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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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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