Frustrating Fed muddling their message 24Mar16

Frustrating Fed muddling their message

Michael O’Neill

FX Consultant / IFXA Ltd


  • US Durable goods a tad less durable
  • FOMC members back to their old tricks
  • Canadian budget is a small positive for Loonie

"White Rabbit" is an old song, but does Janet Yellen remember those times? Photo: iStock

By Michael O’Neill

This morning’s release of US Durable Goods likely didn’t do anything to change the opinions of either hawks or doves. on the Federal Open Market Committee. The headline data was well down from the previous month but slightly better than expected. On the other hand jobless claims were better than the previous week but slightly worse than expected. All in all a non-event, allowing those that can, to get an early start on their Easter holiday.

“Go ask Janet, when she’s 10 feet tall”

Janet Yellen, the former president of the San Francisco Federal Reserve is of the age to remember when that city’s Haight Ashbury district was the scene of all that was cool in 1967, USA Hippies roamed the street like the hordes of extras in "Walking Dead", and the Jefferson Airplane were singing “White Rabbit”.

“One pill makes you larger, one pill makes you small. And the ones that mother gives you, don’t do anything at all. Go ask Alice Janet, when she’s ten feet tall”- Grace Slick; Jefferson Airplane

You may be forgiven for thinking that its 1967 all over again and the Janet Yellen led Fed is under the influence of illicit, mind altering pharmaceutical’s which have negatively impacted their ability to communicate a coherent, uniform message.

A little over a week ago, the Federal Open Market Committee statement and Janet Yellen’s press conference left FX traders and others convinced of their dovish bias. And why not?

Hawks on the horizon or is it doves? Photo: iStock

The FOMC reduced the number of rate hikes projected for 2016 from 4 to 2, downgraded their outlook for the US economy and expressed concern over global economic and financial risks.

This week, a series of Fed speakers, (Atlanta Fed President, Dennis Lockhart, Chicago Fed President, Charles Evans, and San Francisco Fed President, James Bullard) gave speeches or interviews that suggested an entirely different view-point.

They all gave indications that the Fed was not dovish at all. Yesterday, in a Bloomberg interview, James Bullard was advocating an April rate hike. Confused? You shouldn’t be.

Riding around on a Carousel

This week’s communication carousel is the identical ride as the one markets experienced in September 2015. At that time, markets concluded that Ms. Yellen’s FOMC press conference was dovish. The rate hikes that were penciled in for December were quickly erased. A week later, the Fed Chair was telling markets that a 2015 rate hike was a distinct possibility while the Atlanta Fed President, Dennis Lockhart was hyping an October move.

We all know what happened then and we can guess what will happen this time. US rates will rise, probably a couple of time between April and year end.

Borrowing for prosperity

Canadian’s ousted Stephen Harper and his budget conscious Conservative party and gave a landslide victory to Justin Trudeau and his Liberal’s in October 2015. They promised to create jobs and grow the economy by spending other people’s money. That’s just what they are doing.

On Tuesday, the Finance Minister, Bill Morneau, announced that the government would repeal the Balanced Budgets Act, a law passed by the Conservative government on June 23, 2015, to promote fiscal responsibility by governments. In the next breath he announced that Canada would run a cumulative $118.6 billion deficit over the next 6 fiscal years. So there!

The jury will be deliberating the pros and cons of this move for years to come but the government’s goal is clear. They are hoping to combat the deterioration in the Canadian economy due to the plunge in oil prices.

The government announced tax cuts, infrastructure and new social housing spending initiatives which are forecast to boost GDP by 0.5% in 2016 and by 1.0% in 2017. In the short term, those measures may provide some support for the CAD.

Source: Department of Finance

USDCAD Outlook

There isn’t a whole lot of data on tap next week to provide USDCAD direction except for Wednesday’s GDP report. A weak report will raise the possibility that the Bank of Canada (BoC) could cut rates at the April 13 meeting but those chances are rather slim. The BoC has already stated that they would like time to assess the impact of the Federal stimulus actions and three weeks is probably not enough time.

USDCAD will also be vulnerable to shifting expectations around the results of the April 17 Opec and non-Opec meeting in Qatar. The prospect of some sort of agreement on production caps or other price stabilization measures has been a major factor in the oil price rally since February. However, next week may be too early for any concerns to manifest into USDCAD trading.

There are two main events that will create short term volatility and they are month end portfolio rebalancing flows on Thursday and the US employment report on Friday. Either one of these events could propel USDCAD above resistance at 1.3350.

The break of resistance at 1.3140, diminished liquidity due to Easter and event risk from both month end flows and nonfarm payrolls suggests that USDCAD will consolidate within a 1.3050-1.3450 range next week.

USDCAD hourly with suggested range for the week

Source: Saxo Bank

USDCAD technical outlook

The short term USDCAD technicals are bearish while trading below 1.3350 which represents the downtrend line from January. In addition, the breach of the 38.2% Fibonacci retracement level at 1.3487, (Jan-2015-Jan. 2016 range) targets a test of the 61.8% retracement level at 1.2750.

At the same time, the intraday technicals are bullish while trading above 1.3080, supported by the break of resistance at 1.3140 and is targeting 1.3350. A break of 1.3350 would lead to 1.3450-60 in a hurry.

The week ahead

UK traders will be extra-grumpy to start the week as the switch to daylight savings time deprives them of an hour’s sleep. Most of Europe will have the Easter Monday holiday to recover. There is a lot of data from everywhere which should spice up FX markets in the lead up the usual month end portfolio rebalancing volatility. The US nonfarm payrolls report will provide an entertaining end to the week.

The short week that was

This week was expected to be as dull as dishwater and it lived up to the billing, at least in FX markets where a distinct lack of key US data made for quiet trading.

Monday was a sleepy start to this holiday shortened week. Japan was closed for Vernal Equinox Day and AUDUSD traders were sidelined awaiting a speech by the Reserve Bank of Australia (RBA) governor on Tuesday. A spike in the USDCNY fix was a bit of surprise but there were no ill effects. Europe was quiet. A trio of dovish sounding ECB speakers failed to garner much attention. The US dollar was bid during the New York session although volumes were reportedly lighter than usual. GBPUSD was undermined by “Brexit” woes and WTI prices seemed to have topped out.

On Tuesday, AUDUSD traders ignored news that Uncle Sam had been complaining about the Reserve Bank of Australia talking the currency lower. The RBA governor’s speech had zero impact on the currency as well. The European session was ruined by the news of the Brussels terrorist attacks. GBPUSD dropped, in part, due some believing that the UK was a terrorist target which could raise the chances that the "leave" side would win the Brexit vote. EURUSD also declined albeit modestly and recovered during New York hours. The same pattern happened in USDJPY. When all was said and done, the terrorist impact on G10 currencies was muted.

Wednesday’s Asia session was quiet as traders prepared for the annual Easter Bunny hunt. In Europe, more Brexit poll results weighed on GBPUSD. The US dollar started the New York session with a bid and it stayed that way all day. A number of Fed speakers managed to get traders re-thinking their doveish Fed view. St Louis Fed president, James Bullard told Bloomberg that an April rate hike is possible. Oil prices dropped and the commodity currency bloc were the worst performing currencies on the day.

Thursday the US dollar entered the New York session with a modest bid due to a combination of pre-Easter weekend position adjustment, softer oil prices, mixed data and hawkish comments from Fed speakers.

Friday will be a lonely day for US traders as they will be at their desks while most of the world is observing Good Friday. Fortunately, they will be entertained by the US GDP report.

— Edited by Clemens Bomsdorf

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Categories FX, Foreign Exchange, Currency, Canadian Dollar

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