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Article / 31 October 2013 at 7:35 GMT

FOMC shows dovish fangs as subtle shift in stance sees USD relief

FX Trade Strategist / www.Loonieviews.net
Canada

The Federal Open Market Committee (FOMC) members obviously ignored the prevailing market wisdom that due to soft economic data and the government shutdown, Wednesday's meeting would be a waste of time. Many economists, strategists and the like expected a Fed statement virtually unchanged from September's. Once again they were surprised.

The Fed just "tweaked" the previous statement but the tweaks changed the nuance of the entire report turning it from dovish to dovish with fangs. It read (to me) like it was a little more decisive. Gone is the phrase "but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labour market" Whether that was worth .0060 points in EURUSD is anyone's guess.

The statement served to remind global markets that tapering will begin on the FOMC's agenda and not on the conventional wisdom's schedule. The flurry of Fed speakers beginning Friday may shed some light as to where the FOMC is with the tapering file.

USD rides the wave

The US dollar made some healthy gains against the majors immediately after the FOMC statement. USDJPY shot from 98.20 to 98.65, EURUSD dropped to 1.3698 from 1.3765, Cable sank to 1.6000 from 1.6055 and USDCAD popped from 1.0450 to 1.0497. Not bad for what had been billed as a benign report.


W STREET
The dollar was boosted by the FOMC statement on tapering yesterday. Photo: Shutterstock


The dollar retraced some of the moves near the end of day in New York and continuing on into Asia. Is this the start of a new US dollar rally phase? Maybe. Both EURUSD and GBPUSD have backed off from their recent highs exhibiting signs that the "up" move may be running out of steam. The reaction to poor US data in recent days has been underwhelming and both currency pairs are nearing the pre-nonfarm payrolls report levels. 

These levels, 1.3720 in EURUSD and 1.5895 in cable are key supports that if broken, would suggest that a short-term top is in place. The Reserve Bank of Australia is actively and bluntly talking down the AUDUSD and the Bank of Canada governor has expressed reservations about Canadian economic growth prospects. The staying power of the dollar rally will be put to the test tomorrow due to month-end rebalancing flows.

Canadian GDP could create fireworks

The release of Canadian August GDP data — consensus is 0.2 percent month-on-month — will be a non event if the forecast becomes the reality. The July report, released September 30, gave the loonie a lift after gaining 0.6 percent following a dismal 0.5 percent drop in June. The key question is if GDP will surprise the market again. The Bank of Canada announced cuts to its GDP forecasts at the beginning of October — maybe they had some inside knowledge.

canada gdp

Source: Statistics Canada

USDCAD short-term outlook

The short-term USDCAD outlook is bullish, looking for a move to 1.0550. There is currently minor support at 1.0470 and uptrend line support at 1.0455. A break below this level would argue for a test of support in the 1.0425 area and period of 1.0410-1.0490 consolidation. 

A large portion of the Canadian dollar weakness since September can be attributed to sales of CAD against EUR and GBP.  If the rally in these currencies has run out of steam, USDCAD gains would be hard to achieve. However, the current technical outlook for EURCAD suggests further gains are in the offing.

USDCAD hourly-chart

usdcad

Source: Saxo Bank

EURCAD 4-hour chart

eurcad

Source: Saxo Bank

Month-end drama

Tomorrow is month-end and that means the Reuters WM fixing flows. Governments in a number of countries have launched probes into concerns that the fixes were fixed and a couple of senior traders at major banks have been put on leave. Despite the probe, fixing trades will occur as usual.  

As long as funds of all types continue to benchmark their FX exposures  to the  Reuters WM fix and unless Reuters WM agrees to transact all flows at their posted rates, there will be volatility leading up to the fixing time. Tomorrow will be no different but volumes may be less than seen in September because it is not a quarter-end, or Japanese half-year end.

There has been some chatter that this month's fix will result in US dollars being sold which, if true, will play havoc with recent short-term long dollar positions.  This could be really problematic in USDCAD especially if Canadian GDP exceeds expectations.

— Edited by Martin O'Rourke

5y
alpha yankee alpha yankee
"The ECB this month established a currency swap line with the People’s Bank of China, bolstering access to trade finance in the euro area and strengthening the international use of the yuan."
5y
alpha yankee alpha yankee
I have pondered so far what if the ECB would also add 'Bitcoin' to its swap line with a special treaty...?
5y
Michael O'Neill Michael O'Neill
Vancouver has a Bitcoin ATM, Maybe that is how the ECB would access their Bitcoin swap line
5y
alpha yankee alpha yankee
a good sense of humor :)
5y
alpha yankee alpha yankee
"This seizure means that the federal government of the United States is now the owner of over three percent of the Bitcoins in circulation, and among the top Bitcoin owners in the world. Intense speculation has been sparked about both the implications of this development, and the way the US government will manage the seized Bitcoin treasure. The implications of this development are surprising.According to the official Guidelines on Seized and Forfeited Property, the seized Bitcoins should be sold at some point in the future. In a press release published in relation to this case, The FBI estimates its current holdings at about $34m:Along with a prior seizure of approximately 29,655 Bitcoins, federal law enforcement agents have now seized a total of approximately 173,991 Bitcoins in connection with the Silk Road case, which, at today’s Bitcoin exchange rate, are worth over $33.6 million."
5y
alpha yankee alpha yankee
A quick check using an online trading tool shows that a massive and reckless instant sell by the government would result in slippage so significant that profits from the liquidation would be reduced by approximately half, a loss of over $15m. If the US government decided to hold on to the Bitcoins rather than liquidate them into dollars, the political nature of the whole Bitcoin project would be transformed, making it change course in unpredictable ways. With the fall of Silk Road and the seizing of its funds, a situation has now been created that in the long term might lead to Bitcoin's final consolidation as a legitimate currency in the US.It can be argued that either scenario, liquidation of the coins or holding by the US government, leads to a tacit but strong legitimation of Bitcoin trade.
5y
alpha yankee alpha yankee
"If the coins are sold, either through a traditional exchange or through some kind of public auction mechanism, the US government would be accepting dollars in exchange for Bitcoins. Once that happens, why shouldn't the rest of society including banks and other financial institutions be able to do the same confidently?With the fall of Silk Road and the seizing of its funds, a situation has now been created that in the long term might lead to Bitcoin's final consolidation as a legitimate currency in the US."
5y
Michael O'Neill Michael O'Neill
Wow, interesting story, thanks
5y
alpha yankee alpha yankee
http://www.aljazeera.com/news/europe/2013/05/201351715166784877.html
http://www.aljazeera.com/video/americas/2013/05/2013518202749548750.html
if this happens in the future the requirement to foreign currency exchange can fade away to a great extend, the volume of FX trade can fall substantially, today's M1 M2 monetary scales would be calculated in a different way and requirement to such a big pool of liquidity which in return stimulates QE sort of mechanisms would be history... ? an equation with many unknowns but worth pondering for long term investments...
"The P2P money creation system that Bitcoin proposes is truly something else as it deflates the dark power of debt-based money in society; it allows envisioning a world where the wheels of debt are no longer at the origin of economic activity. "
5y
alpha yankee alpha yankee
and if one BitCoin happens to equal a XAU bullion in value (.ca 2000 USD) then XAU would lose its reserve value, and central banks would begin to swap their gold stocks with bitcoin stocks to an extent the XAU would become an ordinary metal.... too far ? maybe, maybe not... at least XAU has many days of glory to see before losing its reputation for ever... When those days come I would swap my XAU profits with Bitcoin for sure... in a desperately digitalizing world XAU would be obliged to hand over its throne to Bitcoin ultimately...

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