By Michael O’Neill, Agility FX, Senior Analyst
Stranger Things is a hit Netflix horror series. It is also a great title to describe how the FX market has reacted to recent events. The contrarian price action appears to becoming the norm, rather than the exception to the rule.
In the past few week’s contrarian price action was seen in Sterling’s reaction to news that the UK Brexit bill was passed without amendments, the US dollar’s reaction to the nonfarm payrolls report, Opec’s upbeat monthly oil report and the Fed’s quarter-point rate hike.
The Ides of March were as deadly to US dollar bulls as they were to Julius Caesar.
The floor fell out from underneath the greenback after the Federal Open Market Committee (FOMC) hiked the range for federal funds to 0.75 percent to 1.0 percent from 0.5 percent to 0.75 percent.
The Australian dollar gained 1.8 percent, New Zealand dollar rose 1.5 percent and the Canadian dollar climbed 1.2 percent from where they opened in Toronto on March 15. Euro and Yen both soared around 1.0 percent.
That was not a normal reaction. Usually, an interest rate increase leads to short term strength in a nation’s currency. Not this time. The March 15 move was virtually pre-announced by a number of Fed officials, between the last week of February and the first week of March. Any benefit to the US dollar from such a move, had already occurred.
Many market participants expected that the “dot-plot forecast” in the Summary of Economic Projections (SEP) would have pointed to an upward bias for interest rates in 2017, from three rate increases to four.
That didn’t happen. Instead, the SEP had few changes compared to the December summary. It is not wise to disappoint Mother Nature or traders. That led to broad US dollar selling and the Canadian dollar was a beneficiary of the move.
Disappointment with officials has been the norm lately. Opec‘s Monthly Oil Report for February was released on March 14. By and large, it was positive. Opec did not change their 3.2% forecast for global economic growth in 2017. They bumped their forecast for 2017 world oil demand by 400,000 barrels per day which equalled their forecast increase for non Opec production in the same period.
That wasn’t good enough for oil traders. They zeroed in on Saudi Arabia’s admission that the Kingdom’s oil production was 10.011 million barrels in February. The production was still below the 10.058-million-barrel cap agreed to on November 30 but some believed the increase might mean that the production agreement was under stress.
Opec says that World Oil supply decreased in February. Source Opec
Oil was sold but the sell-off was short lived. WTI had already declined nearly 13 percent since the middle of February as bullish bets following the Opec production cut agreement on November 30, were unwound. Tuesday’s move may have been the final wash-out. The drop in oil prices put a floor under USDCAD losses, until the FOMC meeting.
The Bank of Japan and Bank of England policy meetings followed the FOMC meeting and neither central bank changed their policies. On March 7, the European Central Bank policy was unchanged.
EURUSD rallied on the perception that ECB President Mario Draghi may have hinted that the quantitative easing program might be coming to an end. Since then, a series of ECB officials have said that isn’t the case.
Sterling rallied hard on March 16, when Kirsten Forbes, a Monetary Policy Committee member, dissented and voted for a hike. The reaction may have been exaggerated because of bearish positioning established when UK Prime Minister Theresa May’s Article 50 bill was passed. The GBPUSD range since February 14 remains intact.
USDJPY is trapped inside a 111.60-115.50 range that has contained moves since January 20. EURUSD also remains rangebound as does the Canadian dollar.
These “strange” price swings may be explained by the Greek philosopher, Heraclitus. He once said “change is the only constant in life.” FX traders are thinking that the “range is the only constant.”
Heraclitus did not say “the range is the only constant in FX, but he should have Photo: Google Images