Barking mad in the Year of the Dog
FX Trade Strategist / http://www.Loonieviews.net
· 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
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