Tapering ECB Expectations 1Sep17

Tapering ECB expectations


· Disappointing NFP data sinks US dollar

· Pending ECB meeting keeping traders on their toes

· BoC could hike rates on Wednesday

Next week’s ECB meeting will determine whether QE

will be D(emonstrandum) or not. Photo: Shutterstock

By Michael O’Neill

The European Central Bank policy meeting, statement, and press conference are slated for Thursday. It could be a game-changer…

FX markets are debating the chances of the ECB announcing a quantitative easing plan. One group believes that the steep rise in EURUSD this year and a poor inflation outlook argue for the status quo. Another believes that the ECB will announce that tapering will begin at a later date without revealing any details.

A third group believes that the ECB will announce QE but with a relatively small monthly size

All the above are concerned with the tone that Mario Draghi will adopt for his press conference. Will he be his usual cautious and dovish self, or will he pat the ECB on the back for a job well done?

A dovish Draghi and/or no taper announcement should lead to EURUSD selling. However, the drop could be limited due to expectations that tapering will happen in 2017.

If so, EURUSD is still a “buy on dips”

Beware the sixth of September

The "sixth of September" is unlikely to replace the "Ides of March" for historical infamy, but it could do serious damage to USDCAD bulls.

On August 31, Statistics Canada reported that GDP rose an eye-popping 4.5%, in Q2, annualised. The 3.7% that was forecast was considered to be strong, but the actual data were a game-changer.

The July 12 Monetary Policy Report upgraded Q2 GDP to 3.4% from 3.1% and is looking for Q3 growth to rise 2.8%. It also noted that the output gap had narrowed significantly. The latest GDP report suggests that the output gap may have already closed. If so, a rate hike on September 6 is a strong possibility.

Source: Bank of Canada MPR

The intraday and short-term USDCAD technicals are bearish. The September 1 break of major support and the 2017 low in the 1.2415-60 range opens the door to further losses. The 61.8% Fibonacci retracement level of the July 2014 low of 1.0630 and the January 2016 peak of 1.4688 is at 1.2180. The intraday technicals suggest that previous support between 1.2415-1.2460 area will revert to resistance.

USDCAD daily with Fibonacci levels:

Source: Saxo Bank

The week ahead

Welcome back, liquidity. Happy Labour Day, Canada and the US. This week will be extra-busy thanks to the long awaited ECB meeting on Thursday. The Reserve Bank of Australia and the Bank of Canada hold meetings on Tuesday and Wednesday, respectively.

Monday, whatever volatility that occurs will be seen in Asia if Australia’s TD Securities Inflation report or Company Profits report sparks any trading interest. After that, the only data of note is Eurozone PPI and UK BRC like for like Retail Sales. The day ends when the Europe leaves since Canada, and the United States are closed.

Tuesday, FX markets should come back to life. The RBA will leave rates unchanged Traders will be looking to the tone of the statement for direction which is expected top be neutral. China Service PMI could also cause a kerfuffle if the data misses the forecasts in a big way.

Europe will deal with Swiss inflation data, Markit Services PMI reports from the Eurozone and individual countries, as well as Eurozone GDP and Retail Sales. UK Services PMI and Inflation Report Hearings are also due.

If the European/UK data don’t spark a trading frenzy, the US session will be dull.

Wednesday, New Zealand traders will react to the GlobalDairyTrade auction results released earlier. AUDUSD will be vulnerable to Q2 GDP data which could surprise to the upside. European data is almost non-existent.

US data include the ISM Non-manufacturing PMI, Markit Services PMI, and Trade Balance. It’s a big day for Canada. The Bank of Canada could catch markets by surprise if it raises rates by 0.25 basis points, which is a possibility following the August 31 Q2 GDP report.

Thursday, China Foreign Reserves and Australia Trade data will distract traders in Asia, while everyone else awaits the European Central Bank policy statement and press conference. Will the strength of the euro really derail a tapering announcement?

Friday, Japan GDP and China trade data are the key reports in Asia. The UK will be in the spotlight in Europe, thanks to a slew of data releases. They include Consumer Inflation Expectations, Manufacturing and Industrial Production and Trade. US data is scarce and will be a non-factor. Canada releases its employment report.

The week that was

This week was supposed to be lively, and it was.

Monday, Asia chose to deal with the disappointment with the lack of insight from Yellen and Draghi speeches at Jackson Hole., by doing nothing. The UK Bank holiday sucked the lifeblood out of European trading. US traders were uninspired, and the dollar finished on a mixed note

Tuesday opened with North Korea missiles leaving contrails of risk aversion in Asia and Europe. Gold prices soared. USDDJPY and USDCHF led the greenback down. Risk aversion vanished in the New York session. The dollar recovered all its overnight losses as President Trump didn’t say anything to inflame the situation. The raging flood in Houston was also a distraction.

Wednesday, Asia and European activity were subdued. Nevertheless, the US dollar opened in New York with small gains. US GDP and ADP employment data beat forecasts, igniting another round of dollar demand. The greenback finished the New York day with healthy gains all around.

Thursday, FX markets were active. NZDUSD sank after a weak Business confidence report. AUDUSD didn’t get any benefit from better than forecast China Manufacturing PMI data. USDJPY added to Wednesday’s GDP powered gains. EURUSD was under pressure.

Everything changed during the New York session. Month-end rebalancing flows were missing in action, US data was mixed but Eurozone inflation rose. That led to US dollar selling which snowballed. USDCAD plummeted after Canada GDP rose 4.5%, beating forecasts. The US dollar ended the month with losses against Euro, Yen and Swissy. The New Zealand dollar was the biggest loser in the month followed by Sterling, Aussie and the loonie.

Friday, It was a subdued Asia and European session with traders waiting for US nonfarm payrolls. A weaker-than-expected nonfarm payrolls report crushed the US dollar.

The US came up short in the jobs department. Photo: Shutterstock

— Edited by Michael McKenna

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

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Categories FX, Foreign Exchange, Currency, Canadian Dollar

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