, in a thin market

Friday's Asian and European sessions were quiet ahead of the US inflation data. CPI was slightly worse than expected, but the initial USD selling quickly abated, and the greenback recovered somewhat.

Google Guam
 You, too, may have Googled Guam this week. Image: Google


— Edited by John Acher

Michael O'Neill is an FX consultant and currency strategist at Loonieviews.net 

11 August
fxtime fxtime
Totally agree on the warnings for usdcad mate.....the fitness no pain no gain comment though....well I have had the pain recently but not the added fitness so obviously I have missed out on that bit of ''fun''.
Have a good weekend Mike. Great article of yours as always.
11 August
usxau usxau
I hear you both loud and clear! LOL
11 August
Michael O'Neill Michael O'Neill
Yea but you are a bike racer. So obviously you are already fit. The pain is just to remind you what not-so-fit people have to endure., :)
11 August
fxtime fxtime
ex racer and no longer fit :-(
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