Fed minutes underpin US dollar gains

Michael O’Neill

FX Trade Strategist / www.Loonieviews.net

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· Higher-than-expected Canada CPI no friend to CAD

· Hawkish FOMC minutes should have been a surprise

· Fed chair Powell takes center stage next week

CAD certainly took the red tram lower this week as the greenback

gained ground. Photo: Shutterstock

By Michael O’Neill

The Canadian dollar suffered along with the rest of the G10 currencies during this week’s US dollar resurgence. Domestic data rubbed salt into the wound as well, with Canadian Retail Sales having dropped 0.8% in December, well below the forecasts and erasing the November gains.

Part of the issue may have been weather-related, but traders didn’t care. USDCAD roared higher, smashed through resistance levels and hung a target on the 2018 peak of 1.2915. The February 23 inflation report should have given the loonie a reprieve; CPI rose 0.7% in January, well above the forecast for a 0.4% rise (although the Ontario minimum wage increase may have impacted the results).

The USDCAD selloff, however, did not last, and prices are near pre-data levels.

The short-term technical picture is bullish. The break of key resistance at 1.2665 and the 200 day-moving average at 1.2704 suggests a revisit to the 2018 peak of 1.2915.

USDCAD four-hour with Fibonacci levels:

Source: Saxo Bank

Mulling over the minutes

The Federal Open Market Committee minutes caused a bit of a stir on February 21, but most of that stirring was in the afternoon US market. The dollar sank then soared when traders concluded the minutes were hawkish.

It should not have surprised anyone that the minutes were hawkish. The January 31 FOMC statement was deemed “hawkish” because of a “tweak” in the wording about inflation.

If the FOMC statement was hawkish, it stands to reason that the minutes would be hawkish as well. Nevertheless, market pundits wrote that Fed rate increase expectations for 2018 rose to four hikes from three…

Maybe so, but according to the CME FEDWatch tool, the market only has two FOMC meetings where the probability of a rate increase is higher than 50%.

Rate hike probabilities:

Source: CMEFedWatch /IFXA

The week ahead

Data, data everywhere and testimony by the new Fed chair… what’s not to like?

Monday:This will be the quiet day of the week.

Tuesday:New Zealand Trade data (forecast flat) could renew the focus on NZDUSD downside.

Eurozone economic confidence, business confidence and German HiCP Inflation reports are due.

The US January Durable Goods Orders report (forecasted at -2.0% versus December’s 2.9%) will be the main event followed by the S&P Case Shiller Home Price Index (forecasted at 6.2%)

Canada Federal Budget is tabled (and may include a costume allowance for Prime Minister Trudeau).

Wednesday:Fed chair Jerome Powell’s testimony to Congress overshadows a data-filled session, and managing expectations may be the order of the day. He won’t be able to ignore the recent spate of upbeat data and uptick in inflation, so like his predecessor, may emphasis caution.

Data includes US Q4 GDP (forecasted at 2.5%), Chicago PMI (forecasted at 64), Japan Industrial Production and Retail Trade (forecasted at 2.1%, y/y). We also have a China NBS Manufacturing PMI print, Eurozone “flash” HICP inflation, and UK Gfi consumer confidence and Nationwide House Prices.

Thursday:Australia kicks things off with Q4 Private Capex (forecasted at 1.0%), then we see PMIs from China, the UK and the Eurozone ahead of day two of Powell’s Congressional address.

Friday: AJapanese employment report, Eurozone PPP and German Retail Sales, UK PMI Construction, and Canadian GDP.

The week that was

The week was expected to get off to a slow start. It did.

On Monday, Chinese New Year’s, US President’s Day, and Canada Family Day sucked a lot of liquidity out of markets. Brexit issues undermined sterling while a narrowing of the Eurozone trade surplus did the same to EURUSD. USDJPY drifted higher with traders looking ahead to Wednesday’s FOMC minutes. The commodity currency bloc slipped on broad US dollar strength.

On Tuesday, China was still closed. USDJPY traded steadily higher until the New York close, rising from 106.60 to 107.34 on concerns that the FOMC minutes would be hawkish. AUDUSD got a boost after the Reserve Bank of Australia minutes, but the gains were erased in a steady decline that continued until New York closed.

