FOMC shows dovish fangs as subtle shift in stance sees USD relief
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.
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.
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.
Source: Saxo Bank
EURCAD 4-hour chart
Source: Saxo Bank
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