Wednesday's Federal Open Market Committee outing saw the US central bank take a slightly more hawkish stance than was expected. Equities took only a minimal hit but the long-term impact on emerging markets could prove far more severe,
Article / 27 May 2016 at 15:25 GMT

Loonie offered as oil consolidates recent gains

FX Trade Strategist /
  • US dollar cautiously bid ahead of Yellen speech 
  • Oil prices approaching stiff resistance 
  • BoC statement may keep USDCAD rangebound

By Michael O'Neill

The US dollar is ending the week with a bit of a bid ahead of Federal Reserve chair Janet Yellen's afternoon speech which is hoped to validate the hawkish rhetoric seen from a number of Fed speakers of late.  

FX activity is extra quiet as those who can make an early escape to enjoy the Memorial Day weekend.

How neutral was the Bank of Canada?

By most accounts, the Bank of Canada statement on Wednesday was neutral. The Canadian dollar squeaked out some gains as there was a faction who were disappointed that the statement wasn’t on the dovish side.

In fact, an argument can be made that the BoC was indeed “dovish”.

Albertan crude

GDP, for instance, has apparently slipped into the negative as the Alberta wildfires 
hit the country's oil-producing region. Photo: iStock 

The statement didn’t mention anything about the impact of the big decline in exports in February and March even though governor Stephen Poloz has repeatedly said that Canada’s economic recovery from the oil price collapse hinges on non-energy exports.

In the April Monetary Policy Report, the BoC downgraded Q2 economic growth to a mere 1%. In Wednesday’s statement the Bank said that the impact from the Alberta wildfires would cut 1¼ points off of Q2 GDP, which puts it into negative territory.

The BoC statement was vague and appeared to be a deliberate attempt to skirt the negative issues overhanging the domestic economy, perhaps hoping that the fiscal initiatives announced in the March budget will lead to economic improvements by the next meeting on July 13. The statement may have read “neutral” but gear-shift is heading toward “reverse”

Canadian trade balance and exports:

Source: Statistics Canada

Oil rally may pause

USDCAD plunged from 1.3188 to 1.2912 when WTI spiked to $50.21/barrel from $48.62/b and then collapsed just as quickly as WTI retreated. Oil prices found support from the May 15 Goldman Sachs report that said the market has shifted from ““nearing storage saturation to being in deficit much earlier than we expected”. 

On Wednesday, the EIA crude stocks change data reported a draw-down of 4.2 million barrels which led to the sharp but short-lived WTI rally.

The WTI technicals are showing signs of fatigue with RSI indicators showing overbought despite the short-term uptrend remaining intact and prices well above the uptrend line which comes into play at $45.10/b. 

In addition, there is strong resistance in the $50-$51.00/b area which should prove difficult to overcome in the absence of a compelling macro story. Intraday, WTI needs to decisively break below the $48.50/b area to suggest that a short-term top is in place and lead to $45-$50/b consolidation.

USOil daily with RSI:
Source: Saxo Bank

USDCAD consolidation ahead

This week’s USDCAD decline from the 1.3187 peak appears to have come to an end with this morning’s break of 1.3050 which will be confirmed on a move above 1.3090. The Canadian dollar negatives are starting to stack up, beginning with a coyly neutral Bank of Canada statement, the prospect of an oil price decline (or at least the rally stalling out), and steadily improving US economic data. 

The latter is behind the slew of hawkish Fed speakers suggesting a rate hike is possible in June or July. That view may be set in stone if Yellen’s Friday speech echoes the hawkish sentiment. At the same time, USDCAD is unlikely to shoot for the moon due to strong resistance in the 1.32-1.3300 area. 

Such being the case, USDCAD may trade within a 1.2900-1.3200 range next week.

USDCAD hourly with expected trading range shown:
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Source: Saxo Bank

The week ahead

The past couple of weeks have been close to a "famine” in the context of major, market-moving data releases. For the coming week, welcome to the feast.

(Unfortunately, the feast won’t begin on Monday due to holidays in the UK and America).

Tuesday is a different story as Australia and New Zealand lead off with some second-tier data ahead of the main event, Eurozone CPI and a host of secondary regional data. The US weighs in with PCE data for April and the Chicago PMI.  The icing on the cake is the month-end portfolio rebalancing flows which point to US dollar selling.