The kiwi mirrored the AUDUSD moves while report from the Eurozone suggesting preferred access for the UK was ignored, and GBPUSD slumped. EURUSD’s downward move was exacerbated by a mixed German ZEW survey. Wednesday’s pending FOMC minutes overshadowed trading in New York and the greenback drifted modestly higher. Wall Street finished in the red.

On Wednesday, China was closed and USDJPY rallied. This time the rally was short-circuited in Europe, and the move was largely reversed. Weak wage price data hurt AUDUSD. UK employment data and a letter suggesting discord among Theresa May’s back-benchers pushed GBPUSD down. Weak Eurozone flash PMI data pressured EURUSD. FX markets were rangebound until the FOMC minutes were released. Trading was choppy immediately afterwards but settled into US dollar demand on fears the Fed would raise interest rates at least four times in 2018. The dollar closed with gains all around, and Wall Street slumped.

China was open for business Thursday and USDCNY fixed at 6.3530. Aussie and kiwi traders didn’t seem to be bothered with the FOMC minutes; those currencies were bought and they opened in New York at or near pre-FOMC levels.

USDJPY was the outlier as initial gains turned into losses on minor risk aversion selling which continued until New York closed. GBPUSD was hurt when Q4 GDP missed forecasts. EURUSD shrugged off a mixed German ZEW survey. New York sold US dollars across the board except against the Canadian dollar; the loonie underperformed because of a weak Retail Sales report.

Wall Street finished mixed, the Nasdaq lost a tad while the other two had small gains.

Finally, we saw a quiet FX session Friday but the US dollar managed to eke out further gains while Brexit stories kept GBPUSD traders on their toes.

— Edited by Michael McKenna

Michael O’Neill is an FX consultant at IFXA Ltd.

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Barking mad in the Year of the Dog

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net

Canada

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· FOMC minutes key focus for next week

· Healthy US data supports end-of-week dollar rally

· USDJPY technicals are bearish below 107.40

Welcome to the Year of the Dog. And a barking mad market. Pic: Shutterstock

By Michael O’Neill

Happy Chinese New Year. It’s the Year of the Dog. The Chinese Zodiac.org website says this year you will be happy, yet frustrated, rested, yet tired and cheerful yet dull. It doesn’t say anything about being barking mad, but perhaps they haven’t looked at financial markets, particularly USDJPY and US 10-year Treasuries.

It used to be very simple. If the 10- year Treasury yield rose, USDJPY would decline. Higher American interest rates meant a widening of the Japan/US yield differential. Japan’s on-going ultra-easy monetary policy contrasted sharply with the Fed’s tightening bias.

Things changed in the first week of January, and it started with a tweak. The Bank of Japan announced, on January 8, that it would buy less “ultra-long” bonds. FX trader’s read “taper” and started selling USDJPY. It hasn’t stopped. Prices were at 113.30 prior to the tweak, and they traded at 105.55, on February 16.

Chart: USDJPY and US 10 year Treasury yields

Source: Investing.com

That is an impressive move and even more impressive when you consider that other than the other than the minor reduction in ultra-long bond purchases, the Bank of Japan appears to committed to easy money. BoJ Governor Kuroda sounded dovish at his January 23 press conference, saying that the bank is committed to monetary easing and quantitative easing until the 2% inflation target was reached. He was reappointed to another five-year term on February 16 which suggests no change in BoJ policy.

Obviously, FX traders don’t see it that way. To them, the January 8 bond “tweak” is evidence that BoJ monetary policy will shift course in the coming months.

Loonie is a bit of a dog as well

USDCAD direction is tied to that of the US dollar. Domestic data has little lasting influence although weaker than expected reports seem to have a longer lasting impact. Blame Nafta renegotiations and the negative (for Canada) headlines associated with them. Canada’s prime minister (stupidly) announced his willingness to walk away from the deal. President Trump is eager to do the same. The Bank of Canada joined the fray when it said that Nafta uncertainty clouds their outlook.

That goes a long way in explaining the USDCAD 1.2250-1.2660 range that has contained price moves since the end of the December. It is unlikely to change in the near term either.

