BoC Governor baits the mousetrap

Bank of Canada’s governor baits the mouse trap

Michael O’Neill

FX Trade Strategist /



· Better than expected NFP data does not impress the market

· FOMC, ECB and BoE policy meetings are the highlight next week

· Ongoing US tax reform discussions will also haunt markets

Next week, we’ll all be in thrall to the world’s central banks. Pic: Shutterstock

By Michael O’Neill

The Bank of Canada suckered FX traders again. After the Bank of Canada (BoC) governor, Stephen Poloz, repeatedly warned that policy would be governed by “incoming data” and “higher interest rates being required over time,” traders focused on economic reports. Those incoming reports were solid.

Most recently, robust Q3 GDP data and a surprisingly large, 79,500 gain in new jobs led many traders to conclude that the December 6 BoC policy statement would be a tad hawkish. A few even expected a rate hike.

But the statement was hawkish, and it wasn’t so. The bulk of the short statement painted a relatively upbeat outlook for the domestic economy. The BoC noted that: a) Growth moderated but would remain above potential in Q3; b) more evidence that business and infrastructure spending is contributing to the growth; C) labour market slack is diminishing.

Poloz baited the spring-loaded mouse-trap with tantalizing policy tidbits. The FX mice take the bait, the bar snaps down, and mouse-guts splatter over the trade blotter.

That’s exactly what happened when the BoC wrote they were concerned about “geopolitical developments and trade policies.” Traders read NAFTA, not trade policies. Forty-six years ago, The Who sang “Won’t get fooled again.” USDCAD traders apparently never heard the tune. Instead, they were channelling Britney Spears, singing “Oops, I did it again," and scrambled to buy USDCAD driving the currency from 1.2655 to 1.2867 by Friday.

The USDCAD technicals are bullish inside the well-defined 1.2660-1.2915 range. Firm oil prices and the prospect of higher prices down the road are supporting top-side resistance while the risk of widening Canada/US interest rate differentials are supporting the bottom.

The week ahead

This will be the last full week of FX trading before the holiday season festivities sideline many traders.

Major Events:

Wednesday: The FOMC meeting and outgoing Fed chair Janet Yellen’s press conference will be significant as it will signal the start of the Christmas/New Year holidays. A 0.25% rate increase is a given, and Janet Yellen’s Joint Economic Testimony is still fresh. Earlier, FOMC members said that they needed clarity over proposed tax reform policies before they could adjust their forecast. If no tax deal by Wednesday, this meeting will be a yawner.

Thursday: The Bank of England interest rate decision/minutes are released. Rates are expected to be left unchanged, but Brexit issues and Mark Carney are wild cards.

The European Central Bank meeting may be a bit of a non-event. The excitement of a tapering announcement has come and gone, but it is too recent for any new policy changes.

The Swiss National Bank policy decision is due. The SNB will leave rates unchanged and express happiness with the weaker Swiss franc against the euro

Major Data:

Tuesday: UK CPI data (forecast 3.0%) A higher than expected print would make Thursday’s BoE meeting a tad more exciting.

Wednesday: UK data again, this time the employment report. The unemployment rate is forecast to be unchanged at 4.3%

Thursday: Australia’s employment report is due. The forecast is for a gain of 20,000 jobs.

Eurozone preliminary PMI data for December is due but the ECB meeting the same day should negate any FX impact.

Friday, Eurozone trade and US Industrial Production and Capacity reports will usher in the holiday season.

The week that was

Monday, Friday’s losses were reversed when Asia started the week focused on the pending US tax reform deal. Better than expected domestic data lifted AUDUSD. Data didn’t help EURUSD, but weak UK construction PMI hurt GBPUSD. Everything was forgiven because of optimism over upcoming Brexit negotiations, and GBPUSD soared from 1.3420 to 1.3532. The optimism turned to pessimism when the Northern Ireland DUP party rejected the UK/EU border plan. GBPUSD collapsed to 1.3420.

Tuesday, AUDUSD was front and centre. The RBA left rates unchanged, and delivered a neutral statement, as expected. The jump in retail sales wasn’t, and AUDUSD rallied from 0.7605 to 0.7652. That move reversed by the close in New York. NZDUSD was underpinned by a speech from the acting governor, Grant Spencer, suggesting that changes in the RBNZ mandate won’t change the interest rate outlook. EURUSD traded sideways in Europe and then bounced in a tight range in New York. GBPUSD was hurt by concern about the Brexit negotiations. The US dollar closed in New York with gains across the board. Sterling was the outlier. The greenback demand was driven by position adjusting ahead of Friday’s payrolls report and hopes for a tax deal. Oil prices climbed on a decline in US crude inventories.

Wednesday, was a mundane FX session across the globe. USDJPY was under pressure in Asia after a BoJ official commented on side effects of monetary stimulus programmes. Australian GDP missed forecasts, undermining AUDUSD while a higher Global DairyTrade auction gave NZDUSD a lift. Sterling was under pressure due to concerns from Brexit. In New York, EURUSD traded lower on bearish technicals and position adjusting ahead of Friday’s nonfarm payrolls report. USDCAD rallied 1.2% after a somewhat dovish Bank of Canada statement. Oil prices dropped after a rise in gasoline inventories was reported. The US dollar closed in New York with gains against the majors except for the Japanese yen and British pound. They were unchanged.

Thursday, AUDUSD got off on the wrong foot. The Australia trade surplus narrowed to almost flat. AUDUSD came under pressure which lasted until the close in New York. NZDUSD tracked AUDUSD lower. Optimism that the US government would avoid a shut-down and that a US tax cut deal would get inked lifted USDJPY from a low in Asia of 112.22 to 113.12 by the close in New York. EURUSD traded with a negative bias in a narrow range. Eurozone Q3 GDP was unchanged and therefore ignored. GBPUSD was bid the entire day on rumours and headlines that Prime Minister May and the DUP would agree on Irish border concerns. Oil rallied because of supply disruption worries from Nigeria. Gold prices dropped 0.6% while Bitcoin soared to just under $16,000.

Friday, US Congress passes the spending bill, averting government shutdown. US nonfarm payrolls were higher than forecast but not high enough to impress FX traders. The initial US dollar strength faded and the greenback drifted back to pre-data levels.

– Edited by Clare MacCarthy

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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