FX volatility may be norm next week-28Jul17

FX volatility could be the norm next week


· USDCAD recoups Thursday’s losses on better-than-expected GDP data

· US GDP missed estimates, but only modestly, and ECI index was firm

· Next week’s US nonfarm payrolls is the highlight in a heavy global data week

Forex volatility roared back to life, and the US dollar dropped

against most G10 currencies. Image: Shutterstock

By Michael O’Neill

USDCAD opened at 1.3445 on June 12 and it had a bullish bias. That lasted until a speech by the Bank of Canada deputy governor ushered in a new rate hiking cycle. Forty-five days and one rate hike later, USDCAD hit 1.2415, a drop of 0.1030 points or 7.7%. That’s impressive, or it would be if it was a solo Canadian dollar move. It wasn’t.

In the same period, AUDUSD was up 5.5%, EURUSD 4.5% and GBPUSD 3.0%. Only the Japanese yen and Swiss franc lost ground.

The timing of the BoC’s policy reversal came during a period when markets were heavily discounting another Fed rate increase and traders were raising expectations for the European Central Bank to start tapering its quantitative easing programme. Add a dash of American political dysfunction and the dollar’s demise was ordained.

The USDCAD skids were greased by a rally in oil prices due to falling US crude inventories and Opec/non-Opec production deals. That wasn’t all.

Canadian economic data releases were constantly above forecasts. May GDP, which was reported on July 28, grew at 0.6%, well above the 0.2% predicted.

Canada GDP

Source: StatisticsCanada

Next week, the global economic data calendar is heavy. For many the marquee data will be Friday’s US employment report for July. Arguably that should lead to plenty of volatility, but leave this week’s trading range intact. For USDCAD the Canadian employment data will be the focus.

USDCAD technicals are bearish while prices are below 1.2620. A break of 1.2620 would target downtrend resistance at 1.2810. A break of 1.2415 would lead to 1.2340 and then 1.2270, with 1.1950 as a stretch target.

USDCAD hourly

Source: Saxo Bank

The week that will be

FX volatility roared back to life in the latter part of this week, and the volatility is likely to hang around throughout the coming week. Buckets of economic data will coincide with month-end portfolio rebalancing flows, a couple of central bank meetings, and US nonfarm payrolls.

On Monday, there’s a flurry of data in Asia, followed by Eurozone CPI and UK mortgage reports. US pending home sales and the Chicago PMI and month-end rebalancing flows should cap off a choppy trading session.

On Tuesday, the China Caixin manufacturing report and the Reserve Bank of Australia meeting will be the key focus in Asia. European FX markets will be entertained by Eurozone Q2 GDP and a slew of manufacturing PMIs. The US responds with personal income and consumption data and ISM manufacturing PMI.

Wednesday, New Zealand employment is the only major economic data in Asia. The European data calendar is light, with only Eurozone PPI and UK construction PMI. The only US data is the ADP employment change.

On Thursday, Asia has AUD trade data and China services PMI to contend with. Eurozone services PMI is due early in Europe, but all eyes will be on the Bank of England meeting and governor Mark Carney’s remarks. The US data includes services PMI and factory orders, but any reaction may be subdued ahead of Friday’s employment data.

Friday, the July US nonfarm payrolls report will likely keep trading subdued, as usual. Canadian data includes the unemployment report and Ivey PMI.

The US Labor Department’s July employment report will be

the data highlight of the coming week. Photo: Shutterstock

The week that was

The Federal Open Market Committee meeting on Wednesday was expected to be a muted affair, partly because there was no press conference in conjunction with the meeting. It wasn’t muted.

Monday started slowly. That’s usually the case in a week with a FOMC meeting. Traders were distracted by more news of China’s belligerence, this time with India, which may have injected an element of risk aversion into markets. USDJPY bounced within a 110.70-111.18 range. The antipodeans were rangebound, but inched higher in Europe. Oil prices and the Canadian dollar were supported by news that Nigeria joined Opec in agreeing to a production cap. New York traders bought dollars, not aggressively, but enough so that the greenback finished the session with gains across the board, except against the loonie. A dash of relatively strong US data helped.