However, the intraday technicals are bearish while prices are below 1.2610, looking for a break of support at 1.2450 to extend losses to 1.2250. The February 15 rally from 1.2450 to 1.2553 is merely a correction, unless 1.2660 breaks.

Chart: USDCAD 4-hour

Source: Saxo Bank

The week ahead

It is a short week. Chinese New Year holidays will put a damper on trading in Asia and Monday’s Presidents Day holiday in the US will make for a slow start.

Monday: There isn’t data or events scheduled to get excited about. The US and China holidays will make the day a write-off.

Tuesday will be a little better in Asia, due to Kiwi data and Reserve Bank of Australia meeting minutes. Eurozone data including the ZEW Survey as well as German PPI data may underpin EURUSD. GBPUSD traders will be busy with retail sales.

Wednesday will be a busy day, starting in Europe. A rash of Eurozone PMI data will keep traders busy and boost EURUSD if they continue to display positive momentum. If UK employment data continues to climb, GBPUSD will stay firm on rate hike expectations. US data will be ignored an trading will be quiet until the FOMC minutes are released in the afternoon. If they provide fresh, hawkish insight, it could kick off an overdue, US dollar rally.

Thursday, UK Q4 GDP (forecast unchanged at 1.5%, q/q) and not expected to create any fireworks. USDCAD traders will key in on retail sales

Friday, Eurozone and Canada inflation data are on tap.

The week that was

Monday: Asia traded nervously as the Nikkei sank 2.32%. Other Asian bourses followed suit. European equity indices were unfazed by the Asia weakness, and they managed to rise. A Bank of England official said that there was “no rush” to raise rates and GBPUSD took a hit. The ECB’s Ewald Nowotny expressed concern that the US administration was manipulating the currency. It was all just noise. Wall Street finished the day with gains. The US dollar closed on a mixed note, but the majors stayed within their recent trading ranges.

Tuesday: It wasn’t a whole lot different from Monday. USDJPY plunged in Asia, triggering stop-loss selling below 108.00. AUDUSD was supported by domestic data. US dollar selling accelerated in Europe. GBPUSD rallied on better than expected inflation data, fueling rate hike expectations. EURUSD climbed in concert with sterling gains. President Trump’s threat to impose tariffs on steel and aluminium was largely ignored. The US data cupboard was bare. FX traders were sidelined awaiting Wednesday’s US inflation and retail sales reports. Oil prices were soft, trading at $59.32. API’s report of a rise in crude inventories didn’t help. Wall Street rose again.

Wednesday: Asia sold US dollars but Europe had buyers. Sterling was lively, rising in in Asia, then sinking in Europe, undermined by Boris Johnson’s “Road to Brexit” speech. Oil prices slid. The dollar opened on a mixed note in New York ahead of CPI and retail sales reports. Inflation beat forecasts and retail sales missed. At first, the US dollar exploded higher. EURUSD plunged to 1.2277 from 1.2348. Sterling got cracked hard as well sinking from 1.3890 to 1.3801. Suddenly things changed. The US dollar buyers became US dollar sellers, and the greenback tanked. EURUSD and GBPUSD soared, triggering stop losses. USDJPY traded down to 106.93. The commodity currency bloc joined the party underpinned by a rise in oil and gold prices. Wall Street rose for the fourth straight day.

Thursday: The US dollar continued to slide in Asia, led by USDJPY selling which took the currency pair to a low of 106.15, even as US Treasury yields rose. AUDUSD rallied after a decent employment report. The Eurozone trade data was not a factor. The dollar opened in New York with small gains except against USDCAD and AUDUSD. They were flat. A data dump of 2nd tier US economic reports was mixed and did not offer any fresh clarity. Wall Street continued with its winning ways, and oil prices climbed. The US dollar closed on a positive note.

Friday, the US dollar enjoyed an end of the week, profit-taking rally, supported by upbeat domestic data including a healthy jump in January housing starts and building permits.

– Edited by Clare MacCarthy

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Canada Jobs report: A nine dressed up as a three

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net

Canada

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· FX markets keeping their eye on Wall Street

· Oil prices suffering from rising US production

· Holidays on Monday and Friday = a short trading week

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The loonie and the Dow both fell this week but the Canadian currency bounced back faster.

