Article / 12 August 2016 at 14:50 GMT

Weak data, rising oil... and the loonie's loving it

FX Trade Strategist /
  • US dollar sinks on weak data
  • Oil prices firm on Opec meeting
  • USDCAD technicals turn bearish

It's been a fine week of birdwatching as the kiwi and then the loonie took flight. Photo: iStock

By Michael O'Neill

The US dollar is ending the week on a down note, having lost ground against all the G10 currencies with the exception of sterling. Hopes for a rebound in Q3 US GDP took a bit of a hit this morning with a weaker-than-expected US Retail Sales report, although it wasn't all bad.  Auto sales were quite strong although 84- and 96-month auto loans remain a questionable practice. 

Today's data also provided fodder for interest rate doves, which helped to undermine the greenback.

Oil rally distorting reality

Oil bears have ceded control of the crude market to bulls. They had driven WTI down from $49.97/barrel, on June 29, to a low of $39.17/b on August 3. Ongoing concerns about rising US crude inventories, increased production, rising rig counts, and a sluggish global economy were behind the move. That all changed with a statement, on Thursday.

Saudi Arabian oil minister, Khalid al-Falih said  "we are going to have a ministerial meeting of IEF in Algeria next month, and there is an opportunity for Opec and major exporting non-Opec ministers to meet and discuss the market situation, including any possible action that may be required to stabilise the market,"

Oil traders scrambled to cover short positions and WTI soared from their $41.00/b Thursday morning low to $44.13/b. 

This oil rally is identical to what occurred in February. At that time, Russia was leading an initiative to get Opec and non-Opec nations to agree to some sort of price support mechanism at a meeting in Qatar. Oil prices rallied sharply and then dropped when members failed to reach an agreement.
At the time, Saudi Arabia Deputy Crown Prince, Mohammad bin Salam said that there could be no agreement without the inclusion of Iran. 

Iran, for its part, said that it had no interest in production caps until they had reached pre-sanction levels.

On August 10, Iranian vice-president Eshaq Jahangiri reportedly stated that "Iran has managed to increase oil production that had been suspended as a result of the sanctions and take back the country's former share of the market."  

There is a school of thought that suggests that the Saudi oil minister didn’t suggest talks to stabilise the oil market without the blessing of the crown prince. If so, and if Iran participates, then an agreement is a possibility.

However, an agreement without production cuts at this point in time doesn’t do anything to cure the existing supply demand imbalance. That imbalance doesn’t look to be getting much better, either. Reuters reported that Iraq just announced an agreement with BP, Shell, and Lukoil to restart investments in oil fields with new production expected in 2017. 

The latest weekly petroleum status report from the Energy Information Administration reiterated that US crude inventories are at historically high levels for this time of year while gasoline inventories remain at the upper limit of their average range. Meanwhile, interest rates are being chopped everywhere to stimulate slowing economic growth.
An Opec and non-Opec nation agreement may merely put a bit of a floor under oil prices suggesting a continuation of the $39-49/b range. The technicals agree. 

WTI is in a minor uptrend while trading above $41.70 targeting the longer term downtrend and the 50% retracement level of the June/August range in the $45.35 area.

WTI (longer-term chart):
Create your own charts with Saxo Trader click here to learn more. 
Source: Saxo Bank 

Loonie riding thermals

The crude oil rally has shifted USDCAD sentiment from bullish to bearish. The failure to break above 1.3200 combined with the subsequent decline below 1.3100 and then 1.2900, has hung a target on 1.2850, the 50% Fibonacci retracement level of the May-July range.  

In addition, today's weaker than expected US data undermined the argument for a rate hike.

The intraday technicals are bearish while trading below 1.3010 and looking for a break of 1.2910 to extend losses. A move above 1.3010 would suggest a period of 1.2920-1.3080 consolidation.

