Dance Like Nobody’s Watching 15Dec17

Dance like nobody’s watching

Michael O’Neill

FX Trade Strategist /


· Central banks appear united with dovish policy statements

· BoC governor stirs the loonie pot while discussing his sleep habits

· Top tier data releases ahead although liquidity could be thin

By Michael O’Neill

Bank of Canada (BoC) governor Stephen Poloz fiddles and USDCAD traders dance like nobody’s watching.The evidence was clear this week when the governor put a different spin on last week’s policy statement." Step right up and dosey do. Shift those rate forecasts to and fro."

In September, the BoC raised interest rates for the second time in 2017. It was in response to strong economic growth. The BoC statement stressed that “monetary policy decisions are not predetermined and will be guided by incoming economic data.”

Another rate hike was expected in 2017, but not in October. Economists and analysts assumed that the BoC would prefer to assess the impact of the previous two hikes, before raising rates again suggesting a year end move was likely. The bank statement noted, “the Bank will be guided by incoming data."

Canadian economic reports between October and December 6, reflected strong growth. The November and December employment reports combined for a gain of 118,800 jobs while Q3 GDP growth surprised to the upside. The Ivey PMI survey and housing starts were robust and above forecasts. If Bank of Canada rate hikes were “data dependent”, the recent data suggested rates would increase on December 6.

USDCAD reversed earlier losses and was threatening to break support in the 1.2640-60 area ahead of the BoC statement. It didn’t happen. Instead, the supposedly “data-dependent BoC” became “geopolitical and trade pact” dependent. The BoC cited trade concerns (traders read NAFTA) as a major reason why rates did not move.

USDCAD rallied and came within spitting distance of the pivotal 1.3000 level. which may have raised eyebrows in Ottawa. Poloz missed the spotlight on December 6 because there wasn’t a press conference scheduled. He made up for it on Wednesday, December 13 when he gave a speech titled “Three Things Keeping Me Awake at Night.”

With a title like that, traders can be forgiven for thinking the speech would highlight risks to the domestic economy and undermine the currency.

It didn’t. The loonie got a lift. The three things keeping the governor awake at night are: 1) Cyber threats, 2) high house prices and household debt 3) the tough job market for young people.

The NAFTA negotiations didn’t make the cut. USDCAD dropped to 1.2715, perhaps on the assumption that if the BoC isn’t worried about NAFTA negotiations failing, why should traders?

More than likely, the move was just a reaction by intraday day traders caught long USDCAD and wrong. The NAFTA negotiations are a major threat to the Canadian economy and will continue to be ahead of the March 2018 deadline.

US rate hikes and the possibility of new appointments leading to a more hawkish FOMC board should continue to support USDCAD for the next month or two.

The week ahead

The calendar says that this is the last full trading week of 2017. The reality is that last week was. Nevertheless, there are some major data releases which could trigger outsized moves in thin, year-end markets.

Major Event:

Thursday: Bank of Japan Interest rate decision, policy statement and press conference. The BoJ is expected leave policy and rates unchanged.

Major Data:

Monday: Eurozone November CPI (forecast 1.5%, vs previous 1.5%, y/y). Will an upside surprise be enough to counter Mario Draghi’s still dovish outlook?

Tuesday: Australia RBA meeting minutes, and the Australian government mid-year economic and fiscal outlook, German IFO survey and US housing starts and building permits.

Wednesday, New Zealand trade balance, and GDP.

Thursday, US Q3 GDP (forecast 3.3% vs previous 3.3%, y/y) Canada November CPI (forecast 0.1% m/m)

Friday, UK Q3 GDP (forecast 0.4% vs previous 0.4%, q/q), US durable goods, (forecast 1.6%) core personal consumption expenditures, Canada October GDP.

The week that was

There wasn’t a lot expected from the three major central bank meetings that were scheduled. Those expectations were met.

Monday, Asia and Europe saw US dollar selling as the greenback pared gains following Friday’s nonfarm payrolls report. The first day of Bitcoin futures trading dominated the news with prices rising over $18,000 from $15,000. The New Zealand government appointed Adrian Orr governor of the Reserve Bank of New Zealand. NZDUSD rallied on the news. Sterling was under pressure the entire day due to Brexit concerns and soft data. EURUSD was rangebound. A bungled bombing attempt created a bit of a stir in the early New York morning but markets suffered no ill effects. The day closed with the US dollar posting gains in pre-FOMC position adjustment trading.

Tuesday, the looming FOMC meeting cast a pall over trading. Asia was as dull as dirt. The impact from UK data, including retail sales, DCLG home prices, PPI and CPI was over in the blink of an eye. EURUSD was a tad offered after a mixed German ZEW report. The US dollar opened in New York with small gains and finished the session with small losses. The tax reform plan wobbled when Kentucky Senator Rand Paul tweeted about his reluctance to support “adding more to already massive $20 trillion debt” USDJPY got spanked. However, position tweaks and better than expected US PPI data drove the greenback to across-the-board gains by the end of the day. Oil prices retreated sharply from the peak of $58.53.

Wednesday, news that the Democrats beat the Republicans in a special election in Alabama, undermined USDJPY, in a quiet pre-FOMC meeting Asia session. Sterling churned in a 1.3313-1.3366 range when the UK employment report was released. EURUSD traders ignored German inflation data, Eurozone industrial production, and employment reports. The US dollar stumbled on weak vore CPI data and then got the stuffing knocked out of it when the FOMC delivered a dovish rate hike. Gold gained 1.3% while WTI oil prices dropped 2.1%.

Thursday, Asia added to the US dollar’s post-FOMC statement losses. AUDUSD got an added lift from a better than expected employment report. NZDUSD got hit when the new minority government downgraded growth forecasts in its first economic and fiscal report. In Europe, the Swiss National Bank left rates unchanged. So did the Bank of England but a dip in Q4 growth forecasts knocked GBPUSD for a loop. The European Central Bank left rates unchanged and tweaked growth and inflation forecasts higher. The EURUSD rally was cut short when ECB president Draghi reminded markets that substantial stimulus was still needed. US economic reports including retail sales and initial jobless claims beat the forecasts. Despite the strong US data, only sterling and the euro lost ground on the day. USDCAD dove after the Bank of Canada governor appeared to change his mind about the interest rate outlook. Wall Street closed with losses despite Disney buying Fox for $52.1 billion.

Friday, the US dollar opened in New York after a quiet overseas session. Traders were concerned about US tax reform uncertainties after Senator Marco Rubio threatened to vote against the bill.

– Edited by Clare MacCarthy

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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