Article / 26 August 2016 at 14:28 GMT

Wishy-washy Yellen doesn't offer anything new

FX Consultant / IFXA Ltd
  • Initial strong reaction quickly faded
  • Oil rally may be just wishful thinking
  • Loonie at middle of five-month range
 Apparently, a place where cowboys and cowgirls meet. Pic: WIkimedia Commons

By Michael O'Neill

Janet Yellen's Jackson Hole speech delivered something for rate hawks, at least that's what the initial FX reaction looked like.  However, that move is already starting to fade as traders realise that her speech wasn't all that hawkish.  Sure she said that she believes that the case for an increase in the Federal Funds rate has strengthened but she also said that the economic outlook is uncertain. That is just more of the wishy-washy Fed speak that the Federal Open Market Committee passes off as insight.

Loonie nearing half-way mark-again

USDCAD has bounced within a 1.2500-1.3250 band since March.  That is a 0.0750-point range and the 1.2875 is the middle.  A decisive break below that level would target 1.2750, the 61.8% Fibonacci retracement level.

The Bank of Canada has been on the sidelines and is expected to remain that way at the September 7 policy meeting.  The BoC expects and big bounce in Q3 economic growth supported by the previously announced fiscal stimulus programs and will be content to “watch the incoming data”.

Meanwhile the two key drivers of USDCAD direction are oil prices and the Fed’s intentions.  For all the most part, WTI has traded within a $39.00-$51.00 range since April.  The uptrend from the August low of $39.15 remains intact while prices are above $45.85.

Arguably, if the $45.00-$5100 range holds, US interest rate sentiment will have the biggest influence on USDCAD direction.

As long as the expectations are for the Fed to boost rates by the end of the year, USDCAD losses should be limited.

Chart: USDCAD daily
Source: Saxo Bank

Why can’t we be friends

War sang that question as the title track of their 1975 album.  It is the same question that US President Obama is asking Iran’s President Hassan Rouhani after the USS Squall fired flares at Republican Guard vessel. 

The US blames Iran for violating International waters but didn’t say how America would react if the Republican Guard ship was touring off the coast of Washington D.C.  That little skirmish added $1.00 to the price of a barrel of WTI oil on Thursday.

Turkey is back in the headlines. On Wednesday, they invaded Syria, with help from Uncle Sam in an all-out attack o Daesh strongholds. Turkey also used the opportunity to attack Syrian Kurdish forces, who are also US allies.

Russian President Putin responded to German Chancellor Angela Merkel’s accusation that Russia broke international law in Ukraine, by ordering snap military drills.  Bloomberg reports that Ms. Merkel told reporters “NATO will stand together against any threats and are committing to protecting the Baltic nations”.  She better fact-check that statement if there is a President Trump.

Believing in unicorns and oil production caps

Oil prices started climbing in February when traders believed that a Russian initiative to convince Opec nations to cap production would be successful. It wasn’t and WTI gave back a large portion of those gains.  The same thing has happened this month. Opec announced an informal meeting in Algiers in September and traders heard “production cap”. The story heated up when Iran’s oil minister said that he would attend.  Saudi Arabia put a wrinkle into the works on Thursday, when the energy minister ruled out a cut in production.

Rising production, abnormally high inventories in the US and the prospect of diminished global economic growth for the balance of the year should limit WTI gains.

Chart: WTI oil 4 hour
 Source: Saxo Bank

The week ahead

This is the week that will rouse somnolent markets from their slumber. It has a bit of everything including reduced liquidity as it is the last week of summer vacation in many areas.

Monday will be busy with markets dealing with the fall-out from Janet Yellen’s speech.  European markets will notice the absence of the UK due to Summer Bank Holiday. 
Tuesday, a lot of Eurozone, German and US data should keep traders on their toes.

Wednesday should be an extra choppy session thanks a slew of European data releases including Eurozone CPI.  It is also month end which means rebalancing flows can disrupt FX markets in the run-up to the 1600 GMT fix.

Thursday is PMI day around the globe although the impact from that data will pale in the face of Friday’s US nonfarm payrolls report.

The week that was

The Janet Yellen speech scheduled for late Thursday at Jackson Hole was expected to be the focus and lead to skittish FX markets.  It was and it did.

Monday, Asia traders picked up on the hawkish Fed them again because of weekend comments from Fed Vice Chair, Stanley Fisher, which appeared to support the rate hike camp.  The Bank of Japan governor verbally intervened in FX when he reportedly said that rates could be cut further. The US dollar traded sideways during the European and US sessions with light volumes.

Tuesday, the Reserve Bank of New Zealand governor, Graeme Wheeler surprised traders when he said that he only expected an additional 35 bps in rate cuts  in 2016. NZDUSD rallied on that statement as traders had been expecting another 0.50 bps in cuts. The US dollar traded sideways in Europe and ignored PMI data. A report that Iran would not just attend the Algiers Opec meeting but consider price support ideas as well, set WTI soaring.  The Canadian dollar rallied on the back of the move. The bloom was off that rose by the end of the day when the API Weekly Crude change reports showed a hefty gain.  Sterling punched above 1.3200 as short position got shaved ahead of the Jackson Hole speech.

Wednesday was a slow day in Asia but picked up a bit in Europe.  EURUSD came under pressure and USDJPY caught a bid.  That theme carried on throughout the New York session.  The over-riding influence was nervousness ahead of Janet Yellen’s speech on Thursday night. A weak EIA Crude stocks report sent oil prices tumbling, undermined the Loonie and gave US equity traders and excuse to sell.

Thursday was the same as Wednesday, slow boring and tedious.  Even the release of better than expected US Durable Goods data just induced yawns.  Oil got a boost on a report that a US Navy ship fired warning shots at an Iranian Patrol boat that had “got too close”.

Friday, the US dollar drifted lower in Asia and Europe and came under renewed pressure when New York started the day.  US Q2 GDP was modestly lower at 1.1%, which was expected.

– Edited by Clare MacCarthy


Michael O’Neill is an FX consultant at IFXA Ltd

26 August
Market Predator Market Predator
Hello Mike, nice reading. Most of all I like parts: 1) The week ahead + 2) The week that was.
28 August
bancodemon bancodemon
Nice "State of the Markets" summary....good read.


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