Article / 16 September 2016 at 15:13 GMT

US inflation uptick revives rate hawks

FX Consultant / IFXA Ltd
  • US CPI data put rate hike hopes on life support
  • Oil bears feasting on loonie, USDCAD chewing through resistance
  • An FOMC surprise is unlikely but can't be completely ruled out
Harris Hawk
 Firmer-than-expected US inflation data revived rate-hike hawks. Photo: iStock

By Michael O'Neill

This morning's US CPI data gave a defibrillator-like jolt to US September rate hike expectations. The hawks are no longer on the way to the morgue, but are back on life support. Rising inflation and low unemployment were the two factors necessary for the Fed to raise rates. On Wednesday, markets will find out if that is true.

USDCAD is chewing through resistance levels like Will Farrell does to scenery. There's not a whole lot of reasons to sell USDCAD, especially if you believe that the Bank of Canada deliberately tried to weaken the currency when it highlighted downside risks to inflation in its most recent policy statement. 

Key Canadian economic data have been soft, the 26,200 job gains announced last week mask the fact that year-on-year employment gains have all been in part-time jobs.

Oil prices are in a downtrend and at the moment, the bears are running the market. This week’s International Energy Association downgrade of 2016 and 2017 oil demand forecasts and the negative reaction to the EIA crude stocks change data drove WTI crude prices below support in the $43.10/barrel area. The 61.8% Fibonacci retracement of the August-September range is at $42.77/b. A move below this level would target $39.20/b.

OILUS continuous shows crude in a downward trend
rates Source: Saxo Bank

The USDCAD technicals are bullish. Yesterday’s drop below 1.3190 and then the subsequent rebound suggests that the move was merely corrective and the uptrend remains intact above 1.3190. A break above resistance in the 1.3250-90 zone will extend gains to 1.3450. A break below 1.3110 will negate the topside pressure and suggest additional 1.3000-1.3280 consolidation.

USDCAD hourly
Source: Saxo Bank 

Canada housing: Is Toronto the new Vancouver?

Much has been written about the overheated Vancouver housing market, with warnings that the bubble would burst. In a preemptive strike, the British Columbia government announced a new 15% foreign buyers tax, beginning on August 2. It may have done the trick.

Vancouver home resales fell 18.8% in August, according to the Canadian Real Estate Association (CREA) on September 15. It blamed the new tax for “creating a cloud of uncertainty among home buyers and sellers”.

That may have been bad news for Vancouver speculators, but Toronto speculators were starting to smile. Condo prices rose 9.5% in August, while prices of single-detached homes rose 21.3% year-on-year.

 Scenic Vancouver may be ceding its real-estate boomtown position 
to Toronto. Photo: iStock

The increase in housing prices in Toronto and the Greater Toronto Area is not just due to speculators and off-shore demand. According to CIBC economists, provincial government policies have created a lack of service land. Intensification policies demand 40% of new construction inside existing urban boundaries. A surge in government-related development costs has also had a major impact on prices.

Toronto may be the new Vancouver, and if you are a Toronto homeowner, that’s not a bad thing.

The week ahead

It's a big week for central banks headlined by the Federal Open Market Committee meeting on September 21. Rate hike expectations have diminished to only 15%, so a hike would be a surprise. The FOMC will also release updated projections for the economy. Any downgrade in forecasts could trigger a wave of US dollar selling.

The Bank of Japan may unsettle FX markets before the FOMC gets a chance to do that. On September 14, the Nikkei Asian Review reported that the Bank of Japan may make negative interest rates the cornerstone future monetary policy easing.

A Reserve Bank of New Zealand interest rate meeting follows the FOMC. The RBNZ is expected to leave its overnight cash rate unchanged at 2.0% but suggest further easing ahead.

Also on the agenda are number of important speeches from key central bankers, including the Bank of Canada’s Stephen Poloz on Tuesday and the ECB’s Mario Draghi, the BoE’s Jon Cunliffe and the Reserve Bank of Australia’s Philip Lowe on Thursday.

The week will end with manufacturing PMI data from Germany and the Eurozone.

The week that was

Although the excitement bar was set pretty low for FX markets this week, sadly, the G10 currencies barely rose to the challenge.

FX markets opened the week in Asia with a risk-aversion chill sending shivers across the G10 currencies. Even US presidential candidate Hillary Clinton caught a chill, diagnosed as pneumonia.  A dearth of top-tier data only added to the FX nervousness. It didn’t get any better during the European session. But it certainly did in New York when Fed Board of Governors member Lael Brainard outlined a number of reasons the Fed should leave rates unchanged. Her remarks triggered a wave of US dollar selling, boosted oil prices and lifted equity markets.

Tuesday’s Asia session started with the USD on the defensive, but it didn’t last. Chinese economic data was mostly upbeat. USDJPY drifted higher as risk-aversion fears abated. The British pound took centre stage in Europe. Traders were disappointed in the UK inflation data and sold GBPUSD, which continued during the New York day. A Nikkei Asian Review article said that the BoJ would cut negative rates deeper at its next meeting, and USDJPY soared. The International Energy Association downgraded crude oil demand forecasts and traders crushed WTI.

On Wednesday, USDJPY continued to climb in Asia as the Nikkei story made the rounds, but trading was uninspired. Oil prices recovered somewhat, helped in part by a smaller-than-expected rise in crude oil stocks as reported by API. The European session was quiet though both EURUSD and GBPUSD posted small gains. New York traders kicked the stuffing out of oil when the EIA crude stocks report was released. The crude build was small, but traders focused on the rise in distillates, and WTI dropped 3%.

Thursday’s Asia session was subdued. AUDUSD didn’t suffer any lasting effects from a weaker-than-expected employment report. Weak New Zealand GDP data undermined Kiwi until mid-morning in Europe. Then it started to rally and it never looked back. The Bank of England meeting was the key focus in Europe. GBPUSD was sold after the BoE indicated that UK rates could be cut further in 2016. However, the move didn’t last, and GBPUSD recouped all its losses by the New York close. The unloaded data convinced FX traders that the chances for a September rate hike were slim and slimmer. Oil prices drifted higher and equity markets rebounded.

Friday is ending with US dollar bulls in control due to an uptick in US CPI data.

The US Federal Reserve
 The Fed's September 21 policy meeting will be the centre-piece of the 
trading week. Photo: iStock

— Edited by John Acher

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

16 September
Market Predator Market Predator
Hello Mike, I like this conclusion (The week that was) and forecast (The week ahead). Job well done. Thx! Enjoy weekend.
16 September
Michael O'Neill Michael O'Neill
Thanks, I'm glad you find it useful
17 September
AndrejLences AndrejLences
Michael thank you for the article. What do you think is the lowest WTI oil can next 2 weeks go ? 39 seems as the new bottom, but I am not so sure, can it go even lower ? Thank you.
19 September
Michael O'Neill Michael O'Neill
Hi AndrejLences, Sorry for the late reply. I think that oil may be supported ahead of the Algiers meeting on j kind of rumours that we got this weekend (Stability deal) That should keep WTI in a 42.75-45.00 range. I find it hard to believe that there will be a deal and even harder to believe that if there was a deal, it would work.


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