USDCAD four-hour with Fibonacci retracement noted:
Source: Saxo Bank 

The week ahead

This week is shaping up to have even less drama and excitement than the previous week thanks to a void in central bank meetings. The week will likely start off even quieter than usual, due to Assumption Day holidays in France, Italy, Spain, Greece, and Portugal.
This week’s slate of UK data releases may take on a heightened level of importance due to concerns of additional Bank of England action in September. Eurozone data are in the same boat with the assumption being that soft data will prompt the European Central Bank to act in September as well.

US CPI data will be closely watched. Weak results will keep diminish rate hike expectations. The Federal Open market Committee minutes are released on Wednesday.

The week that was

Those FX traders not expecting a whole lot of excitement from this week got it right. For the most part, summer markets and low volumes led to directionless range trading, although there were moments of excitement.

Monday started with Asia buying USDJPY on the back of the strength of the nonfarm payrolls report. Aussie and kiwi shrugged off soft China trade data and pushed higher into the European session. 

GBPUSD traded down on dovish comments frlom a BoE official. EURUSD traded sideways. Oil prices rallied, supported by talk of an "informa" Opec meeting in Algiers in September.

Tuesday, AUDUSD dipped on a modestly softer business confidence survey but recouped all of those losses and more, in Europe and New York. GBPUSD stayed under mild pressure with 1.2952 as the low but retraced the losses by lunch time in New York. 

US economic data was soft. Productivity measures were weaker, labour costs increased and inventories rose. Rising oil prices gave the Canadian dollar a boost.

Wednesday started with Aussie firmer on central bank-speak. Reserve Bank of Australia governor Glenn Stevens appeared to dismiss the chances of negative rates in Australia which is a bit perplexing since the RBA OCR is sitting at 1.5% at the moment.  Why even talk about negative rates? 

EURUSD rallied until the New York open and then gave back all those gains. The day was dull with the highlight being the water in the Olympic swimming pools turning green.

Thursday, the Reserve Bank of New Zealand awoke traders from their slumber, except for those in Japan who had the day off for Mountain Day. The RBNZ cut rates by 0.25%, warned of additional easing to come and complained, as usual, about the high level of the currency.

NZDUSD dipped to 0.7160 on the news and then immediately soared to 0.7345 before drifting lower for the rest of the day and into the New York close. 

GBPUSD dipped below 1.3000 and came to rest at 1.2929 but was unable to get above 1.3000 for the rest of the day.  

US data were not much of an event. The US dollar closed higher against the G10 currencies, with the exception of the Canadian dollar,  ahead of Retail Sales, PPI and Consumer Sentiment data on Friday. 

US equity indices closed at new record highs and oil prices rebounded on comments from the Saudi oil minister. He said that Saudi Arabia would do its part to rebalance the market.

Friday was relatively sleepy until US data disappointed traders. The greenback traded lower into the European close except against AUDUSD.

Autumn at the Brandenburg Gate, Berlin
With US data soft and the euro still higher than the ECB would probably prefer, we will have to wait until we head into autumn for more direction froom the "big two" central banks. Photo: iStock

Edited by Michael McKenna

Michael O’Neill is an FX consultant at IFXA Ltd. 
Dj TinTin Dj TinTin
hope for some upside next week GBPCAD Michael
John Shaw John  Shaw
I've been telling everyone that the USA is in trouble. Big trouble. You can see it on the streets and in he stores here. There was no real recovery from 2009.
Watch now as autos tank. FCA has 96 month 0% financing and everyone else is at 84 months at 0%. Whatever it takes to keep it rolling.
Whoever the next POTUS is, they are going to have a doosey on their hands.
Have a good weekend Mike and thanks for sharing another great article.
Look for USDSCAD to bounce on the 1.29 level. Might even breach the support shortly thereafter.
Those are my dice.
fxtime fxtime
Totally agree on the USA John.
zefy zefy
Michael how do you see correlation between WTI and SP now?
Michael O'Neill Michael O'Neill
Don"t really follow it much so my opinion won't be helpful, sorry


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