- Monetary policy decisions have generated remarkably little market impact from ECB holds to Fed hikes
- Swaps show the market is pricing in a near 50/50 chance of a hike by the BoC by mid-year but near certainty of one by year’s end
- Remarkable progress by the Canadian Dollar and a watch on monetary policy may leverage reaction where others have proven stoic
What do the DailyFX Analysts expect from the major currencies, equity indices and commodities through the 2Q 2018? Download forecasts for these assets and more with technical and fundamental insight from the DailyFX Trading Guides page.
Monetary Policy Decisions Have Proven a Limited Fundamental Lever
We have already navigated through 16 major central banks’ rate decisions this year, and the market impact from these otherwise important events has been largely restricted. The Bank of Canada’s (BoC) upcoming policy event may prove an outlier to this norm however. When we consider the state of global monetary policy, it should come as little surprise that the market is particularly responsive to these deliberations whether they come from the Federal Reserve, the European Central Bank or the Bank of Japan. Broadly speaking, the world is sporting one of the most accommodative (read ‘dovish’) policy standings on record. That means low interest rates and deflated volatility for the most part. Even the early efforts to reverse course (‘normalize’) come with curbs. First waves of rate hikes and QE unwind still leave extremely thin yield and abundant liquidity. From the Fed’s efforts itself, the fastest pace and one of the highest rates is even curbed for potential thanks to an extremely transparent forward guidance.
Why the Bank of Canada Decision is Different
Where much of the market-moving potential of monetary policy events is disarmed is the clear and heavy anticipation. Either it is clear that the groups have no intention to tighten anytime soon, or like the Fed, they telegraph well in advance. For the BoC’s path though, there is considerable debate. Through the outlook of the entire year, the markets – through swaps – are pricing in a near-certainty of another rate hike. That puts it in a unique stratosphere among its peers as one of the few major central banks that is even considering tightening. Add to that picture the close to 50-50 chance of a hike by its mid-year milestone (the late May meeting) and speculative impact is more tangible. For today’s meeting, the market’s afford only a 20 percent chance of another lift, but there is plenty to account for in anticipation, which will keep the market highly tuned to what the Governor Poloz and his colleagues signal
The Activity of the Canadian Dollar
Another aspect contributing to the potential in this event is the activity of the Canadian Dollar itself. Through the opening quarter of the year, the Canadian Dollar dove aggressively and persistently. The decline was an earned one between the unfavorable sentiment surrounding NAFTA negotiations, the threat of a blanket US tariff on imported steel and aluminum, and the downgrade in BoC rate forecasts. After a deep dive that put the market in to a technically oversold position, the fundamental picture started to shift for the better. Canada won an exemption from the US tariffs, optimism started to show through in negotiations and the rate speculation started to stabilize alongside data. In turn, the Canadian Dollar retraced more than half of its earlier losses in just the past month. The Canadian Dollar has been remarkably active over this period, which will make it even more sensitive to what is on the docket ahead.
Outcomes and Options
There are a few things I will be looking for in the BoC rate decision. First and foremost, the speculative rank will look to any indication of how likely a hike in May is. At close to 50 percent, it is easy to tip the probabilities in or out of favor of this unique view. Rhetoric that focuses on inflation rather than economic concerns for example could signal to the attentive speculator that favor has been cast. However, I would also keep tabs on the central banks assessment of how trade wars can impact this trade-dependent country as well as the trouble that can arise from financial excesses (such as housing and general debt). As for crosses, looking for bullish cases for the Loonie may find pairs that have already traversed significantly; but that is where the momentum is most favorable. I like NZD/CAD and EUR/CAD as they haven’t covered much ground yet, but CAD/CHF and CAD/JPY still have potential. The list is short for what pair is best served for a Canadian Dollar retreat, but I think AUD/CAD is one of the best technically staged pairs. We focus on the BoC rate decision and its potential in today’s Quick Take Video.
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Top Tier Data, Risk Aversion Portend Volatility
Financial markets may face breakneck volatility as a steady stream of heavy-duty scheduled event risk is compounded by wild swings in sentiment.
The US Dollar may continue to push higher as haven demand amid deteriorating market sentiment takes over from Fed policy bets as the catalyst du jour.
There is an argument to be made that Sterling has suffered enough and that most, if not all, of the bad economic backdrop has been priced in. But is next week the week to have that argument?
The Australian Dollar faces a week full of US economic data, but much shorter of domestic numbers. This could see USD back in the ascendant, if only for lack of AUD-specific impetus.
Chinese Yuan Forecast: Yuan May Benefit from Capital Inflows, Trade Talks and Chinese PMI
Capital inflows could remain high around June 1, when A shares are officially included in MSCI indices; trade talks may solve some discrepancies; PMI gauges could boost the outlook of a sustainable recovery.
Crude oil hit a wall as OPEC and its allies are said to increase production while total US inventories swelled by the most since February.
