Observations of DXY, USDCAD, Crude Oil and Starhub

Fed rate hike and DXY movement

The US Federal Reserve hiked rates last night. The last time it did so was exactly one year ago. I recall that at that time the Fed Chairman ‘communicated’ 4 rate hikes this year which was reduced 2 two and then two became 1.

So finally it happened. Question: Is this going to be one and done or are there going to be more? I do not think that the Fed had a choice. After Trump’s election as the next POTUS, market rates started moving as bonds sold off. In my opinion, market rates rose first, Fed followed.  Is there more? DXY may provide an answer.

For the longest time, DXY the dollar index was capped by 100. I think it is critical to monitor whether DXY is a true break. If DXY continues to go higher, then market believes that the USD will continue to strengthen/the Fed will hike rate some more. Which comes first Fed rate hike followed by USD strengthening or the other way I cannot tell. If DXY goes back below 100 and stays, then the probability of a next hike is largely diminished. More about that over here.

Last night’s FOMC release here.

FOMC dot plot released 14 December 2016

FOMC dot plot released 14 December 2016

This is the footnote that goes with the dot plot.

Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projections for the federal funds rate.

 

2 reasons USDCAD bounced 1.5% in last 12 hours

There are two reasons for this big move in USDCAD. The pair had corrected strongly because of CAD strength after OPEC decided to cut production. Prior to last night’s Fed rate announcement, USDCAD had already fallen to an 8-month support trend line. This means that a) USDCAD is short-term oversold,  b) buying at trend line is a with-the-trend buy at a level with a low-risk proposition.

Additionally, the Fed’s decision means that for the first time since 2007, interest rates are now in the USD’s favour instead of the Loonie. Take that as a death cross.

USDCAD weekly chart August 2015 - present

USDCAD weekly chart August 2015 – present

 

WTI, Brent corrects

Again it’s the Fed’s fault but you are responsible for the correction in crude oil. Actually no prizes for guessing. The inverse correlation between crude oil and dollar strength is well known and much discussed like this post ‘EURUSD and WTI outcome if DXY strengthens‘. These are my personal observations:

  1. OPEC announcements are short term noise.
  2. In the long run, price of crude oil is inversely correlated to US dollar strength. The explanation has to do with the real income of oil-producing countries. This is how it works: Crude is mostly priced in USD > Oil-producing countries’ income is in USD > If USD depreciates, income of these countries  fall so has to be offset by rise in price or rise in production of crude oil > If USD strengthens, income of these countries rise so they are happy to let price of crude oil fall or to reduce production. (Replace ‘income’ with ‘purchasing power’ is another way to understand this; it is possible that OPEC is willing to cut production precisely because they anticipated USD to strengthen? Hmmmm.)
Brent Crude vs DXY weekly chart 2006 to present

Brent Crude vs DXY weekly chart 2006 to present

 

Starhub selling climax?

Starhub (CC3.SG) is a telco listed in Singapore on the Singapore Exchange. It was a dividend play but recently it’s stock price has not been very fortunate. Traded price has fallen sharply since falling out of a 10-year trend line in May last year. Price recently bounced off a 4-year low. The company was hit by a series of developments in the telco market: the entrance of a 4th telco and then erosion of revenue from cable TV as savvy consumers switch to internet TV as easy as setting up an Android box.

The reason I brought this stock up is because I think there is a selling climax weeks ago which is a pretty rare signal. So I am 1) going to put it here as a bookmark in case I need an example for training material in future and 2) going to see where Starhub will have a reversal pattern.

 

What’s a selling climax?

  1. Price trending down.
  2. Accelerate price in fall with expanding volume.
  3. Low created is unlikely to be that easily violated for a considerable time.
  4. Price rise from a selling climax can be accompanied by declining volume.
  5. Termination of bear market is often (not always) accompanied by selling climax.
Starhub selling climax technical analysis phenomenon

Starhub selling climax phenomenon

Signs 1-4 are present. We just need a bullish reversal to show up as a termination of the bear trend for this whole selling climax phenomenon to be confirmed. Selling climax and volume concepts are discussed in Practical Technical Analysis for Novices (2006) Chapter 8 – 10.
 


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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.   Soh's Twitter account @sohtionghum was ranked #23 out of The Top 70 Twitter Accounts To Follow In 2015 by MahiFX.   Disclaimer notice: "I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."
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