Central bank stimulation arouses traders
FX Consultant / IFXA Ltd
- Central bank-heavy week ends with USD in demand
- PBoC makes a surprise rate cut following iffy GDP print
- Loonie under pressure as WTI wilts on oversupply
Central banks set the tone this week with Thursday’s ECB blockbuster
sparking all sorts of fresh moves in the FX space. Photo: iStock
By Michael O’Neill
Instead of little blue pills, global central banks are providing wads and wads of cash to financial markets. Traders, of course, are aroused and even though the effects will last far longer than four hours, there is no need to see a doctor.
Today saw China cut rates with the People’s Bank of China trimming the deposit and lending rates by 0.25%. The PBoC also chopped the reserve requirement rate for banks by 0.5% in an effort to boost liquidity and jump-start economic growth.
Yesterday, Mario Draghi, president of the European Central Bank all but confirmed another round of stimulus activity for the Eurozone in December. Mr. Draghi’s comments have fueled speculation that the Bank of Japan will use the likelihood of ECB stimulation as an excuse for additional policy action.
With all this stimulus soon to be available, global equity markets are getting plenty of action and the US dollar is in demand. The greenback has managed healthy gains this week, spanning across the G10 currency spectrum. EURUSD is down 3.0% and USDJPY is up 1.75%;
oil prices are soft but rangebound
China’s rate reduction is further evidence that the economy is struggling and therefore unlikely to result in an immediate surge in commodity demand. Opec is another issue as the cartel has lost control of pricing with a variety of producers discounting already discounted contracts and Saudi Arabia production continues at record levels.
The US Energy Information Administration reported crude stockpiles in the US rose by 8.0 billion barrels. China slowdown risks and a higher US dollar have put downward pressure on oil prices today and WTI dropped through minor support at $44.90/barrel which sets up another test of $42.90/b.
Loonies feathers getting plucked
In a game similar to pulling the petals off a daisy (she loves me; he loves me not…) the loonie’s feather are being plucked but with a minor difference in the chant to "they hate me me; they hate me more…"
It hasn’t been a good week for the Canadian dollar. It started Monday with the election of Justin Trudeau and the Liberal party, who were awarded a majority government even though they ran on a platform of raising taxes and expanding budget deficits.
Then along came the Eeyore of the central banking community, Bank of Canada governor Stephen Poloz. Mr. Poloz always finds the clouds in a clear sky and this time was no different as he downgraded economic growth forecasts and said that the effects of the oil price collapse will be felt for longer than previously expected.
And it gets worse…
Once November rolls in, Canadians are fairly used to
the "it only gets worse" mentality. Photo: iStock
This week’s Canadian economic data were not impressive. Retail Sales looked good, but the headline was deceiving. It was all auto sales which may have been stronger due to year-end discounting.
Today’s inflation data was below forecasts with energy prices to blame. Nevertheless, low inflation suggests that the BoC will be sitting on its hands well after the Fed starts hiking rates.
Next week could be another dodgy week for USDCAD, at least on Friday. That’s when the August GDP (forecast 0.1%) gets released. Furthermore it is also month-end meaning the usual portfolio rebalancing hijinks will occur and this month has an added wrinkle as it is year-end for Canadian Schedule 1 banks, which suggests an additional reduction in liquidity.
USDCAD technical outlook
USDCAD is at a crossroads. The 1.3140-1.3150 area represents almost the exact middle of the 1.2835-1.3455 trading band that has been intact since September 28. Consistent price action above this zone targets 1.3450 although there is plenty of resistance ahead of that level. If USDCAD.
On the flip side of the coin, the failure to sustain the break above the 1.3140-50 area would shift the focus back to 1.2850.
The intraday technicals are bullish while trading above 1.3050 with the break above 1.3250 targeting 1.3220 and then 1.3340.
Only a move below 1.3050 would negate the upside pressure.
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Source: Saxo Bank
The week that was
The ECB meeting was expected to be the highlight of the week and it was. What wasn’t expected to cause much of a stir was the Canadian election: It did. This week had it all, in fact, with central bank surprises and well, more central bank surprises with a side of oil supply concern thrown in for good measure.
Monday started with China announcing that Q3 GDP grew by 6.9%. Traders weren’t sure if it was good news or bad so attention shifted to worrying about what Mario Draghi would say on Thursday. As it turned out, they were right to worry.
Tuesday, the Reserve Bank of Australia minutes created a bit of a ripple as they were a tad less dovish than expected and AUDUSD rallied. Canada and the Canadian dollar, for their part, took a rare turn in the global spotlight on election news and EURUSD was trapped in a 1.1333-1.1380 range while the kiwi got whacked on a lousy GlobalDairyTrade auction.
Wednesday saw a lot reminiscing about Marty McFly and Back to the Future. It was also very quiet in Asia but not so in Europe where an initial risk aversion-type move faded into a risk-neutral move as the day progressed. USDCAD rallied when GDP forecasts were cut by the BoC and WTI sank on news that US crude inventories rose far more than forecast.
We’re drowning in the stuff. Photo: iStock
Thursday was really two days: Pre-ECB and Post-ECB. Pre-ECB FX was a tad choppy in Asia. EURUSD held above 1.1300 and GBPUSD rallied on strong retail sales data. Post-FOMC FX was volatile as EURUSD dropped 2.1% and USDJPY rallied from 119.75 to 120.60. New York ended the day trying to determine the effect of December ECB stimulus on the Fed and the BoJ.
The week ahead
European and UK traders will be feeling a tad more refreshed when they start their day, thanks to an extra hour of sleep. Daylight Savings Time ends and the clocks go forward by an hour, and they may need the extra rest!
The FOMC meeting on Wednesday may provide a bit of clarity about a December rate hike. But then again, maybe it won’t. The Reserve Bank of New Zealand’s interest rate decision and statement is also out that day. The OCR is expected to remain unchanged. The week will end with the usual month-end fireworks.
Michael O’Neill is an FX consultant at IFXA Ltd.