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Forex Thoughts articles by Dirk du Toit
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Relational Analysis Chart of the Week
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Week of April 11, 2016 |
USDCAD & US OIL CHART
Chart created with Saxo Trader |
Chart Theme: GLOBAL ECONOMIC GROWTH
OIL is also known as "Black Gold" and the demand for OIL is seen as an indicator of the strength / weakness as well as strengthening and weakening of the global economy.
The overwhelming majority of OIL transactions are priced in USD. As a result OIL supply and demand changes can be followed by following the US dollar price of oil.
But in the broader currency market, the relationship between OIL and currencies is complex.
One reason for this is the dominance of OIL as an export product on the economy and currency of large oil exporters, like Canada.
There are usually strong correlation between the value of the USDCAD and the price of OIL, and thus perceptions about global economic growth.
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Chart Event: BOC Monetary Policy Meeting, Wednesday 13 April
The overnight interest rate of the Bank of Canada (BOC) is 0.5% and no one expected the BOC to change this during their meeting this week.
But as the most important participants in financial markets these days with extremely low interest rates and other special measures to implement monetary policy central banks' every word is scrutinized by market analysts.
During this week's meeting the BOC upgraded thir economic outlook and they also indicated they think the global economy had just a bad patch in the beginning of 2016 while they believe there is upside potential for the OIL price going forward.
Let's see what happened in practice if we look at the USDCAD & (US) OIL chart of recent times.
Chart Observations:
- From 15 October 2015 to 20 January 2016 the USDCAD traded from a low of 1.2830 to a high of 1.4688.
The USD strengthened 13.34% versus the CAD over this three month period.
- Over that same period US OIL fell 39.36% - three times as much.
- On 20 January 2016 OIL made intraday low at 26.82 and on this same day the USDCAD made an intraday high at 1.4688.
- Then on that day both reversed and three months later OIL trade at $40+ and USDCAD at 1.27/28.
- The chart above is not in percentage scale therefore the USDCAD move is visually exaggerated but it serves to show how precise the timing of the correlations were.
- While USDCAD generally rallied since the turning point in January, OIL sold off for a second time to $26 and made a big low on 11 February.
- USDCAD made over the six months of this chart observation period a perfect reversal and just before the BOC meeting this week USDCAD was trading back at the levels it started in October 2015.
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Week of March 15, 2016
Chart created with Saxo Trader |
Chart Theme: POLICY DIVERGENCE - ECB
The ECB policy divergence theme is all about the difference in policy of the FED and the ECB.
During their May 2014 meeting the ECB announced a big concern with "too low inflation" and fingered the strong euro as one of the main problems.
By June 2014 the ECB painted a bleak picture of economic growth and inflation expectations and the EURUSD started to decline noticeably.
At the same time the FED was busy reducing their stimulus, buying fewer treasuries every month.
While the FED got to the end of the tapering and warned that their may be a long time between the stop of QE and the start of normal interest rate hikes, by September 2014 the market got a sniff that the ECB would begin a bond buying program and perhaps move to negative rates.
In January 2015 the ECB announced a big bond buying program.
In the mean time the FED was eyeing improved jobs figures, but stubbornly low inflation and the global economy wasn't looking too good either. As a result they refrained from any idees of an imminent rate hike.
The reason we chose this chart this week is because it is the anniversary of a momentous EVENT one year ago, the FED meeting of 18 March 2015.
The euro was sitting at lows last seen in 2003 and the FED could deliver a killer blow in support of the USD.
The FED however made a surprise move and the EURUSD spiked 400 pips.
| The FED's surprise was to remove what's called "forward guidance".
Forward guidance try to prevent surprises due to the central banks' actions in the hope that markets will be less disrupted by their actions.
However, over time it became clear that it had the opposite impact.
Nevertheless while I have commented at the time that most analysts simply kept at their story, whatever it was, HSBC came out saying "the USD rally is over".
Today it is a year later and many analysts still stick to their story of a year ago ...
But although EURUSD visited the 1.05 handle again briefly in April and December (again on expectations of further QE by the ECB) the low made on 9 March was the low. By the time the FED hiked rates in December 2015 the EUR was happily trading around 1.10.
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Chart created with Saxo Trader |
Chart Observations:
- From May 2014 to January 2015 EURUSD lost 2,300 pips (23 big figures)
- From 24 January 2015 to 9 March, 7 weeks, EURUSD lost another 1,200+ pips
- From 10 March 2015 to 15 March 2016 EURUSD remained between 1.1700 (briefly at the highs) and 1.05 (briefly at the lows).
- It is currently trading at 1.1175
Chart Events: Central bank (FED & ECB) policy 15/03 to 16/03
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Week of February 22, 2016
Chart created with Saxo Trader |
Chart Theme: POLICY DIVERGENCE - BOJ
The BOJ policy divergence theme is all about the difference in policy of the FED and the BOJ. The BOJ is still expanding on QE and introducing special "policy accommodation" measures in order to fight very low inflation and economic growth.
On the other hand the FED is busy normalizing policy and had started an interest rate hike cycle in December 2015.
In theory this means the USD should strengthen and the JPY should weaken every time the market gets a sniff of what the BOJ or FED is going to do next ....
Let's see what happened in practice if we look at the USDJPY chart of recent times.
Chart Observations:
- From early December 2015 to 16 Dec. the USDJPY traded from just above 120.00 to just above 122.50
- On 16 December the FED hiked rates as was expected by most at that time.
