THREE WISE MENThe ECB, OPEC and FOMC may not be Kings but the markets hope they are wise. December is less than two weeks away and it promises to be a frothy, if not frosty, month for FX markets.  This will be a December to remember, at least in financial markets. There are two game-changing central bank meetings and one OPEC meeting scheduled in the month and December is not known for having deep market liquidity.

1) European Central Bank: (ECB).  The ECB meeting and press conference on December 3rd is the first major risk event.  Mario Draghi, the ECB president indicated at his post-meeting press conference in October that stimulus action was likely in December and hinted at a deeper interest rate cut. He said that the governing council would not be in “wait and see mode” but “wait and assess” mode.  EURUSD reacted rather violently to this news and dropped from 1.1480 on October 22 to touch 1.0630 on Tuesday.

As big a move as that it is, it is still well short of the March low when EURUSD hit 1.0460.  At that time, the ECB was just beginning their quantitative easing program. In a few weeks they have hinted that they are going to be increasing the size and the scope of the bonds being purchased with a rate cut tossed in. If so, the March low may merely be a speed bump on the EURUSD race to parity. Or maybe not.

2) Organisation of Petroleum Exporting Countries (OPEC). OPEC has had more than their fair share of financial market turmoil created in the wake of their meetings or by their member’s actions. (Timeline is from Reuters)  The first oil shock in 1974 created huge lineups at US gas stations and introduced “fuel efficiency” into the lexicon of car buyers.  The Iran resolution in 1979 and the Iran/Iraq war in 1980 led to fears of supply disruption from two founding members. The 1986 oil glut let led to a steep plunge in prices. (Brent oil reached a low of $8.75/barrel) That was the end of OPEC’s fixed price structure. Iraq caused a big spike in prices in 1990/91 when they viewed Kuwait as a “cash cow”, ripe for milking and invaded them. In 1998/99, the so-called Asian crisis sent crude tumbling and Brent was back below $10/barrel.  The 2003 American invasion of Iraq in search of WMD’s boosted oil prices. Demand continued until July 2008 when oil touches $147.00/barrel. The US created 2008 financial crisis crushed that rally and oil prices collapsed. China demand in 2009 kicked off another 5 year rally which ended at last year’s November  OPEC meeting.

What does OPEC have in store for their December 4th meeting?  OPEC and non-OPEC producers have been hammered.  One argument is that Saudi Arabia intended to put the higher cost producers (read, US shale) out of business and reclaim their market share. That goal has not been accomplished. The shale producers are still producing.  On Friday, the Russian Energy Minister Alexander Novak told Reuters that he did not expect OPEC to cut output and added that Russian production would likely rise in 2016.  The Energy Information Agency (EIA) predicted that the combination of record crude stockpiles, slowing demand growth and resilient non-OPEC supply would worsen the oil glut in 2016. If the OPEC meeting concludes without a nod to productions cuts, commodity currencies, including the Canadian dollar, will get crushed.

OPEC3) Federal Open Market Committee (FOMC).  The December 16th FOMC meeting gets top billing but it will likely be undeserved.  Janet Yellen, Chair of the Federal Reserve came as close to pre-announcing a rate hike as a Fed Chair can do.  She has repeatedly said that she thought US economic conditions would warrant a rate hike in 2015.  And just in case people weren’t listening, on October 29th, she announced to the world that “December was live”.  So who is left to be surprised when the Fed makes the announcement?  Apparently 30% of the market, which could leave a bit of a mark if they all react after the announcement, especially since a lot of traders will have closed their books for the year.

Is the Loonie at risk?

That is a lot of risk for FX traders and it also poses major problems for the Canadian dollar. There is no shortage of forecasts calling for a weaker Canadian dollar from current levels.  The depressed price of crude and expectations for a widening of Canadian US interest rate differentials support a higher US dollar.

December also poses another issue and it is that of liquidity.  Many global banks have year-end in December.  As a rule, risk positions are sharply curtailed in order avoid nasty, bonus impacting surprises.

The same holds true for many pension funds. Corporate accounts tend to get their FX requirements done early. Reduced liquidity also equates to higher volatility. The few active traders will be chasing scarce dollars which raises the vulnerability of stop loss orders, that if triggered will exacerbate a currency’s moves.

Speculative positions as reported by the Chicago Futures and Trading Commission (CFTC) showed that short Canadian dollar positions were trimmed slightly last week.  They are well below the October peak indicating that there is plenty of room for speculators to reload.  However, whether they do it in December or January is another matter.

The short term USDCAD technical outlook is bullish as the uptrend from the October low remains intact while trading above 1.3200.  The series of higher lows points to a test of 1.3466 on a break of resistance in the 1.3350-70 area.

There is no question that the Wise Men of ECB, Opec and FOMC pose a big risk to markets and USDCAD positions.  The question is “in what direction”.  If one believes that the FX markets are efficient it implies that the current price in for example, EURUSD or USDCAD reflects the known and anticipated risks.  If so, then an ECB stimulus package should not be much of a surprise.  That implies limited US dollar gains on the news and perhaps a big sell-off on disappointment.  The same holds true for the Opec meeting.  Last year’s surprise was that Opec refused to cut production.  No one expects them to cut production this year so even a token cut would be a surprise and spark a big rally in crude prices and a rally in the Canadian dollar.  The FOMC meeting is likely to be the biggest disappointment. No one should be surprised by a 0.25 point rate hike and a doveish statement.

FX markets and USDCAD in particular, tend to like the path of least resistance and that path may be illuminated by the December Holy Trinity delivering as expected.

By David Mark, Agility FX Analyst

The three wisemen of December – ECB OPEC and FOMC