Pic: Shutterstock

By Michael O’Neill

The headline Canadian employment number was beastly. Stats Canada announced 88,000 jobs were lost in January. That was a far cry from the consensus forecast for a gain of 10,000. The loonie tanked like this week’s Dow Jones index but in minutes, not days. The difference was, the loonie recovered.

USDCAD spiked from 1.2590 to 1.2686 within seconds of the reports released. Then traders read the second sentence in the Labour Force Survey. It noted that 137,000 part-time jobs were lost but full-time jobs increased by 49,000.

A collective “Doh” echoed across trading rooms. The loss of the part-time jobs was because the holiday season ended. In reality, it was a healthy report. USDCAD collapsed to 1.2560 before ticking higher.

USDCAD technicals are bullish inside the 1.2240-1.2920 range that has been intact since the middle of September. The break above 1.2350 negated an intraday downtrend and a sustained break above the 100-day moving average at 1.2314 supported by a close above 1.2560 will shift the focus to 1.2920.

Chart: USDCAD daily

Source: Saxo Bank

Wonky Wall Street

Punters who benefited from soaring equity prices and were spending their winnings before cashing their chips, had a rude awakening this week. Their gains as of January 31, were 5.6%. One week later, not only did they lose those gains, they were down 3.47% for the year. Plans for a new Porsche became hopes for a gently-used Ford Fiesta.

Bank of England Governor Mark Carney acknowledged the volatility on February 8, noting that markets are healthier when there is two-way risk. Arguably, the equity market meltdown is just a correction of an over-heated market. US tax reform policies and infrastructure spending plans should keep domestic growth humming along.

The week ahead

The week will get off to a slow start until Wednesday. Equity price movements will keep FX traders on their toes

Monday, Japan is closed for National Foundation Day while the USA celebrates Presidents Day

Tuesday: It’s a big day for data in the UK, highlighted by inflation data. The consensus forecast is for CPI to dip to 2.9%, y/y (previous 3.0%).

Wednesday: It is GDP Day in Japan, Germany (plus other Eurozone countries), and the Eurozone itself. Eurozone Q4 GDP is forecast to rise to 2.7% from 2.6%, y/y.

It is a big day for data in the US as well. January CPI is forecast at 2.1%, y/y, unchanged from December. January retail sales are expected to slip to 0.3% m/m (previous 0.4%).

Thursday: Australia’s, January employment report gets things going. The consensus estimate is for a gain of 25,500 jobs (previous 34,700) US data releases include, PPI, Capacity Utilization, Industrial Production, and Philadelphia Fed Manufacturing Index.

Friday: Asia markets will be celebrating Chinese New Year. UK Retail Sales and US Michigan Consumer Sentiment are the only notable releases.

The week that was

Monday: Global stock markets were front and center. Asia and European equity indices reacted to the previous Friday’s Wall Street market meltdown with one of their own. The FX market was rather oblivious to the equity price movements, and the US dollar opened in New York little changed from Friday’s closing levels. That changed with the opening bell on Wall Street. Stock prices collapsed. The Dow Jones Industrial Average (DJIA) shed 1,175.21 points or 4.6%, and this time, the US dollar soared. The day ended with US dollar gains across the board except against the Japanese yen. Strong US economic data, including a rise in the ISM non-manufacturing index, provided additional support to the greenback.

Tuesday: Equity woes spilt into Asia markets. The Nikkei 225 dropped 4.73%. AUDUSD got spanked on weak Retail Sales and Trade data. The Reserve Bank of Australia delivered as expected. They left rates unchanged and issued a neutral policy statement. European trading was a tad less frenzied. EURUSD got a lift from German Factory Orders data while GDPUSD traded sideways. The FX majors opened in New York close to flat. Only AUDUSD was lower than Monday’s close. In New York, FX traders were jittery, keeping their eyes on Wall Street. Monday’s rout wasn’t repeated. The DJIA closed with a 567.02 gain. Oil prices rallied when US inventories didn’t rise as much as expected. The US dollar finished the session with small gains across the board, except against AUDUSD and USDCAD.

