The FOMC statement is just the beginning 28Jan15

The FOMC statement is just the beginning

Michael O’Neill

FX Consultant / IFXA Ltd


Original post on

  • FOMC statement a coin toss
  • Forward guidance is for fools
  • EURCAD demand supports Loonie

By Michael O’Neill

FX markets have been rocking and rolling like a Saturday night at “Ozzfest” although instead of screaming guitars we have screaming traders who were caught off-guard by central bank actions.
Traditionally, the days leading up to the release of a Federal Open Market Committee (FOMC) meeting statement are characterised by sluggish currency pair movement. Usually traders are content to bide their time until they discover what it is that the FOMC members have up their collective sleeves. That hasn’t been the case this week.

FX currency pairs have been all over the map, caught up in the aftermath of the European Central Bank’s (ECB) announcement of a massive quantitative easing program, the far left wing Syriza party victory in Greece, renewed pro Russia separatist and Ukraine violence and heightened instability in Libya and the Middle East. Oil price concerns and regional economic data surprises round out the volatility drivers.

This afternoon’s FOMC statement may be the opening act for another week of turmoil ahead of month end portfolio rebalancing flows and employment data on the following Friday.

FOMC schizophrenia

The lack of a press conference following today’s FOMC meeting implies that today’s statement would be fairly consistent with the December statement. The Fed may be unlikely to announce a major policy change without the benefit of a press conference to explain the changes. The conclusion that the statement will be doveish has contributed to an overall drop in the US dollar as evidenced by the fall in the US Dollar Index. (USDX).

That opinion seems to have changed in the past few days. There are a number of analysts, strategists and economists suggesting that the risk is that the FOMC statement is seen to be hawkish. They believe that keeping the wording very similar to the previous statement is an indication that the Committee is unconcerned with the slate of soft economic reports and that “patience” expires in June, as previously thought. If so, the US dollar will resume its rally.

USDX points to further US dollar gains.

Although the intraday USDX technicals are bearish with a downtrend from the 95.87 peak intact while trading below 94.80, a short term uptrend exists from 92.75 while trading above 94.20. A move back above 94.80 suggests a retest of the peak. A move below 94.20 would lead to a test of the longer term uptrend line currently at 93.55.

Chart: USDX 4 hour

Source: Saxo Bank

If you listen to fools-forward guidance

“Close the city and tell the people that something’s coming to call” (The Mob Rules, Black Sabbath 1981 album)

The denizens of New York City can be forgiven for thinking that they “listened to fools” after officials closed all roads and subways in the city of 8.4 million people on Tuesday, in anticipation of three feet of snow falling in a just a few hours.

The actual accumulation was in the neighbourhood of six (6) inches, a minor irritant almost anywhere in the northern hemisphere.

Another way of looking at it is that the weather report was ”forward guidance” or more aptly “forward mis-guidance” for city officials. FX traders know all about how forward guidance has been working especially over the past few weeks.

On January 12, 2015, a Swiss National Bank (SNB) member (Danthine) reportedly said that the EURCHF floor at 1.2000 will remain a cornerstone. Oops we lied. The Bank of Canada’s (BoC) led most senior economists to believe that a rate hike would be delayed, back in December. That forward guidance said nothing about a rate cut. And the Bank of England’s (BoE) Mark Carney has proven to be the master of “forward mis-guidance” with his rate hike /rate cut flip-flops.

No one is saying that the Central Bankers’ are fools but it certainly is foolish believing that forward guidance is a fact sheet rather than a wish list.

The bear facts about the Loonie

The outlook for the Loonie is bearish. USDCAD is supported by a number of factors including the risk of a second rate cut by the BoC in March, a further drop in oil prices, expectations for a US rate hike in June and a slowing of the global economy. The prospect of both another rate cut and weaker oil prices should have sent USDCAD skyward it hasn’t.

A key reason for the slow grind higher is Canadian dollar demand against EUR and JPY. Often times, the Canadian dollar is viewed as a proxy to the US and with long US dollar positions against the EUR near extreme (arguably) levels many see buying Canadian dollars as a proxy to the US. This is because increasing US economic growth bodes well for Canadian economic growth due to the size of Canada’s trade with its southern neighbor.

The following EURCAD chart shows that with the exception of one spike in December, EURCAD has stayed within a relatively narrow 0.0500 point band since October.

Chart EURCAD 4 hour with trading band

Source: Saxo Bank

– Edited by Clare MacCarthy

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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