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Article / 20 May 2016 at 15:30 GMT

Sure thing or sucker's bet?

FX Consultant / IFXA Ltd
  • Canadian data prove to be uneventful
  • Traders cautious about June rate hike
  • Major US data back-loaded to end of next week
By Michael O'Neill

Whenever an action by the Federal Open Market Committee appears to be a sure thing, keep your money in your pocket.

Remember the “Taper Tantrum” of 2013? By June of that year, thanks to numerous speeches and interviews by various FOMC members, markets were so convinced that tapering would begin in September the speculation was focused on “how much” and for “how long?”. 

Tapering didn’t happen. David Hannum’s famous quote about P.T. Barnum’s role in the Cardiff Giant Hoax, “there’s a sucker born every minute” was applicable to traders as well.

It can be easy to get distracted. Photo: iStock

In 2015, markets fretted for the entire year about when the zero interest rate policy would end. FOMC meetings were eagerly awaited and traders were disappointed (at least those looking for a rate hike) after every statement was released. 

After repeatedly announcing that US rates would rise in 2015, Janet Yellen ran out of year and ZIRP came to an end in December 2015.

The FOMC’s December 2015 dot-plot forecast four rate hikes in 2016. Traders jumped all over that view despite Yellen and the Committee’s constant caveats that “rate hikes were data-dependent”. In March, the FOMC added “global economic and financial risks" to the data dependent equation. 

Four rate hikes in 2016 became two and the ghost of P.T Barnum was heard to chuckle.

The last couple of years have seen many instances where the message being delivered by various Fed officials contrasted sharply with Ms. Yellen’s press conferences. This week, we have heard from Federal Reserve of San Francisco president John Williams, Atlanta Fed president Dennis Lockhart, and the New York Fed’s William Dudley. All three were opining about a June/July rate increase.

Despite the hawkish speeches from Fed officials, the CME Group FedWatch tool’s probability of a June rate hike is only 30% while July’s rises to 52%. That may be evidence that the market is running out of suckers.

CME FedWatch tool for June and July:
Source: CME 

Crude and loonie taking a time-out

The Canadian dollar has seen better days and those days were not very long ago. Just a mere three weeks, in fact. Since then, US rate hike chatter and overbought Canadian dollar positions drove USDCAD back to levels that haven’t been since early April. There are an increasing number of FX forecasters suggesting that we have seen the low in USDCAD (1.2462) and that a retest of 1.3500 is likely by year-end.

The tight WTI/ USDCAD correlation evident from January through to the end of April, appears to have gone missing in May. Both USDCAD and WTI are rising. The risk is that WTI may be close to a top for an number of reasons including, additional supply coming back to the market due to the price levels and a return to production from supply disruptions in Nigeria and Canada. 

WTI technicals show strong resistance in the $50-51/bbarrel area and a lot of room to consolidate between $45-50/b.

Today’s Retail Sales report was soft but not totally unexpected following two previous months of gains. CPI rose in line with expectations. Still, it isn’t enough to have an impact on next week’s Bank of Canada meeting. 

Oil and USDCAD rising:
Source: Saxo Bank

USDCAD technical outlook

The intraday USDCAD technicals are bullish while trading above 1.2960. The break of 1.3160 suggests that a short-term bottom is in place and has hung a target on the 1.3300-20 area, representing the 38.2% Fibonacci retracement level of the 2016 range. 

A move below 1.3040 would extend losses back to 1.2960.

USDCAD four-hour:

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Source: Saxo Bank

The week ahead

Next week isn’t a banner week for US data but what data there is, will be closely scrutinised for clues to the Fed’s rate hike intentions.

Monday will see a rash of PMI data in Europe the US but not for Canada which will be closed for Victoria Day. St. Louis Fed president James Bullard speaks and will likely add his voice to the rate hike clamour.

Tuesday will deliver a fair amount of Eurozone data as well as a speech from Reserve Bank of Australia governor Glenn Stevens.

Wednesday, New Zealand Trade data will kick things off in Asia while the German IFO survey may be the highlight of the European session. The Bank of Canada interest rate decision will and the weekly EIA crude stocks report will dictate USDCAD trading.

Thursday, Europe will focus on UK GDP data. It is also a big data day for the US with the release of Durable Goods, Services PMI, Pending Home Sales and Jobless claims.

Friday, the release of US GDP and consumer sentiment may keep Asian and European traders on the sidelines awaiting the release. The impact of the data may be short-lived as it is the start of the first American long weekend of the summer (Memorial Day) and traders will be heading for the doors as early as possible.

At the beach
As satisfying as data analysis can be... Photo: iStock 

The week that was

It was expected to be a fairly slow start to the week and it was... sort of.

On Monday, Asian markets were a bit busier than they normally would be when lot of European nations were closed for holidays (Whit Monday or variations on that theme). China got the ball rolling with weaker than expected Retail Sales, Investment and Factory output data. 

However, what got all the attention was the news that Goldman Sachs had reversed its oil price outlook and now said that demand was starting to outstrip supply. The US dollar ended the New York session mixed with commodity bloc currencies outperforming.

Tuesday, the release of the RBA minutes gave AUDUSD a boost in Asia and the rise in oil prices improved risk sentiment. That sentiment continued in Europe although it wasn’t evident in EURUSD which traded flat. The US data were “as expected” and their impact on FX was minimal ahead of the FOMC minutes due Wednesday. Hawkish Fed speakers on Monday and Tuesday succeeded in getting traders to be concerned about a June rate increase.

Wednesday’s Asian session was about what you would expect ahead of the eagerly awaited US news. FX markets were a tad skittish and tone carried on into the European session. Equities were lower, the US dollar was bid and oil prices were firm. Sterling was the exception. GBPUSD rallied on fresh Brexit polls predicting the “Stay” side handily winning the referendum. 

The FOMC minutes confirmed what the Fed speakers were saying, which was US rates could increase in June. USDJPY soared and EURUSD plunged. WTI prices were further undermined by a surprise build in weekly crude stocks as reported by the EIA.

Thursday, Asia traders reacted to the FOMC minutes and sold Aussie and bought Yen. Europe stayed with the theme but the US dollar was well of its overnight peak by the time New York started. 

New Yorkers bought dollars but that move quickly faded. It didn’t help that the US data was as expected and did not provide any ammunition for either rate hawks or doves. New York Fed president, William Dudley was talking about a June or July rate hike but his remarks had little impact on trading.

Friday ended the way Monday started – sleepily.

Federal Reserve
"As visions of unprecedented Fed policy moves danced in their heads..." Photo: iStock 
Michael O'Neill is an FX consultant at IFXA Ltd.
20 May
John Shaw John  Shaw
Welcome to the Casino bud. Another well written piece. Thanks for sharing.
Have a great long weekend Mike.
20 May
Michael O'Neill Michael O'Neill
Same to you, John.
20 May
Estuardorlemus Estuardorlemus
Great article, have a good weekend Michael.


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