Wednesday: In Asia, NZDUSD jumped after a strong employment report, but the move was reversed by the time New York opened. USDJPY drifted lower on stock market nervousness and was the only currency to record a gain when New York opened. EURUSD rallied in Europe but got crushed by when Germany announced a new government coalition with a Social Democrat Party member becoming Finance Minister. Sterling was sold after a drop in UK house prices. Oil prices were under pressure due to fears of rising US production. The fears were confirmed in New York when the Energy Administration Agency reported US crude production rose to 10.25 million barrels per day. A comment by European Central Bank council member Ewald Nowotny complaining that the US administration was keeping the US dollar low, spurred broad US dollar demand. Also, the US Congress announced a budget deal which removed the threat of a government shutdown. The US dollar finished in New York with big gains against the majors except for sterling. GBPUSD finished flat for the session, ahead of Thursday’s Bank of England meeting.

Thursday: FX markets were nervous and choppy. In Asia, the Reserve Bank of New Zealand left rates unchanged and issued a somewhat dovish statement. NZDUSD dropped from 0.7258 to 0.7170 by the start of Europe and then spent until the end of the New York day, clawing back losses, finishing at 0.7219. AUDUSD traded steadily lower. USDJPY was bid from the Asia open until New York started, peaking at 109.74. It was all downhill after that and USDJPY finished at 108.76. The Bank of England left rates unchanged but a hawkish sounding sentence in the Quarterly Inflation Report sent GBPUSD soaring from 1.3870 to 1.4062, just before Wall Street opened. A fresh wave of equity selling began and when the day was done, the DJIA had shed 1,032.9 points for 4.14%. The S&P 500 and Nasdaq followed closed behind. The day ended with the Japanese yen and Swiss franc booking gains, EURUSD and GBPUSD, unchanged from the New York open and the commodity currency bloc in the red. Oil prices continued to be undermined by fears of rising US production.

Friday, FX markets were a tad subdued and range-bound. A kind of a calm washed over European equity markets and Wall street opened on an "up" note.

– Edited by Clare MacCarthy

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US dollar rallies but bearish sentiment prevails

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net

Canada

· US dollar rallies as nonfarm payrolls beat forecasts

· Three central bank meetings next week, no rate hikes expected

· USDCAD may have found a floor at 1.2250

Has the latest dollar rally put a floor under CAD? Photo: Shutterstock

By Michael O’Neill

What is there to like about the Canadian dollar when USDCAD trades in the 1.2250-70 area? Not much.

For starters, the Federal Open Market Committee Policy statement on January 31 was more hawkish than dovish, as per many economists and analysts. Afterwards, the CME FedWatch tool pegged the odds for a rate increase in March at 83.1% compared to 70.9%, on January 26.

The Bank of Canada statement two weeks ago was more dovish than hawkish because of the admission that NAFTA negotiations were clouding their economic outlook.

The Atlanta Federal GDPNow projects Q1 2018 GDP growing at a 5.4% clip, a jump from the 4.2% forecast on January 29. It is a very volatile metric, but the core takeaway is that US economic growth continues to climb.

Canada GDP growth is expected to slow from 3.0% in 2017 to 2.2% in 2018 and 1.6% in 2019.

Oil prices gains are delivering less Canadian dollar support due to the widening spread between Canada’s main crude export, Western Canada Select, and the North American benchmark WTI. The discount was CAD 35.60 on January 31, 2018, compared with a CAD 17.27 discount on that date last year

.

The fundamentals suggest that USDCAD should be higher. That means the Canadian dollar rally since mid-January isn’t about domestic issues at all, but a function of widespread US dollar weakness. The weakness stems from the perception that global central banks are shifting away from easy monetary policies toward a neutral-to-tightening bias at a time when the pace of US rate hikes may be slowing.

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That perception is starting to change. US Treasury yields have risen sharply over the past few days with the 10-year note cracking resistance at 2.75% and headed toward 3.0%. President Trump’s tax cuts could add fuel to rising US economic growth. Many US employers handed out bonus cheques to their employees. Those cheques, helped by a jump in average hourly earnings to 2.9% from to 2.6%, reported February 2, may lift consumer spending.

