Article / 14 October 2016 at 14:49 GMT

US dollar remains firm as oil hangs on to gains

FX Consultant / IFXA Ltd
  • US retail sales deliver expected results, Michigan consumer confidence doesn't
  • Oil price rally may be running out of steam (oil?)
  • Next week's central bank meetings may deliver some FX excitement
Michigan theatre - maybe one can get surprised there as well. Photo: iStock 

By Michael O'Neill 

A nasty surprise from the Michigan Consumer confidence Index (Actual 87.9 vs. forecast 91.9) took the bloom off the USD and led to profit taking selling. Still, the USD is finishing the week with healthy gains against the G10 currencies. Only the AUD and CAD are higher on the week and that is because of the oil price rally.

Oil rally: Real or a mirage?

Oil prices have been on a tear. WTI has been in a medium term uptrend since March and an intraday uptrend that began in the middle of September. At that time the low was $42.47. It rallied to $51.57 on October 10, a gain of 21.4%.

The reality is that the rally began when Opec announced a production cap agreement at a meeting in Algier, in September. It accelerated on October 10 when Russia's President Vladimir Putin agreed to join the party.

The Saudi oil minister, Khalid Al-Falih, (certainly “talking his book”) predicted “it is not unthinkable that we could see $60.00 by year end” according to Bloomberg. BP’s President, Bob Dudley got into the act suggesting that oil prices should be in the $55-$70/b region for the rest of the decade. Both comments led to oil price gains.

The mirage is that there isn’t any evidence that the current state of oil over-production in the face of dwindling demand has diminished. Arguably, it has gotten worse.

Adding oil to the fire? Photo: iStock
Opec announced that crude oil output in September reached a new record of 33.64 million barrels per day. World oil production reached 97.2 mb/d, a 200,000-barrel increase from August. The Paris based International energy Agency (IEA) said that for the rest of 2016 oil demand will decline to 1.2m b/d from the 1.3m b/d forecast they made in September. Making matters worse, the predict that the oil market will be oversupplied throughout the first half of 2017.

The International Monetary Fund downgraded its global growth forecast to 3.1% from 3.3% on October 6 citing modest US growth and a meager recovery in the Eurozone.

WTI snapped the uptrend line from September 28 when prices broke below the $49.90-$50.10 level, suggesting that a test of support at $49.20 is in the cards. If this level gives way, WTI should see a quick return to the $46.40 zone.

Chart OILUS continuous:


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The week ahead

Next week promises a little something for traders in all the regions, although market moving US data is rather light.

Monday will start with Asia digesting Janet Yellen’s Friday afternoon speech in Boston. If it is benign, there isn’t a lot of anything to stoke trading fires until Europe opens. Eurozone CPI will be closely watched especially because of the European central bank policy meeting on Thursday.

Tuesday, Aussie traders will contend with a speech by Reserve Bank of Australia Governor Phillip Lowe and the release of the RBA minutes. Kiwi traders will keep their eye on domestic inflation data. There is a lot of UK economic data for sterling traders to ignore since Brexit is the only thing that matters. US CPI data could really boost US dollar demand if it surprises to the upside

Wednesday, the RBA’s Mid-year Economic and Fiscal Outlook is released, giving Aussie traders something to read if the China data (Retail Sales, Industrial Production and GDP) doesn’t wreak havoc in the markets. The Eurozone will be quiet as markets await the ECB policy meeting the next day. The Bank of Canada delivers its policy statement which risks undermining the Canadian dollar if it has a doveish bent.

Thursday, the Asia session will deal with Australia employment data. In Europe, UK data (retail sales) will be ignored as all the attention will be on Mario Draghi and the ECB.

If Thursday’s ECB meeting doesn’t detonate any bombshells, Friday will be very quiet.

The week that was

The bar was set fairly high for FX excitement this week. That was due to a holiday in Japan and a partial financial market holiday in the US on Monday and void in tier one data releases until Friday’s US retail sales and consumer sentiment reports. Even the mid-week release of the Federal Open Market Committee minutes wasn’t getting hearts aflutter. Fortunately for traders, the high bar was not much of a challenge.

Monday’s Asia session had a lot to contend with. China traders returned to work after a week long holiday and promptly drove the yuan to a six year low. Traders were digesting the ramifications to the rate hike debate from Friday’s lower than expected nonfarm payrolls report and the results of the second Clinton/Trump debate. The initial move was to sell EURUSD and USDJPY. By the Europe walked in, Hillary Clinton was viewed as the debate winner. The US dollar rallied. 

The US market wasn’t a quiet as one would assume on a partial holiday. Russian President Vladimir Putin saw to that when he announced that Russia would join with Opec in a production freeze or production cut. Oil prices screamed higher and USDCAD bulls nearly choked on their turkey.

Tuesday, the Assistant Governor of the Reserve Bank of New Zealand opined about the necessity of a weaker Kiwi. He got it. NZDUSD dropped from 0.7142 to 0.7640 by the end of the New York session. Asia traders continued to sell EURUSD and buy USDJPY. Oil prices traded sideways.

Sterling was uneventful until Europe started. That’s when a newbie Bank of England MPC member made an unflattering comment about the pound. Sterling had a “Brexit” moment and plunged to 1.2090 from 1.2330. The US dollar ended the New York session on a positive tone supported by rising US rate hike expectations.

Wednesday, the spectre of the FOMC minutes (released in the New York afternoon) haunted traders for the entire day. They feared that the minutes might be a tad more hawkish than expected which supported the US dollar in Asia, Europe and New York trading. For the record, they weren’t. 

In Europe, Sterling traders were thrown a life-line by UK prime Minister May. She agreed to a parliamentary debate on Brexit and GBPUSD rallied. The New York session ended with a firmer US dollar as most concluded that the minutes left the door ajar for a December rate hike.

Thursday, FX markets were skittish. It started when China posted ugly import and export data. That  news fed fears that additional China economic weakness could spill over into other nations and prevent the US from increasing interest rates. 

Sure, it’s a bit of a stretch but the US dollar had rallied strongly since the beginning of October and traders apparently wanted an excuse to book some profits. Another strong US jobless claims report may have helped to ease some of the concerns. The New York session ended with traders looking ahead to US Retail Sales and consumer confidence data.

Friday saw a more positive tone in Asia FX markets thanks to better than expected China CPI data. That news gave AUDUSD a lift. USDJPY traded higher throughout the day. In Europe, Mark Carney’s comments stating that the BoE “wasn’t indifferent” to the level of sterling spooked GBPUSD bears and the currency recovered all of its overnight losses. US Retail Sales data was as expected. Traders were awaiting a Janet Yellen speech in the New York afternoon.

— Edited by Clemens Bomsdorf

Michael O’Neill an FX consultant at IFXA Ltd. 


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