On Tuesday, the Bank of Japan minutes did not raise a ruckus. In fact, they were barely noticed. The antipodeans flirted about within well-worn ranges, awaiting key data and a speech on Wednesday. EURUSD rallied to 1.1668 from 1.1631 partly due to a strong German Ifo survey. Strong US data erased the move in New York. The New York session was noisy, but in the end, the only real big mover was WTI oil prices. They rallied on news that Saudi Arabia would cut August production, Nigeria would accept a production cap and talk that Opec would extend production cuts beyond March 2018. US equity indices set new record highs, traders were distracted by the Senate healthcare vote, and President Trump hinted at renominating Fed chief Janet Yellen.

On Wednesday, the AUDUSD reaction the Reserve Bank of Australia governor Philip Lowe’s speech was muted. The governor said the RBA won’t move in “lockstep with other central banks”, which is what the deputy governor had said earlier. Australia CPI was as expected. Bank of Japan deputy governor Hiroshi Nakaso said the BoJ would continue with its current easy money policy, but USDJPY was unmoved. In Europe, UK Q2 GDP data lifted GBPUSD to 1.3058 by the start of New York trading. EURUSD was offered, but from an elevated level. A large drawdown in US weekly crude inventories boosted oil prices. The US dollar tanked across the board when the FOMC statement was viewed as dovish.

Thursday, the US dollar came under added selling pressure in Asia. AUDUSD touched 0.8064, helped by strong import/export data. Kiwi rallied with Aussie, and it got an added boost from an upbeat Fonterra forecast. USDJPY was up and down in a 110.80-111.70 range until noon in New York. EURUSD and GBPUSD peaked near the European open and then retreated until the New York lunch hour. US durable goods surprised to the upside, which led the Atlanta Fed GDPNow index to jump to 2.8%. Oil prices climbed and the Dow set a new record high.

On Friday, Asian and European FX markets stayed close to home before the US GDP data. There was a flurry of activity when GDP was below forecast, but the moves were reversed as the data wasn’t all that negative.

The greenback had a rough week. Image: Shutterstock

— Edited by John Acher

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Leader of the pack 14Jul17

Leader of the Pack

· Cautious Yellen stance validated by weak US retail sales and CPI data

· Will ECB’s Draghi offer any surprises at next week’s news conference?

· Bank of Canada changes the playbook as low inflation becomes temporary

Canada’s central bank became Leader of the Pack, as it was the

first among the G10 to hike rates outside the US. Photo: Shutterstock

By Michael O’Neill

Bank of Canada governor Stephen Poloz is the Leader of the Pack. He is the Jax Teller of the Central Bank Sons of Anarchy, having usurped Janet Yellen’s Clay Morrow character in the battle against inflation.

In January 2014, the Bank of Canada cut its overnight rate to 0.50% due the negative impact on inflation from falling oil prices. The BoC governor threatened to cut them again in January 2017 if US protectionist policies put “our inflation target at risk.”

It appeared to be working as Canadian inflation rose to 2.1% in February. But Canadian interest rates didn’t rise. They remained near record-low levels because inflation declined steadily, and posted a paltry 1.1% rise in June.

Canadian inflation stays tame

Source: IFXA

When the plan isn’t working, change the terminology. On July 12, the risks of falling inflation putting the BoC inflation target at risk vanished. Low inflation became temporarily low inflation, and that temporary status allowed the BoC to raise interest rates.

US Federal Reserve chief Janet Yellen has been wrestling with the same low-inflation problem as the BoC’s Poloz. That didn’t stop her from raising interest rates. The Fed funds rate has been hiked twice in 2017, but a third increase is looking doubtful. Weak US retail sales and inflation data on Friday lowered the odds of a December hike to 43.1% from 47.3% before the release.

Where does that leave the European Central Bank? We will know next week as the ECB governing council meets on Thursday. But if the new central bank policy playbook includes revised low-inflation descriptions, a slightly hawkish ECB president Mario Draghi shouldn’t be a complete surprise.