- USDJPY peaked on that uptrend around the FED rate hike, in "buy the rumour, sell the fact" style and traded back to 120.00 at the end of the year.
- The JPY is the ultimate safe haven currency during periods markets stress more than usual and from the start of the new year we know the PBOC caused the markets to feel really stressed.
USDJPY traded in line with the "risk off" theme until it made a bottom at 116.20 on 20 Janaury, just as oil, stocks and other markets also bottomed.
- When markets rally, USDJPY rally and that is what we saw. By end of January the USDJPY was back to 121.50.
- Then market turmoil resurfaced, specifically oil sold off for a second time to $26 and made a big low on 11 February.
- And the Yen strengthened according to the safe haven trade. When the markets made the lows, the JPY went crazy and even hit 111.00!
- All according to plan. (Maybe a bit excessive!)
- But when things stabilize, the USJPY would turn back UP to where it belongs (120+) again, right?
- In theory it sounds perfect. In practice it didn't happen.
- At the end of the chart observation period, two weeks after the markets made a V shape reversal USDJPY is still trading around 112, mostly well below 115.
Chart Event: BOJ policy meeting 29 January 2016
On 29 January there was a BOJ policy meeting, but no-one really expected them to add special measures. That was thought to come in March.
But the BOJ did surprise everyone and announced negative interest rates. USDJPY spiked to 122.50.
That is what should happen. BOJ add more stimulus, thus JPY should weaken.
But then the JPY turned around and didn't stop before it hit (very briefly) the 110 handle on 11 February.
Since then up to the end of the chart observation period, USDJPY was still trading "normal" (UP if markets smile, DOWN if markets sneeze), but apparently happily between 111 <--> 114.
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Chart Conclusion: Have the FX majors factored in QQE?
- On 3 December the ECB added stimulus and the EURUSD jumped 500 pips on a little "disappointment".
- On 16 December the FED hiked rates and in response the USDJPY traded lower (instead of higher) to the end of year.
- On 21 January the ECB indicated strongly that they will add more stimulus in March. EUR traded not down from 1.09 to 1.05 but UP to 1.13 on the market turmoil. But then when markets recover it doesn't go back all the way even to 1.09.
- On 29 January the BOJ added stimulus and the JPY strengthened 800 pips from 119 to 111 before it stopped.
- On this last point, lets be fair. Market turmoil was responsible for a lot of the down move. But one would think if it really would have gone to 130 (as it "should have") the market turmoil might just have cancelled that out and it may have traded between 115 and 125.
- But that didn't happen. Something else must be going on. Here is clear policy divergence yet the JPY goes to the other side ... and stays there!
Several of the biggest banks analysis maintain that any current "weird" moves in FX is temporary and EURUSD will go to and below parity and JPY to and beyond 130. These include Goldman Sachs, Deutsche Bank, Morgan Stanley, Credit Agricole and Bank of America, Merrill Lynch.
This weird price behaviour usually means something analysts thought would still be driving the market has changed. We think the really big moves we got on policy divergence in EURUSD and USDJPY the last two or three years, are over.
It is a bit early to be very positive about this, but USDJPY 130 and EURUSD at 1.000 look very far away ... if only another round of policy measures must get them there!
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Week of January 25, 2016
Chart created with Saxo Trader |
Chart Theme: Global Markets
For this chart we chose a few global markets because we got the impression there might have been some bottom developing in different markets after the rough start to the year.
This would have an impact on major currencies if correct:
- US Oil - Definitely a driver of the recent market sell-off
- US Stocks - Showing the market sell-off in the deepest market of them all
- Copper - Representing industrial commodities
Chart Observations:
- The DOW Index (black line) rose 12.5% from late September to early November from 16,000 to 18,000
- From mid-October COPPER (blue line) and OIL (orange line) started a clear decent
- COPPER lost 19.16% from October 15 to January 15, 2016.
- OIL lost 43.09% from 8 October to January 19, 2016.
- The DOW Index remained stable close to all time highs and only lost 1.12% to the end of year, 2016(17,717).
- Triggered by PBOC currency measures markets started to tumble from the first trading day in 2016.
- The DOW Index lost 12.00% up to January 20, 2016. (15,767)
Chart Event: ECB Meeting on 21 January 2016
The ECB Policy Statement on 21 January (excerpt only)
Yet, as we start the new year, downside risks have increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks. In this environment, euro area inflation dynamics also continue to be weaker than expected. It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March, when the new staff macroeconomic projections become available which will also cover the year 2018.
Chart Conclusion: Markets Bottoming?
On observation day 29 / 30 January 2016 we include the following in our conclusion:
- The ECB introduced QQE on 3 December during the observation period
- The FED hiked rates for the first time in a decade during the period
- The ECB indicated in January 2016 they might have to do more on their next meeting in March
- The BOJ surprised the market with a move to negative rates on 29 January
Despite the US FED raising rates and the ECB and BOJ adding QE stimulus global markets seem to be bottoming.
On 29 January, since lows in the middle of the month, these three markets rose as follows:
- COPPER - 6.38%
- OIL - 13.08%
- DOW - 5.65%
This has important implications for EURUSD as in the current environment, the euro is associated with "UP" when markets are going DOWN and "DOWN" when markets are going UP.
Yet in the week since the ECB meeting, the euro only lost 0.28% while these other markets made stunning gains ...?
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