FOMC minutes – countdown to disappointment 19Nov14


FOMC minutes — countdown to disappointment

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

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By Michael O’Neill

The run-up to today’s FOMC minutes has been lively, with plenty of regional news providing trading ammunition. The Kiwi got whacked on another sour milk auction while the JPY sank after Bank of Japan governor Kuroda’s comments about inflation falling below 1%. Inflation was also a concern in the UK with the Bank of England minutes showing that some MPC members were concerned with rising inflation. GBPUSD caught a bid on that news. As expected, US housing data barely caused a ripple on a weaker-than-expected print, with focus clearly on the pending FOMC minutes.
Minutes may disappoint USD bears

The minutes from the Federal Open Market Committee (FOMC) meeting of October 29 are only a few hours away from being released. The FOMC statement was deemed to be hawkish and the US dollar embarked on an impressive rally. This week, some analysts are fretting that the FOMC may not have been as hawkish as the markets believed, due to persistently low inflation. They are expecting that the minutes may provide evidence of elevated inflation concerns by members of the Committee, which weren’t evident in the statement thereby causing a delay in rate hikes.

They should also prepare to be disappointed. The FOMC statement acknowledged the improvement in the labour market but reiterated that it would be appropriate to maintain the 0-1/4% target range for federal funds for a “considerable time”. A discussion about inflation shouldn’t be news, considering the FOMC’s mandate, which also suggests that the statement accurately reflects their concerns.

Selling Loonie on Keystone vote is loony.

USDCAD has climbed from 1.1290 to 1.1350 (currently) in part, due to disappointment on news that the US Senate voted against approving the Keystone XL pipeline. It is not a big deal; it was merely political grandstanding and a ploy to force President Obama to actually make a decision. This time, the pro-pipeline advocates only had 59 votes, including those of Democrats. In January, the Republicans will control the Senate and have the required 60 votes needed to put the bill on Obama’s desk.

USDCAD Outlook

The idea that the Loonie may be heading south for the winter may be premature. Just because Buffalo, NY is buried in 150 centimetres of snow and a large part of Canada and the US is in the grip of a polar vortex-like weather pattern does not mean that winter has arrived. The calendar says that it is still autumn for another 31 days.

Photo: iStock

The drop in WTI oil prices below $75.00/bbl will fuel bullish USDCAD views and limit Canadian dollar gains even though domestic economic data has steadily improved. The Canadian housing market — long considered a bubble in need of bursting — has defied naysayers. Canadian exports have greatly improved and the Federal government is on the cusp of a budget surplus. The Canadian employment landscape has taken a turn for the better and inflation seems to have found a floor. Taken all together, the domestic economic improvements have offset, to a degree, the effects of lower oil prices on the Canadian dollar, implying that the November 1.1220-1.1440 range will remain intact.

Chart WTI oil daily

Source: Saxo Bank

USDCAD technical outlook

The intraday USDCAD technicals are bullish while trading above 1.1330, needing a break of the November downtrend line from the 1.1460-65, which is currently at 1.1360, to extend gains to 1.1405 and then 1.1420. A move below 1.1330 targets a return to 1.1280 and then 1.1240.
The long-term technicals are also bullish USDCAD. The uptrend from the September 2012 low of 0.9620 is intact while trading above 1.0880. The break of 1.1260, representing the 50% Fibonacci retracement of the 2009-2011 0.9430-1.3040 range targets the 61.8% retracement level, which is 1.1660.

Chart: USDCAD hourly with support and resistance

Source: Saxo Bank

Chart: USDCAD 5 year daily with Fibonacci retracement

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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