The week ahead

The ECB meeting on July 20 will be the major focus as will a Bank of Japan meeting that same dam. US traders will be distracted by US president Donald Trump’s healthcare bill and corporate earnings releases.

Monday, Japan is closed for Marine Day. China retail sales, industrial production and GDP data will be the key focus for AUDUSD and NZDUSD traders. A big upside surprise in Eurozone CPI would be needed to elevate the drama ahead of the ECB meeting on Thursday. There isn’t any data from the US.

Tuesday will be quiet. New Zealand inflation and the Reserve Bank of Australia meeting minutes are on tap, which could cause a brief stir. Sterling traders will deal with inflation data. The US housing market index is the best the US has to offer

Wednesday is likely to be another quiet session as traders mark time ahead of Thursday’s ECB meeting.

Thursday kicks off with Japan trade data and Australia employment, followed by the Bank of Japan policy meeting and news conference. The BoJ meeting shouldn’t produce any surprises. The surprise could come from Draghi, especially if he talks about tapering of quantitative easing at the press conference after the ECB’s governing council meeting.

Friday will be a day of rest for most regions, except Canada where retail sales and CPI data are due.

The ECB’s governing council meets in Frankfurt on

Thursday, July 20. Photo: Shutterstock

The week that was

This week was expected to get off to a slow start — and it did.

On Monday, in Asia, US dollar bulls were basking in the glow from Friday’s US employment numbers. AUDUSD inched higher while the kiwi traded sideways. China CPI ticked lower (actual -0.2 versus forecast -0.1), but didn’t cause any problems. USDJPY climbed to 114.25 from 113.85 on increased odds of another Fed rate hike in 2017. The rally peaked in Europe, and USDJPY dropped back to 114.00 where it closed in New York. EURUSD drifted in a 1.1380-1.1405 range the entire day, and GBPUSD bounced in a 1.2855-1.2903 band. There was no US data of note.

Tuesday was Monday all over again. FX ranges were tight although data releases put some life into kiwi and aussie. A-better-than expected Australian business confidence survey gave AUDUSD a lift, while soft New Zealand electronic card sales undercut NZDUSD, which dropped from 0.7274 to 0.7204 my lunchtime in New York. That proved to be the low for the week.

European traders were entertained by the ebb and flow of sterling. A rally from 1.2871 to 1.2926 vanished after Bank of England deputy governor Ben Broadbent failed to talk about interest rates in a speech. EURUSD spiked to 1.1480 from 1.1380 after Donald Trump Jr’s (the president’s eldest son’s) emails with a Russian offering “dirt on Hillary” became public.

On Wednesday, the emails were the entertainment in Asia and led to USDJPY selling. The euro dropped from its Asia peak of 1.1488, undermined by ECB officials’ efforts to downplay any risk of quantitative easing tapering any time soon. Sterling traded in a narrow band in Asia and then dropped to 1.2813 from 1.2854 in Europe. The move was erased when the UK posted a 43-year low in the unemployment rate (Actual 4.5%).

USDCAD plunged to 1.2680 from 1.2935 after the Bank of Canada raised rates by a quarter point, to 0.75%, and delivered a hawkish outlook. A rally in oil prices helped the move.

Fed chief Yellen triggered a dollar retreat and equity market rally when she said that interest rates were close to neutral and not in need of rising much more.

On Thursday, Yellen’s dovish stance reverberated across Asia. The antipodeans rallied, supported by strong China trade data. USDJPY sank to 112.86 as US rate hike expectations got pared back. EURUSD climbed to 1.1455, but that move didn’t last, and the pair opened in New York where it closed on Wednesday. Sterling added to Wednesday’s gains, climbed to 1.2952 and spent the rest of the day bouncing between 1.2915 and 1.2952. US data was a nonevent, and day two of Yellen’s testimony didn’t provide any fresh insight.

On Friday, the Asian and European sessions were dull ahead of major US data releaes. Retail rales and CPI were weaker than expected, and the US dollar tumbled across the board.

It wasn’t a good week for the greenback. Photo: Shutterstock

— Edited by John Acher

Michael O’Neill is an FX consultant and currency strategist at Loonieviews.net

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