Mixed US data muddles dollar outlook 28Oct16


Mixed US data muddles dollar outlook

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US GDP beats forecasts, but consumer sentiment doesn’t
  • USD retreats as mixed data were seen reducing risk of a December Fed hike
  • FOMC meeting will not provide any drama
  • USDCAD topside pressure continues to build

Fickle consumer? Soft US consumer sentiment dampened December

rate-hike expectations. Photo: iStock

By Michael O’Neill

Today’s US GDP and consumer confidence data were supposed to provide rate-hike clarity. They didn’t. Third-quarter GDP beat expectations, and by itself may have been strong enough to trigger a rate hike next week. Except it wasn’t by itself. The Reuters/Michigan consumer sentiment index threw cold water on the positive sentiment from the GDP data when it came in at 7.2, a two-year low.

More stimulus for Canada.

The Federal government may be poised to make another attempt at jump-starting the Canadian economy (and their popularity) on Tuesday, November 1, when finance minister Bill Morneau will table the “fall economic statement”. CBC news reported in September that he may use this as an opportunity to fast-forward billions in infrastructure spending. He may offer details on the planned Infrastructure Bank, a new federal agency, to attract infrastructure spending investment.

On the other hand, it may just be an update from the previous budget filled with forward-looking statements that will be forgotten by the time the 2017 budget rolls around.

USDCAD outlook

There’s a good chance that Bank of Canada governor Stephen Poloz uses a speech in British Columbia on Tuesday to remind markets that domestic rate cuts were discussed. That would offset any thinking that possible stimulus by the Federal government will lead to Canadian dollar gains.

USDCAD has been supported by a dovish BoC, mixed economic data, oil price pressures and the prospect of higher US interest rates. That sentiment won’t change next week.

USDCAD technical outlook

The short-term and medium-term USDCAD technicals are bullish. The sustained break of 1.3305 (38.2% Fibonacci retracement of 2016 range) targets the 50% Fibonacci level at 1.3565. The break of 1.3405 this morning targets resistance at 1.3460 and then 1.3550. A move below 1.3300 would negate the short-term topside pressure and suggest additional 1.3220-1.3420 consolidation.

USDCAD 4-hour chart

Source: Saxo Bank

The week ahead

There is plenty of potential for excitement and drama in the coming week. But it won’t be coming from the Federal Reserve Open Market Committee meeting on Wednesday. The proximity of the November 8 US election and the lack of a press conference eliminate any risk of market-moving news.

The week will start off with potential FX volatility from the usual month-end portfolio rebalancing flows. Another down day in US equity indices would suggest US dollar demand. China Manufacturing PMI reports could unsettle markets if they are below forecasts.

The week will end with the usual US dollar hi-jinks following the nonfarm payrolls release. The US election on the following Tuesday may lead to subdued trading in the afternoon.

In between, there’s still a lot of room for sparks to fly. On Tuesday, the Bank of Japan holds its monetary policy meeting, but is not expected to deliver anything major. The Bank of England meeting on Thursday could create some turmoil if the 17 out of 60 economists surveyed by Reuters are correct in their call for a 25-basis-point rate cut.

The Bank of Japan’s policymakers meet on Tuesday.

Photo: Screengrab from video on BoJ website

The week that was

There wasn’t much of anything this week for traders to sink their teeth into. So, they didn’t. In the words of an FX voice broker from many years ago, “empty and looking” sums it up.

Monday was a holiday in New Zealand, so FX markets were a tad slow off the mark. USDJPY traders didn’t care too much about Japan’s better-than-expected manufacturing PMI data. Manufacturing PMI reports came from everywhere in Europe. Traders took a shine to the Eurozone data and pushed EURUSD to 1.0900 from 1.0858. GBPUSD followed EURUSD higher. Those moves were erased in New York on the back of strong US PMI data leading to a higher chance of a December rate hike. Bank of Canada “misspeak” sent USDCAD on a roller-coaster, down and then back up.

On Tuesday, the antipodeans snapped their losing streak and rallied. USDJPY continued to move higher, supported by the earlier US data. EURUSD posted marginal gains on better-than-expected German IFO data, but trading was sluggish ahead of speeches from the Bank of England’s Mark Carney and ECB president Mario Draghi. Cable took a beating before Carney started talking and then rallied when the BoE governor dropped hints that additional rate cuts were not a certainty. Draghi defended the ECB but didn’t say anything to have an impact on EURUSD trading. By mid-morning, the US started to lose ground on poor consumer confidence data and ended the day lower than the where it was when New York opened. A drop in the WTI oil price sparked by reports that Iran wanted to be exempted from production caps accelerated on news of a large build-up in US inventories.

On Wednesday, AUDUSD was bought due to above-forecast inflation data reducing the risk of a near-term rate cut. Conversely, Kiwi was under pressure because of expectations of a near-term rate cut. EURUSD rallied in Europe and peaked mid-morning in New York, supported partly by a rumour that the ECB would keep buying bonds beyond the March 2017 end date. The GBPUSD rally capped out at 1.2250. USDJPY traded higher, buoyed by rising US rate hike expectations. Oil prices spiked when the US Energy Information Administration’s crude stocks report contradicted the previous day’s American Petroleum Institute reading. That rally ended as quickly as it started.

On Thursday, Asia traders stayed close to home and kept the dollar within narrow ranges. Sterling was the life of the party in Europe when GDP numbers were better than expected. That balloon burst as soon as the market realised that with Brexit negotiations looming the data was useless. In New York, jobless claims and durable goods did not provide much inspiration as they were close to forecasts. The steep jump in pending home sales tipped the scales in favour of the greenback. The dollar ended the day with gains across the board.

On Friday, Sterling fell notably against the USD after a Northern Ireland court rejected challenges to Brexit. According to the judge, the law does not restrict UK prime minister Theresa May’s ability to negotiate an exit from the European Union. US GDP data surprised to the upside, while consumer sentiment was softer than expected.

Belfast. A Northern Ireland court’s rejection of legal challenges to Brexit cleared away another obstacle to the UK leaving the EU, and hammered sterling. Photo: iSto

— Edited by John Acher

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

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Author: Loonieviews

In the past 30+ years, I have been an FX interbank market making trader, a high performing FX and Derivatives Sales person, creator of simple and complex risk mitigation strategies and a manager of high performance FX teams. The Trade of the Day is a culmination of that experience. Retail FX traders have access to a well-crafted and carefully researched FX trade strategy designed to generate FX profits while mitigating losses.

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