Yields on core European bonds went for a slide yesterday as prices rose in response to the ECB's decision to leave its QE programme unchanged – for now at least. Elsewhere, the USD continues to make gains on its peers.
Article / 29 July 2016 at 16:28 GMT

Month-end mayhem sends US dollar on a joyride

FX Consultant / IFXA Ltd
  • US and Canadian GDP miss forecasts
  • Month-end portfolio rebalancing flows add to US dollar's woes
  • It's the RBA and the BoE's turn to disappoint

oil worker
 Weaker oil prices and a slowing US economy should keep USDCAD in demand. Photo: iStock.

By Michael O'Neill

The US dollar went for a joyride today, fuelled by month-end flows, stop losses and disappointing data. The weaker-than-expected US GDP data certainly reduced the prospect of a US rate hike in September.

The Disappointment Duo

The Federal Open Market Committee and the Bank of Japan yanked the rug out from under markets when they failed to live up to advanced billing.

The FOMC got the ball rolling. Prior to the meeting, various Fed officials had made comments that referenced improving data, the rebound in the employment report and diminished Brexit fallout, leading to the belief that Wednesday’s FOMC statement would lean toward hawkish. Instead, the statement was ambiguous, giving something to everyone and satisfying no one.

The hawks liked the reference to the labour market strengthening, and the increase in labour utilisation. They also like the nod to increased household spending and were thrilled with the line "Near-term risks to the economic outlook have diminished”. “Hawk” the herald angels sang.

“Coo” said the doves. This statement is not a whole lot different from the June statement, and that was doveish. The Committee barely altered their concerns stating, “Business fixed investment has been soft, inflation has continued to run below the Committee’s 2% low run objective” and “market measures of inflation compensation remain low."

FX Traders voted with their wallets and sold US dollars.  That move was validated on Friday, when US Q2 GDP grew at a disappointing 1.2%, well below the 2.6% forecast. It shouldn’t have come as a surprise.  Yesterday, the Atlanta Fed's GDPNow indicator was updated to show Q2 GDP was only 1.8%. 

Today’s US dollar selling may have had more to do with month-end portfolio rebalancing than anything else.

The Bank of Japan is the other half of the disappointment duo. FX markets had expected the BoJ to announce a cut in interest rates and an expansion in bond purchases. Instead, they announced a review. The BoJ governor, Haruhiko Kuroda, said that they will review prior activities to determine why easing hasn’t boosted inflation.

USDJPY dropped from 105.57 to 102.62, which will give Mr. Kuroda something more to think about. Intervention, perhaps?

Loonie behaving loony

Fans of Sesame Street know that Kermit sang that it wasn’t easy being green. It’s not easy being the Loonie either. 

Earlier in the week, the road map for the Canadian dollar was pretty clear. Falling oil prices would drive USDCAD through resistance at 1.3250 and extend those gains to 1.3400.

Then today happened. USDCAD dropped from 1.3184 after the US and Canadian data was released and hit 1.3078, while WTI was languishing below $41.00/barrel. 

Month-end Canadian dollar demand for portfolio rebalancing contributed to the USDCAD plunge, as did diminished US rate hike expectations following their soft GDP report.

Looking ahead, the WTI downtrend from June 27 remains intact while trading below $43.30, which is being guarded by an intraday down trendline that comes into play at $41.50. As long as prices are below these levels, the 50% Fibonacci retracement level of $38.72 is a viable target.

Meanwhile, the USDCAD uptrend from June 23 remains intact while trading above 1.3000. A break back above 1.3185 would suggest that today’s move was merely corrective.

The prospect of weaker oil prices and a slowing US economy will keep USDCAD in demand.

USDCAD 4-hour
 Source: Saxo Bank

The week ahead

There are two central bank meetings scheduled, so two opportunities for markets to get disappointed.

There is a 50/50 chance that the Reserve Bank of Australia will cut rates on Tuesday, in part because of last week’s CPI report. In the UK, a Reuters poll had 46 out of 49 economists surveyed, expecting that the Bank of England would cut rates by 25 bps on August 4.
Data wise, it is a nonfarm payrolls week. The consensus forecast is for a gain of 170,000 which is well down from June’s 287,000 gain.

China PMI data will lead off a slew of PMI data reports for Europe and the United States, while Canadians (most of them, anyway) have a holiday on Monday.

The week that was

It was a big week for big central banks. The FOMC interest rate statement and the Bank of Japan policy statement were highly anticipated. They both disappointed.

Monday was boring. The G20 statement was the usual blather. The US dollar was reasonably firm although yen showed signs that it wanted to move higher. EURUSD bounced within a 1.0950-1.0990 range until the New York close. Traders were unimpressed with slightly better IFO data and there wasn’t any US data of note. Oil prices declined throughout the day and as it turned out, throughout the entire week.

Tuesday, Japan stole the show. The rumour of Japan’s soon-to-be announced fiscal stimulus program of 20 trillion yen was pared back to a mere 6 trillion. USDJPY tanked, the Nikkei sank and long kiwi and aussie positions were money in the bank. 

EURUSD cracked above 1.1000 and hit 1.1030, but couldn’t hold the gains. GBPUSD was undermined when an MPC member, Martin Weale, appeared to support a Bank of England rate cut. US new Home Sales jumped 3.5% in June, back to pre-crisis levels. Surely the FOMC would be impressed (they weren’t).

Wednesday was lively. Japan’s Prime Minister, Shinzo Abe, trashed the rumour of a ¥ 6 trillion stimulus plan when he said it would be ¥28 trillion. USDJPY soared to 106.60 from 105.10. Then traders had second thoughts, and those thoughts included “what about the BoJ? Will they cut rates?” 

USDJPY retreated back to the 105.50 area. US Durable goods proved to be not so durable, but the news didn’t have much impact on FX. Meanwhile, WTI prices were attempting to stage a recovery and had climbed back to $43.17 from $42.50/b. The EIA spoiled that rally when they reported another rise in crude oil stocks. WTI closed in New York around $41.70/b.

The New York session ended with markets trying to make sense out of the FOMC statement. Rates were left unchanged and the statement was rather ambiguous. EURUSD traders thought it was doveish and drove the single currency to 1.1075 from 1.0980. Sterling traders drove cable to 1.3245 from 1.3095. USDJPY traders didn’t really care, and were more concerned with the pending Bank of Japan announcement.

Thursday, EURUSD managed to extend its post FOMC gains to 1.1119 before consolidating and spending the entire day in a 1.0960-1.1115 range. USDJPY was offered ahead of the BoJ meeting and sterling was undermined by BoE easing concerns. 

Oil was a major focus in New York with WTI on track for July to be the worst month in a year. The Atlanta Fed GDPNow indicator for Q2 GDP was downgraded to 1.8% from 2.2 % on Wednesday. The day ended in New York with traders awaiting the BoJ announcement.

Friday, the BoJ left policy and rates unchanged and USDJPY went on a wild ride . By the time European traders were getting ready to head out the door for the weekend, USDJPY was below the overnight low and EURUSD was in the mid 1.11's. 

— Edited by D. Deacon

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


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