Equities Forecast: S&P, Dow, DAX & FTSE – A Cautionary Pause Begins to Show
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Euro Moving Towards Key Support to Curb Persistent Selling
EUR/USD TECHNICAL HIGHLIGHTS:
- EURUSD selling shows no signs of abating, close below Jan 2017 trendline sets up further weakness
- Key risk events on the calendar come in the form of Eurozone inflation and US NFP report
For the intermediate-term fundamental and technical outlook on EUR/USD, check out the recently released DailyFX Quarterly Forecast.
The theme of selling EURUSD has shown no signs of abating with the pair now trading around the mid-1.16 area. Last week saw the trendline dating back to January 2017 offer some mild support on Wednesday, however, another bout of Euro weakness saw the trendline support ultimately breached. A close below the trendline could provide a telling sign that another leg lower will be in store for the pair.
As we look ahead to next week, risk events on the calendar for the Euro will come in the form of the Eurozone inflation and the latest US NFP report. In terms price action, the aforementioned breach of the Jan’17 trendline sets up run in on the 2016 high situated at 1.1616, while a weekly low from November 7th at 1.1553 looks to be pivotal, a break below will likely see an extension of the bear run. Resistance on the topside resides at 1.1709, marking the 38.2% Fibonacci Retracement of the 1.0340-1.2556 rise, alongside 1.1750 (May 24th high).
EURUSD bulls on the longer term may find comfort in the fact that the Relative Strength Index on the daily chart is in oversold territory, which could indicate that the pair may see a modest reversal in the near-term. However, when the pair has previously been in oversold territory the rebound has been mild at best and followed by another wave of selling.
EURUSD CHART: DAILY TIMIE-FRAME (Sep 16-May-18)
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Crude Spills on Saudi’s Proposed Increase, Short-Term Top Likely
Fundamental Forecast for USOIL: Neutral
- The ONE Thing:Saudi turning on the spigots may lead to lower prices, but bullish environment remains. OPEC rhetoric is rightly center stage as oil traded notably weaker toward week’s end. Saudi Arabia’s oil minister, Ali-Falih, said he sees a ‘likely’ oil supply boost in H2 2018.
- Per BHI, U.S. Oil Rig Count rises to 859, US total count at 1059
- Crude Oil Price Forecast: Brent Premium Favors OPEC Induced Volatility
- The technical analysis picture of crude oil shows a sharp pullback off 3-year highs. Chart support comes in for the WTI front-month contract at $67.50/$64.50 per barrel.
Crude had the first weekly decline for the month of May as OPEC’s comments spooked bulls. More oil coming out of Saudi & Russia is helping to narrow a popular futures calendar spread that helped to visualize the bullish support for crude that weakened this week.
Shortage Fears Wane on OPEC+ Rhetoric
Data source: Bloomberg
Seemingly bearish rhetoric took hold of the Oil market causing the price to fall on Friday. Multiple reports came about OPEC, and their allies that are collectively known as OPEC+ as rolling back production cuts. There remains uncertainty about Venezuelan and Iranian supply that has likely supported these comments from OPEC+.
The front-month WTI crude contract broke back below $70 and calendar spreads between December 2018 to December 2019 futures contracts narrowed to the weakest levels in more than a month. The wide spread aligned the move above key resistance levels.
Additionally, owners of oil producer equities are likely not as concerned as an exposed futures traders given that many producers have been locking in high prices through hedging via options.
Crude has nearly erased May’s Gains With ~3.5% Drop Last Week
Data source: Bloomberg. Created by Quasar Elizundia
Once again, WTI and Brent crude has become the market everyone is discussing! Unlock our forecast here
Big Pullback on 240-Minute Chart
Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT
The sharp pull-back is seen well with RSI(5) on the four-hour chart. The RSI(5) has hit the lowest point since crude began its impressive ascent from $58/bbl in February to above $72/bbl earlier this week.
Since the news came that Saudi and Russia are considering easing global output cuts, the price dipped aggressively lower. Oil has its first weekly loss for the month on Friday’s nearly 3% loss.
Traders can look to trendline support zone and prior structure support points near $64.50/67.50 as likely support on the pullback. A deeper move below this zone would shift me from neutral to cautiously bearish, but the broader cycle change favoring commodities makes this a difficult view to hold.
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Next Week’s Data Points That May Affect Energy Markets:
The fundamental focal points for the energy market next week:
- Monday: US Memorial Day
- Monday: Statistics Norway releases quarterly survey on planned investments in the oil industry
- Wednesday (delayed for holiday) 04:30 PM ET: API Weekly Oil Inventories Report
- Thursday (delayed for holiday) 11:00 AM ET: EIA issues weekly US Oil Inventory Report
- Thursday 12-2pm: EIA releases monthly report
- Friday 1:00 PM ET: Baker-Hughes Rig Count
- Friday 3:30 PM ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts
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