The Big Bang theory — when hawks and doves collide
FX Consultant / IFXA Ltd
- BoJ surprises with another round of stimulus
- US dollar bulls are in the driver’s seat
- USDCAD poised for further gains
By Michael O’Neill
The Big Bang Theory ( with apologies to the Barenaked Ladies) goes like this:
"The whole FX universe was in a hot dense state
Then this week, expansion started, wait..
The German IFO began to cool
US Durable Goods began to drool
The BoJ made them look like fools
We bought dollars (we bought the Nikkei)
Yellen, Kuroda aren’t history
Unravelling the central bank mysteries
That all started with the Big Bang."
BoJ unleashes the bulls
The ghouls and goblins will soon be trekking the streets threatening tricks and demanding treats similar to the Bank of Japan’s (BoJ) approach, which was to trick USDJPY bears while treating Nikkei bulls. Today’s surprise expansion of the Japanese stimulus programme resulted in a 4.8% gain in the Nikkei while the JPY dropped 2.6%. The hawkish FOMC statement collided head-on with the doveish BoJ statement, and the result was the Big Bang.
On Hallowe’en night, the BoJ’s approach has been compared to a "Trick or treat" strategy.
The week that was
The early activity on Monday was all about stress; specifically, the results of the European Central Bank (ECB) stress tests. Not surprisingly, there weren’t any new concerns and the news quickly fell off the radar screens. That opened up the door to Federal Open Market Committee statement predictions. Most expected a doveish statement and the US dollar traded lower vs. the majors.
The soft dollar tone carried over into the Tuesday session, supported by US Durable Goods data, proving once again that they weren’t all that durable, dropping 1.3% in September.
Wednesday was deathly dull for Asia and Europe, right up until mid-afternoon in New York. Then there was the Big Bang or the hawkish FOMC statement, to be more precise. Labour markets were no longer “significantly underutilised” and inflation concerns were downplayed. Traders scrambled to buy US dollars and the rally was on.
Thursday started where Wednesday ended with the post-FOMC USD rally continuing in the early going. Better-than-expected US GDP data added to the demand but pre month-end portfolio rebalancing flows added an element of two-way risk into G7 trading.
The week that will be
The week will start with the US and Canada recouping the extra hour of sleep, lost on the shift to Daylight Savings time on March 9. These well-rested traders will be glad for the extra beauty sleep as this could be a real rock’n’roll week. It starts with the fallout from a slew of Manufacturing PMI data from China, the Eurozone and North America. Central bank policy updates will be provided by the Fed’s Richard Fisher and the Bank of Canada’s Stephen Poloz at 17:50 GMT.
On Tuesday, the Reserve Bank of Australia (RBA) interest rate decision and statement will set the tone for the Aussie dollar and its crosses. Later on, US trade data will be watched for evidence of a growing US economic recovery.
Wednesday is all about US releases, with traders looking to see if the data validates the hawkish conclusion for the previous week’s FOMC statement. There are two Fed speakers scheduled as well.
On Thursday, Australian employment data is the appetiser ahead of the entrees from the BoE and ECB’s rate decision and statements.
The Friday show has the Australian Monetary Policy statement as the opening act with the US nonfarm payrolls as the headliner.
The Loonie doesn’t know if it is coming or going, and crashing into ceilings and floors as a confluence of contrary influences just confuses traders. Last week, the Bank of Canada dropped the word “neutral” from its statement, which FX traders quickly interpreted as hawkish. The Loonie soared.
However, WTI oil prices have tanked and are currently trading down 1.5% on the day ($79.91/bbl). That is important. The Globe and Mail reports that Stephen Poloz, the Bank of Canada governor, told the House of Commons and the Senate that oil at less than $90/bbl would deliver a significant hit to the Canadian economy. That should put to rest any lingering expectations of interest rate increases in Canada to match US moves. There is an underlying negative bias to the Canadian dollar. Concerns about Canadian economic growth lagging behind that of the US were reinforced today with the weaker-than-expected Canadian GDP report.
USDCAD technical outlook
The short-term USDCAD technicals are bullish following the break of the October downtrend line from 1.1380, which came into play at 1.1220. The subsequent move above 1.1260 suggests that a short-term low is in place at 1.1125. A break of resistance at 1.1290 targets 1.1360, 1.1390 and 1.1440. Only a move below 1.1180 negates the uptrend. Failure to break 1.1290 suggests further 1.1190-1.1290 consolidation
Source: Saxo Bank