Nonfarm payrolls increased by 200,000 leading to broad US dollar buying. However, today’s rally is rather pathetic compared to the magnitude of the dollar losses since the first week of January. Even still , until the US dollar index (USDX) can climb above 90.60, the greenback will remain under pressure.

USDCAD technical outlook

The short-term USDCAD technicals are bullish following the break above resistance in the 1.2305 and 1.2350 area. However, unless prices can move above 1.2420, representing the downtrend line from December 26, the rally will only be a correction, suggesting an additional 1.2250-1.2420 consolidation.

USDCAD daily:

Source: Saxo Bank

The week ahead

US economic data take a back seat to international data and central bank policy statements.

Major events: Tuesday sees a Reserve Bank of Australia interest rate decision. The RBA is almost universally expected to leave rates unchanged. The statement is expected to be mildly upbeat.

On Thursday we have a Reserve Bank of New Zealand Interest rate decision. No change in rates is expected. On the same day we have a Bank of England policy decision and Quarterly Inflation Report. The BoE is expected to leave rates unchanged, while Governor Carney’s inflation letter may make for entertaining reading.

Major data

The week is full of important economic reports from every region.

Monday, Services PMI data is due in every region including the US.

Tuesday, Australia releases a slew of reports including New Home Sales, TD Inflation, Retail Sales and Trade

Thursday, China trade data will be key in Asia.

Friday, UK Industrial Production, Trade, Manufacturing Production data and the NIESR GDP Estimate will be key for GBPUSD traders. USDCAD traders will look to Canadian employment data for guidance.

The week that was

Monday: It was a quiet start. Traders were understandably reluctant to commit to a course of action ahead of major risks running the gamut of political, monetary policy, month-end, and major data events. The US dollar opened in New York with modest gains and finished the day the same way. In between, FX currencies were choppy but rangebound.

Tuesday: FX volatility returned. The FX majors were whippy but remained in the well-established short-term ranges. There wasn’t any shortage of economic data reports from Australia, New Zealand, or the Eurozone. However, the impact of the data was short-lived. Rising Treasury yields under-pinned USDJPY. GBPUSD traders seemed oblivious to dire Brexit warnings and keyed in rallied because of mildly hawkish comments by the BOE’s Carney. Oil prices dropped due to fears of rising US crude inventories. The greenback was a tad firmer against the majors by the end of the day due to pre-Trump speech position adjusting. GBPUSD was the exception.

Wednesday: President Trump’s State of the Union hogged the spotlight in Asia but was quickly dismissed. The focus shifted to economic data. Soft inflation data sent AUDUSD lower but not for long. Broad US dollar weakness, in part due to month end flows, pressured the greenback. EURUSD gains were capped at 1.2450. Sterling traded with a bid despite a negative government Brexit report that was leaked. The New York session was whippy. Better than expected Chicago PMI data and Pending Home Sales didn’t give the greenback any lasting benefit. Dollar selling was evident into and around the 1600 GMT fix. The FOMC statement was thought to have had a mildly hawkish tone, and the dollar closed the day with small gains versus the majors except for the Swiss franc and British pound.

Thursday: The hawkish FOMC statement didn’t stand the test of time, at least as far as EURUSD and GBPUSD were concerned. Sterling even shrugged off the impact of a worse-than-expected Manufacturing PMI report. They climbed steadily while the fear of higher US rates lifted the US dollar against the commodity currency bloc, Swiss franc and Japanese yen.

The bullish dollar sentiment did not survive the morning in the US. A host of strong economic reports, rising Treasury yields and the prospect of a faster pace of Fed rate increases did not deter US dollar bears. EURUSD rallied to 1.2522, GBPUSD climbed to 1.4275, and the dollar finished with losses across the spectrum Oil prices were at three-year highs, with traders deciding that rising global growth and Opec production compliance offset the risk of higher US Shale production.

Friday: A better than expected US employment report gave the dollar a boost in New York in a move supported by rising US Treasury yields and the risk of a faster pace of Fed rate increases.

Friday’s strong January jobs report, however, did little for US equities. Photo: Shutterstock

— Edited by Michael McKenna

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