Wednesday, China releases Caixin PMI data. while Australian GDP information is also due. There are a lot of UK data which may get more attention as long as the Brexit polls continue to show the Remain side with a convincing lead.  The key US data release of the day will be ISM Manufacturing PMI

Thursday begins with Australia Trade data which will be overshadowed by the looming European Central Bank interest rate decision and press conference.

On Friday, US nonfarm payrolls will be the star of the show and as usual, FX trading will be muted ahead of the release.

The week that was

The bar was set pretty low in terms of FX trading expectations for this week and for the most part, those expectations were met.

Monday started with the US dollar offered against Aussie and kiwi, a theme that didn’t last past early morning in Europe.  USDJPY sank on news that Japan posted the largest trade surplus in six years and it continued to be sold during the New York session.  

Eurozone PMI data were mixed and EURUSD traded choppily but managed to close almost where it started the week.

On Tuesday, Asia markets fixated on the Japanese finance minister’s apparent definition of a “one-way move in USDJPY; five big figures in two days.

That helped USDJPY recoup all of Monday’s losses while  AUDUSD and NZDUSD were sold and oil prices started to rise. Rising Fed rate hike expectations gave the greenback some backbone supported by strong Housing data.  

EURUSD retreated from 1.1200 to 1.1140 by the close in New York.

Wednesday saw the commodity currencies find a bid in Asia due to higher oil prices and rising equity markets. A better-than-expected New Zealand trade report provided additional support for the kiwi. 

European markets followed the Asian lead and the US dollar was generally soft; USDJPY remained bid. The weak dollar tone continued throughout the New York session. The EIA report of a 4.2m barrel drawdown in crude stocks ignited another bout of oil strength and WTI was soon flirting with $50/barrel. Rising oil prices and a benign Bank of Canada statement sank USDCAD.

Thursday’s Asia session started where the New York session ended; the US dollar was offered, except against NZDUSD. Bearish news on milk prices from Fonterra put kiwi under pressure. Commodity currencies were in demand in Europe with Brent oil making a new six-month high.

In Europe, EURUSD drifted in a narrow range as traders awaited Fed chair Janet Yellen’s speech on Friday. In New York, WTI broke through $50/barrel to reach $50.21, but retreated almost immediately. US Durable Goods looked good but it was mostly due to aircraft orders while the other components were weak. That news took the wind out of the dollar’s sails.

Friday's FX trading was on the subdued side of the equation due to looming long weekends in the UK and the US and Janet Yellen's afternoon speech.

Janet Yellen
It's not even a policy speech, but USD traders will be combing Fed chair Janet Yellen's words for any sign of hawkish or dovish leanings this evening. Photo: Federal Reserve/

— Edited by Michael McKenna

Michael O'Neill is an FX consultant at IFXA Ltd.
John Shaw John  Shaw
Another great piece Mike. Thanks for sharing.
The US is already closed down and the highways busy here in sunny Ohio so watch for USDCAD to slowly drift lower fro the rest of the day I think. 20 - 30 pips maybe. listless.....
Have a great weekend bud.
Michael O'Neill Michael O'Neill
Thanks John, enjoy your Ohio long weekend
Market Predator Market Predator
Nice article Mr. O'Neill. I'd like to read more about portfolio rebalancing issue. "The icing on the cake is the month-end portfolio rebalancing flows which point to US dollar selling." Thanks, enjoy rest of weekend.
Michael O'Neill Michael O'Neill
Hi Market Predator: At the risk of over-simplifying the issue,, i will try to give you the abridged explanation. Month-end Portfolio rebalancing occurs, on the last business day of the month (for many, but not all portfolio managers. Many equity portfolio managers have benchmarks that they need to achieve (exceed)and managers active in foreign markets tend to adjust their currency hedges.based on the 1600 GMT closing FX rates as posted by Reuters/WM

The hedges are increased or decreased based upon the change in Equity market performance between US indices and the other global indices.
Michael O'Neill Michael O'Neill
Month end flows : continued:
For example as of Friday US equity markets have risen about 1.2% suggesting that the value of equity managers US dollar hedges increased, necessitating US dollar selling to bring to bring portfolio hedges back into line.

The calculation of FX flows are far more complex that what I have just described with fixed income portfolio changes playing a role as well. Determining the size of the month end flows is another can of worms as no one bank or institution is privy to all the data.

Even though month end at 1600 GMT is still the most popular time for execution, portfolio managers are pre-dealing to avoid the huge swings that can occur.

I hope this explanation helped
Market Predator Market Predator
Hello Mr. O'Neill, thanks for this explanation, it's more clear for me now. Have a nice day, MP.


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