In the wake of volcanic ash clouds and the Goldman Sachs fraud charges, and despite the overnight blowup in Chinese equity markets after authorities there announced new, strict measures aimed at choking off the real estate bubble, risk is impressively refusing to give up the fight and is making a stand late in the North American session with predictable results for FX: the USD rally has faded a bit and AUDUSD is pressing at the important 0.9220 resistance again as we are writing this. JPY crosses, meanwhile, are posting almost across the board hammer formation as this morning’s lows were unable to hold into the close and bond markets eased lower. The US 10-year future, to take an example, had erased almost all of the Goldman-Sachs induced run-up news from Friday. The reversal in USDJPY is an important one and sets up better odds for a further rally in coming days.
It came forward from apparently reputable, yet unnamed, sources today that SEC commissioners voted 3-2 (along party lines) to approved the decision to sue Goldman.
Bank of Canada preview
A number of factors have driven USDCAD all the way to the parity level and even slightly beyond for the cycle: an increasingly hawkish Bank of Canada that has made it clear that it will hike rates beginning soon and a market that has responded to this and now priced in some 150 bps or more of policy tightening in the coming year. There are three more drivers for a strong Canadian dollar at the moment: 1) the Bank of Canada has expressed far less concern about the strength of the currency in this cycle than it did in the past cycle of strengthening, 2) oil prices (at least until the last couple of trading days) have been very strong and 3) Canada's bank almost completely bypassed the financial crisis due to strictre regulation and the Canadian fiscal and debt positions are among the best of the major countries.
A number of factors have driven USDCAD all the way to the parity level and even slightly beyond for the cycle: an increasingly hawkish Bank of Canada that has made it clear that it will hike rates beginning soon and a market that has responded to this and now priced in some 150 bps or more of policy tightening in the coming year. There are three more drivers for a strong Canadian dollar at the moment: 1) the Bank of Canada has expressed far less concern about the strength of the currency in this cycle than it did in the past cycle of strengthening, 2) oil prices (at least until the last couple of trading days) have been very strong and 3) Canada's bank almost completely bypassed the financial crisis due to strictre regulation and the Canadian fiscal and debt positions are among the best of the major countries.
Of course, over the last couple of days, the USDCAD has suddenly been derailed by a sharp consolidation in risk appetite, which has included a sharp rally in Bankers Acceptance STIRS and a sharp sell-off in oil and CAD has been one of the most negatively affected currencies, just as it was one of the strongest currencies when risk appetite expands.
This all sets up a potentially large reaction to the decision tomorrow: there are two major factors to consider: the status of risk appetite and the BoC rhetoric: No change in guidance (disappointing the sizable minority looking for a more aggressive statement) plus a continued souring in risk appetite could make for USDCAD trading above 1.0300 in a hurry. A hint that the Bank is looking to time its first hike for the June 1 meeting and global risk markets suddenly back on a rally track would see us back at parity in a flash. Regardless of the immediate outcome, the parity level may be a tough one to crack for a while unless we see 10% more upside in global equity markets from the recent top and a 90 dollar/barrel oil price. A "mixed signal" situation could confuse the CAD bulls and bears in equal measure. Our view is that CAD is getting overvalued, with the admission that strong risk appetite in the near term can continue to keep valuations stretched to even-more-stretched.
Chart: USDCAD vs. oil prices
A fairly clear price relationship here. The move back below 84 dollars/barrel is a clear disappointment for the CAD bulls and is technically interesting for oil traders.
A fairly clear price relationship here. The move back below 84 dollars/barrel is a clear disappointment for the CAD bulls and is technically interesting for oil traders.
Chart: USDCAD vs. March 2011 STIRs
The market has gotten very aggressive on its forward view of the Bank of Canada's actions, which gives strong fundamental support. Of course, the Bank of Canada will have to follow the market's script and continue to find justification for this view in the months to come.
The market has gotten very aggressive on its forward view of the Bank of Canada's actions, which gives strong fundamental support. Of course, the Bank of Canada will have to follow the market's script and continue to find justification for this view in the months to come.
Riksbank also on tap
Besides the Bank of Canada meeting tomorrow, we also have a Riksbank meeting on tap. The Riksbank is looking to hike in approximately the same time frame and concern is riding high there about the potential for a new housing bubble. EURSEK has not been doing much of anything for the last seven weeks as the market doesn't seem to have a view on that pair. Could the meeting tomorrow shock the market out of its complacency and either see a sharp rally or sell-off out of the range? While the market's forecast for Riksbank has been relatively stable of late, a rash of relatively weak data is preventing the krona from rallying strongly vs. the Euro, including a poor recent showing in Retail Sales, a low print for the latest inflation data, and a fall in average house price data in March.
Besides the Bank of Canada meeting tomorrow, we also have a Riksbank meeting on tap. The Riksbank is looking to hike in approximately the same time frame and concern is riding high there about the potential for a new housing bubble. EURSEK has not been doing much of anything for the last seven weeks as the market doesn't seem to have a view on that pair. Could the meeting tomorrow shock the market out of its complacency and either see a sharp rally or sell-off out of the range? While the market's forecast for Riksbank has been relatively stable of late, a rash of relatively weak data is preventing the krona from rallying strongly vs. the Euro, including a poor recent showing in Retail Sales, a low print for the latest inflation data, and a fall in average house price data in March.
Looking ahead
Also on tap we have the New Zealand consumer prices for Q1 and the RBA minutes in the Asian session. AUDNZD is beginning to look “reversalish” again, though it still needs a close through 1.2950 and then 1.2820 to speak of outright bear market potential.
Also on tap we have the New Zealand consumer prices for Q1 and the RBA minutes in the Asian session. AUDNZD is beginning to look “reversalish” again, though it still needs a close through 1.2950 and then 1.2820 to speak of outright bear market potential.
UK inflation (CPI/RPI) is also on tap tomorrow after GBPUSD has made a fairly sharp comeback attempt in today's trade and looks to close above the 55-day moving average after trading more than 100 pips below it at one point today.
EURUSD made a stand at important levels and remains above the final Fibo retracement supports on the throwback sell-off. More bullish confirmation for that pair would come with a move back above the 55-day moving average, which would kick the 1.3800+ attempt scenario back into high gear, while a close below 1.3400 would dampen expectations again.
Stay on your toes out there. The Chinese stock market drop yesterday received less attention than it should have. A clamp down on construction in China could have tremendous consequences for commodity markets and companies that provide materials for the Chinese building spree.
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