FOMC statement – are the doves crying wolf?
FX Consultant / IFXA Ltd
- USD selling squeezing stale long dollar positions
- FOMC statement risks disappointing doves
- Loonie has wings
By Michael O’Neill
The US dollar is under pressure in what appears to be a nervous market ahead of today’s Federal Open Market Committee interest rate decision and statement. The FOMC is widely expected to pull the curtain down on Quantitative Easing 3 (QE3), mainly because the decision was pre-announced in the September statement. The end of QE3 is a big deal and it is not unreasonable for the FOMC to be content to leave that as the key focus in today’s statement.
Doves may be crying wolf
A random review of expectations for today’s statement reveals a market that has spent a considerable time debating whether or not “considerable time” will be used to describe the duration of the current target range for the federal funds rate. Leaving it in is dovish, while omitting it is hawkish.
Another key focus is inflation. Bloomberg reports that some “policy members have, in recent days, mentioned below-target inflation as a risk that weighs against raising interest rates”. Last month, the statement said “economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate.”
It would be a fairly aggressive move for the FOMC to alter this statement considering that there is no post-meeting press conference to help explain their rationale, which is why it is unlikely to be changed.
The September FOMC statement was viewed as hawkish and it contained the reference to “considerable time”. If today’s statement contains more or less the same wording, than it would be difficult to conclude that it is dovish.
The US dollar has given up a lot of ground over the past week on expectations that today’s FOMC statement will be seen as dovish. The risk is that the move is overdone and that those crying “dove” are really crying “wolf”.
Loonie has wings
The Loonie has wings and it is flapping them madly. The USDCAD has traded erratically while slowly grinding lower since peaking at 1.1384 less than two weeks ago. Free-falling equity prices combined with plunging WTI oil prices drove USDCAD to the peak. Since then, equity markets have recovered all of their losses but the WTI price hasn’t. In fact, the outlook for WTI remains bearish.
Nevertheless, FX traders appear to have been caught on the wrong side of this move. The break above 1.1290 turned the technicals bullish with a 1.1550 target. The subsequent retreat looked to be merely consolidation prior to a renewed up surge. That sentiment ended with the break below the 1.1170-90 zone.
What has changed?
What has changed to shift USDCAD from a bullish bias to a bearish bias? Aussie and Kiwi have been steadily recovering from the prior USD rally and the Canadian dollar has lagged that move. (until yesterday).
Source: Saxo Bank
The Bank of Canada has gone to great lengths to alter the markets perception that they are dovish and would like to see a weaker Canadian dollar. The governor gave a speech on September 16 trumpeting the benefits of a floating rate, while stating that “trying to control the Loonie is off the table”.
A key shift in sentiment for the timing of the first US rate hike has led to widespread US dollar weakness and the Canadian dollar is rallying by default.
Canada’s Competition Bureau approved the takeover of Tim Hortons (THI:TSE) by Burger King (BKW:NYSE) yesterday. The news reminded traders that there is a potential CAD$12.5 billion dollars that needs to be bought to close the deal which is expected to occur by year end or very early in 2015. There may have been USDCAD selling on the back of this news.
USDCAD technical outlook
The USDCAD technicals are bearish following the break of the uptrend line from September at 1.1220 and triple bottom support at 1.1170 targeting the July uptrend line that comes into play at 1.1050. A break of that level would open point to further weakness to the long-term uptrend line from September 2012 which sits at 1.0790. In the short term, USDCAD support is at 1.1120, 1.1070 and 1.1050. Resistance is at 1.1170 and 1.1220.
Source: Saxo Bank
– Edited by Oliver Morrison