Loonie Views: 'Money for nothing says the FOMC'
In 1985, the British rock band, Dire Straits, sang "Money for nothing and your chicks for free". If they decided to update the song for 2013, they might be singing "Money for nothing says the FOMC".
Mark Knopfler could have another hit by singing about the Fed. Pic: Shutterstock
The Federal Open Market Committee (FOMC) stunned markets globally when it released a statement that included; "... the Committee decided to modestly reduce the pace of its asset purchases". The initial reaction, as evidenced by the two charts below, was chaos and then the US dollar embarked on a robust rally against all the majors.
EURUSD 1 minute snapshot pre-post FOMC. USDJPY 1 min snapshot pre-post FOMC
Source: Saxo Bank
And there was more good news..
At the end of the day, the US Senate announced that it had passed the budget deal agreed upon by the House last week, greatly reducing the risk of a government shutdown in January. It reduces but doesn't eliminate the risk because both parties now have to agree on how to blow the budget. Watch for new infrastructure projects like stairways to heaven, highways to hell and strawberry fields forever as both parties chew through USD 1.02 trillion dollars.
Equities lead the risk on parade
It might not be cheap money forever, but it is certainly cheap money for 2014 and equities traders voted with their cash, driving the S&P 500 up 1.7 percent and the Dow Jones Index up 1.8 percent. Asian equity markets were just as thrilled led by the Nikkei 225 which jumped 1,6 percent
Chart: World Stock Indexes
The equity markets indicate (at least at this moment) that it is "Risk On" which may be good for some emerging markets but unlikely to help the Aussie or the loonie. Australia has a slew of problems including rising budget deficits, the collapse of the commodity boom and a bank governor actively talking down the currency. Canada is weighed down by a central bank viewed as dovish with some analysts predicting a rate cut if inflation continues to hang below the Bank of Canada's target.
It ain't all unicorns and sunshine
The twin dramas of tapering and the US budget negotiations that have distracted markets for the past six months have been put to bed, at least for the next three weeks, making room for some old fashioned political uncertainty to come back into focus. What about China and Japan sabre rattling over a barren rock in the South China Sea? China has declared it an Air Defense Identification Zone much to the chagrin of Japan and South Korea. The US has stuck its nose into the fray by over-flying the island in fighter jets without any consequences — yet. The Syrian civil war is still raging on with Russia backing the government and the US siding with the rebels. The Iran-US-EU nuclear accord remains a work in progress while Israel believes that Iran's uranium enrichment program is also a work in progress. Israel has been known to act preemptively and ask for permission later. Egypt is still a mess as is Libya and Turkey is undergoing some political turbulence. The Ukraine government is suffering a major backlash from its citizens for selling out to Russia and ditching EU negotiations. There are a lot of places that could upset the equilibrium of the planet and the size of the next FOMC taper pales in comparison.
Is it lights out for the loonie?
It's the season to stuff turkeys but it appears that FX traders want to stuff the loonie as well. After touching 1.0707 back on December 6, the USDCAD has languished within a 1.0575—1.0675 range albeit with a bullish US dollar bias until after yesterday's FOMC statement. With 1.0690 resistance and the previous 2013 high at 1.0707 out of the way, there is only the 38.2 percent Fibonacci retracement of the 0.9410—1.0350 range from 2009 at 1.0800. After that, there really isn't much in the way of resistance until the 1.0850-60 area on the daily charts and you have to go back to May 2010 to find it.
Chart: USDCAD daily with Fibonacci
Source: Saxo Bank
Beware the Grinch who stole profits
The USDCAD has enjoyed a nice bounce from 1.0575 last seen on Tuesday which was even more impressive when you consider the positioning reports suggesting that long USDCAD positions were fairly substantial after jumping in the previous week. Liquidity has been an issue and it will get even worse next week. Canada releases CPI and retail sales on Friday and if these numbers surprise to the upside, the long USDCAD positions may not look as attractive. In addition, EURUSD has been bid for the past month and looks to have turned bearish which could lead to EURCAD selling, while still keeping the medium-term EURCAD uptrend intact. Beware a correction for there is no such thing as 'money for nothing".
Chart: USDCAD 30 minute with correction zone
Source: Saxo Bank