When will BoC make up its mind?

When will the Bank of Canada make up its mind?

Michael O’Neill Michael O'Neill
FX Consultant / IFXA Ltd

  • USDX direction unclear
  • Bank of Canada unclear on rate cut plans
  • Loonie rangebound until Wednesday

By Michael O’Neill

USDX: Breakout or fake out?

The USDX has survived a number of attempts to head lower in the past week and yesterday’s spike to 95.40, breaking resistance at 95.15 could be the start of another leg higher.

Then again, however, it could just be a false break suggesting further 93.70-95.15 consolidation. However, the long term uptrend from July 2014 is still intact but that trendline doesn’t come into play until 91.90, leaving plenty of scope for a downside correction.

A decisive break above 95.20 for a few days would suggest further gains ahead.

USDX daily with resistance and uptrend line shown
Source: Saxo Bank

Loonie nervous ahead of BoC

Bank of Canada governor Stephen Poloz has gone to great lengths to confuse FX markets and he has been successful. After blind-siding FX markets in January with a surprise rate cut, he then gave the impression that it was the first of at least two.

That view was reinforced in a speech by deputy governor Agatha Cote a week ago. But just when traders were buying into the rate-cut scenario, Mr. Poloz used a speech to tell markets that the rate cut was merely “insurance”… the conclusion was that a rate cut next week was no longer likely and USDCAD rallied.

Meanwhile, WTI prices are see-sawing between 48.75 and 51.75. The downtrend is intact but the trendline is steep. The Saudi oil minister was making noises suggesting that the worst was over –at least for Brent, which has managed to increase its spread over WTI. A move above $52.00/barrel would bolster the Canadian dollar.

Ahead of Wednesday’s BoC meeting, USDCAD is likely to bounce within a 1.2410-1.2550 range. That range is vulnerable on the top if EURUSD continues to push lower toward 1.1000.

USDCAD with pre-BoC meeting range highlighted
Source: Saxo Bank

Ceasefires brokered and broken

The Russian-backed rebels are appearing to be honoring the ceasefire and are pulling back heavy weapons from the front lines (perhaps under threat of new EU sanctions against Russia). Meanwhile, Ukraine is operating under the threat of its gas supplies being cut off by Russia – a move that would make it a truly "cold war".

Elsewhere, the US and Nato have pre-announced a spring offensive to retake Mosul with as many as 20,000 US ground troops. Big-time shooting wars tend to disrupt FX markets but that is unlikely to be the case this time. The so-called Islamic State of Iraq and Syria, or ISIS, lacks heavy weapons, aircraft and is not seen as a much of a threat to the heavily armed, well trained Nato/US forces.

There is a risk that Russian rebels take advantage of Nato’s distraction with ISIS in the spring to claim more Ukraine territory, and a move like that would certainly boost FX volatility.

The week that was

This week, the US dollar was like a dormant volcano coming to life – thunderous rumblings, hot air, plumes of ash-filled smoke, and finally an explosive eruption.

Monday’s Asia session was quiet with Chinese New Year celebrations still ongoing. Europe saw a barrage of headlines about the Greece debt negotiations but nothing to disrupt FX markets. The same held true in the New York session as traders bided their time until Janet Yellen’s Congressional testimony.

Tuesday was fairly dull in Asia and Europe, although Bank of England governor Mark Carney and friends stirred the GBPUSD waters in their testimony to the Commons Treasury Select Committee.

The New York session, for its part, received a double dose of hot air as Janet Yellen’s remarks were not as hawkish as anticipated and the US dollar came under pressure. More hot air followed from the Bank of Canada, where Stephen Poloz appeared to take next Tuesday’s rate cut off the table when he described the previous cut as “insurance” rather than a monetary policy action.

USDCAD dropped like a rock.

Balancing rock

"Wait for it…" Photo: iStock

Wednesday was a day of indecision. The market debated whether Ms. Yellen’s remarks were hawkish or dovish and the G10 currencies stayed within their recent trading bands.

Thursday, the volcano blew its lid. The US dollar was offered during the Asian session with the AUD, the kiwi and the loonie all in demand.

The action, however, didn’t continue on in Europe and the activity stalled. – that was the calm before the storm. A combination of positive US data and a hawkish comment from the Fed’s Bullard on rising US inflation fueled EURUSD selling. The break of 1.1270 triggered stops and suddenly the dollar was in demand across the board, setting the stage for a messy month-end on Friday.

The week that will be

It will be a busy week with loads of FX volatility due to key data releases and interest rate decisions from the Reserve Bank of Australia, the Bank of Canada, the Bank of England, and the European Central Bank.

Debates are currently raging about the prospect for further rate cuts from the RBA on Tuesday and the BoC on Wednesday. The announcement of a quantitative easing programme last month, however, makes this month’s ECB announcement anti-climactic.

The grand finale is on Friday when the US and Canadian payrolls reports are released.

— Edited by Michael McKenna

Michael O’Neill is an FX consultant at IFXA Ltd.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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