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Dollar and Equities Slip after Fed Hikes, Now It’s the ECB’s Turn

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Talking Points:

  • Heavy speculation long ago priced in the Dollar’s yield advantage, which undercut the response to the Fed’s hike Wednesday
  • Where USD carry gained little traction, the Fed’s acceleration adds greater pressure on over-extended risk appetite
  • The ECB is facing a policy decision more akin to the Fed’s 2014 shift, but it too may connect more readily to risk trends

See how retail traders are positioning in EUR/USD, other key Dollar pairs and global equity indices as monetary policy adds to concern already stoked by trade wars. Find speculative positioning on the DailyFX sentiment page.

A Fed Rate Hike and Upgraded Forecasts Shakes the Wrong Market Pillar

The Federal Reserve triggered a speculative response from the markets this past session, but it wasn’t exactly the reaction from the Dollar and risk assets that most had anticipated. And, that is perhaps a sign of where the speculative tide is rising. Accounting for the US central bank’s event Wednesday, the top line outcome was a 25 basis point hike to the target range bringing it to 1.75 to 2.00 percent. That was fully expected and thereby fully discounted by the broader market. That said, the greater nuance from the ‘quarterly’ events didn’t disappoint. In the Summary of Economic Projections (SEP), the group modestly improved its forecasts for growth, inflation and employment. The figure that traders were looking at however was the outlook for interest rates. There, the median rate forecast rose by 25 basis points to 2.325 percent – or four full 25 basis point hikes through 2018. That is an unmistakable upgrade from the March assessment of three hikes. Yet, as hawkish as the headlines were from this event, the details offered reason for restraint. Though the forecast is now officially four full rate hikes versus three, the actual change from those members voting was slight – really a technicality or rounding error. What’s more, where the Fed is leveraging an advantage for the Dollar, we see the market increasingly unsettled in its pursuit of risk trends and favoring short-term capital gains rather than long-term income.

Dollar and Equities Slip after Fed Hikes, Now It's the ECB's Turn

Why a Fed Upgrade Earned the Dollar Limited Traction but Raises Capital Market Risk

For those that have been trading FX or following interest rates for their investments over the past few years, it is no surprise that the Federal Reserve is the most hawkish major central bank – by a wide margin. The US central bank began tightening its monetary policy (actual rate hikes) back in December 2015 and has more or less maintained a gradual pace of tightening since. This put US policy in distinct contrast to all of its largest peers. In fact, in 2017, the Fed put in for three rate hikes when most of its global counterparts maintained or expanded accommodative monetary policy. And yet, the Greenback steadily lost ground through the year. Why is that? First the markets are forward looking. When the Fed moved to taper, it signaled their intention to start down a path or normalization that would contrast to the ECB, BoJ, BoE and others. This earned the Dollar remarkable gains starting in 2014, well before its first rate hike. This highlights another unique aspect of the market: there was greater appetite for capital gains versus ‘income’ (dividend, carry, yield, etc). In other words, the market valued the undervalued perspective where the start of rate hikes would start the flow of capital into the US, but there was little actual interest in holding long-term exposure to collect a 1.00 or even 2.00 percent annual carry. Slightly increasing the yield advantage doesn’t overcome the serious limitation that yields globally are extremely low such that the risk-reward of long-term buy-and-hold is unprecedented in how unattractive it is. Add to that the implications of tighter monetary policy calling into question how far the markets have reached based on the low volatility and low yield supporting years of speculative stretch, and we undermine the whole reason the Dollar advanced in the first place.

Dollar and Equities Slip after Fed Hikes, Now It's the ECB's Turn

The ECB Decision Is More Tuned to Speculation, A Greater Threat to Risk Trends

Ahead, the top event risk is the European Central Bank rate decision. Of the three major central bank rate decision this week, the ECB’s arguably represents the bigger event for its own currency and can leverage a greater sway over speculative trends than the Fed’s actual move to tighten. It may seem counterintuitive at first blush that a high probability hold in policy can lead to greater market response than a realized hike; but when we consider the market’s penchant for looking ahead and the influence of changing tides for broad risk trends, the potential for the European authority is easier to understand. Through the remarks of key ECB officials over the past few weeks, anticipation for a definitive taper has hit reached levels of virtual certainty across the speculative rank. Of course, this expectation creates the same skew that the Fed faced whereby it is easier to disappoint than impress; but the impact of meeting or exceeding forecasts can more readily translate into market movement. The current situation for the Euro is similar to what the Dollar experienced in 2014. That said, 2017’s remarkable rally likely signals the speculative anticipation has already found its way into the currency’s pricing. Furthermore, if this well-known dove starts its long climb out of extreme accommodation, it can more definitively shift global monetary policy towards a hawkish bearing and definitively disrupts the monetary policy – speculation connection.

Dollar and Equities Slip after Fed Hikes, Now It's the ECB's Turn

Keeping Tabs on ‘Other’ Themes

Between the Fed and ECB policy changes, it is easy to have our attention pulled into the influence of developed market monetary policy. However, we should also consider the other high profile events and themes that are set to define our course forward. For themes, trade wars has been conveniently shoved to the backdrop but it remains very much in flux and represents a prominent risk to risk exposure moving forward. As for event risk, the Pound has itself been remarkably active for headline fodder – it just so happens, there are offsetting fundamental winds to keep the Sterling from establishing a clear range. This past session, the run of May inflation data was headlined by a 2.4 percent headline CPI and 2.1 percent core figure which puts little pressure on the BoE to accelerate or abandon its early monetary policy shift. Meanwhile, the crunch votes in Parliament have rendered support for Prime Minister May’s government with votes against requirement to stay in the single market and the PM to return to negotiation without a Brexit agreement. This not particularly encouraging for the outlook in the UK, but it does narrow the possible outcomes and thereby reduce ‘risk’. We discuss all of this and more in today’s Trading Video.

Dollar and Equities Slip after Fed Hikes, Now It's the ECB's Turn

If you want to download my Manic-Crisis calendar, you can find the updated file here.



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Forex

Bitcoin Net-Longs Slide Into 1-Month Lows

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Bitcoin Client Positioning

Bitcoin Net-Shorts 5.2% Higher Since Last Week

Bitcoin: Retail trader data shows 76.8% of traders are net-long with the ratio of traders long to short at 3.3 to 1. The number of traders net-long is 1.1% lower than yesterday and 8.0% lower from last week, while the number of traders net-short is 0.5% lower than yesterday and 5.2% higher from last week.

Be sure to check out our Bitcoin Trading Guide if you’re new to cryptocurrencies!

Bitcoin Net-Long Dip Indicate Bullish Bias

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Bitcoin prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Bitcoin price trend may soon reverse higher despite the fact traders remain net-long.

— Written by Yayati Tanwar, DailyFX Research



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Canadian Dollar (CAD) Eyes Latest Inflation Report

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Canadian Dollar Price, News and Analysis

  • Inflation expected unchanged, but any uptick could seal another rate hike in October.
  • Canadian economy continues to grow strongly.

IG Client Sentimentshows retail are 46.3% net-long of USDCADa bullish contrarian sentiment indicator.

Canadian Dollar May Receive a Boost on Latest Inflation Report

The Canadian dollar is currently treading water ahead of the July CPI report with the market expecting a 0.1% month-on-month rise and a 2.5% annualized reading, both unchanged from last month’s strong report. Canadian CPI grew at its fastest rate in over six years in June, due to higher energy prices, and another strong reading today will increase pressure on the Bank of Canada to hike rates again, probably at the October meeting. The central bank has already hiked rates by 0.25% twice this year and by a total of four times in the last 12 months. Last week data showed Canadian unemployment falling to 5.8% from a prior 6% while employment grew by 54.1k against expectations of 17K and a prior month’s 31.8k.

USDCAD has remained in a 1.2950 – 1.3200 range over the last month, despite the strength of the US dollar and fears over the NAFTA negotiations. The pair currently trade at 1.3130, just above 23.6% Fibonacci support at 1.3118 and below the July 24 high at 1.3192. An inline or slightly stronger-than-expected reading would seal another 0.25% rate hike and see USDCAD break lower with the 38.2% Fibonacci retracement at 1.2952 the short-term target. A weaker-than-expected reading today would see the July 24 high under pressure.

We have recently released our Q3 Trading Forecasts for a wide range of Currencies and Commodities, including the Canadian Dollar.

USDCAD Daily Price Chart (January – August 17, 2018)

Canadian Dollar (CAD) Eyes Latest Inflation Report

DailyFX has a vast amount of updated resources to help traders make more informed decisions. These include a fully updated Economic Calendar, and a raft of Educational and Trading Guides

— Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1



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USD/CNH & Gold Price Action Point to Reversals Gaining Traction

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Gold, USD/CNH Technical Highlights

  • Gold price reversal and sentiment supportive of a low
  • Correlation between Gold & CNH extremely high
  • USD/CNH reversing hard from near Dec ’16 peak

For an in-depth intermediate-term technical and fundamental outlook, check out the Q3 Gold Forecast.

Gold price reversal and sentiment supportive of a low

On Wednesday, we were discussing the oversold, overly bearish backdrop in gold, but that first we needed to see some type of swift flush and reverse or something of that nature before looking for a low. We didn’t have to wait long, as the past few sessions qualified as flush-and-reverse price behavior, with silver, unsurprisingly and in silver-like fashion, displaying even more capitulation-like behavior, shedding 3 of its 4% in an hour on Wednesday.

As long as gold & silver can hold onto yesterday’s lows on a closing basis, we’re looking for at least a rebound back to the point of origination of the most recent leg lower (~1210 & 15.30). If another leg lower develops we’ll have to reassess.

Check out the IG Client Sentiment to see how other traders are positioned and why it can be used as a contrarian indicator.

Gold Daily Chart (Flush & Reverse)

Gold daily chart, flush and reverse

Correlation between Gold & CNH extremely high

If gold is reversing then so is CNH and vice versa. Gold and CNH have a 3-month correlation of 97%. They are effectively the same market at this juncture. How one plays it is up to the instrument of choice, but be mindful of total risk if trading both.

Gold/CNH Daily Chart (97% 3-mo Correlation)

Gold/CNH daily chart (97% 3-mo correlation)

USD/CNH reversing hard from near Dec ’16 peak

USD/CNH is in the process of carving out a weekly key-reversal bar just shy of the December 2016 high, assuming it doesn’t post a big rally from here. Trade a little higher today or lower and the reversal currently in place will stand as confirmed.

The candle development along with a break in the upward channel on the daily time-frame should usher in more selling, and perhaps in swift fashion. Looking lower, there are minor levels along the way that were carved out as the channel matured, but the broader target is the bottom of the upward grind since last month, right around the 6.60 mark.

USD/CNH Weekly Chart (Key-reversal nearly complete)

USD/CNH weekly chart, key-reversal as long as no sizable rally ensues today

USD/CNH Daily Chart (Channel break to send it lower)

USD/CNH daily chart, channel break to send price lower

Resources for Forex & CFD Traders

Whether you are a new or experienced trader, we have several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.

—Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX



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