Forex traders live for volatility. Significant asset price moves provide for more market opportunities. Currency traders do not care what direction prices move, so long as they move. This is a significant week when it comes to scheduled economic events with three major central banks making statements and the release of monthly U.S. jobs data. There was a danger that many would have to wait-and-see before participating; however, the market has been dealt an opportunistic hand especially when it comes to interest and commodity sensitive currencies like the Aussie dollar and the Canadian loonie. For the remaining majority, the currency markets have been largely quiet and self-contained, with the mighty dollar hovering close to its recent seven-year high against the yen (¥114.18) and near a two-year high against the EUR (€1.2456). The greenback has managed to surge in recent days as investors react to the growing chasm in monetary policy between the Federal Reserve and other central banks, particularly the Bank of Japan.
Australia Maintains Record-Low Interest Rate
In the overnight session Down Under, the Reserve Bank of Australia (RBA) delivered the trifecta of fundamental releases: trade, monthly retail sales, and an interest rate policy decision. The significance of these tier one economic releases was not lost on AUD trading. Stronger-than-expected retail sales (September +1.2%, month-over-month) initially gave the Aussie a lift, before disappointing trade data (-AUD $2.3B versus -$1.8B expected) and an upward revision in unemployment (+6.2% versus +6.1%) sent AUD/USD to its lows around $0.8650. The reaction to the RBA statement was largely positive however, and the AUD/USD has since rallied to its euro highs of $0.8746.
As expected, the RBA left rates on hold (+2.5%) at record lows for the 14th consecutive time, adding the exchange rate is “above estimates of fundamental value particularly given further declines in key commodity prices.” There was no major change to Governor Glenn Stevens’s guidance, as RBA members stuck with the well-worn central banker comment that it remains “prudent.” On inflation, the RBA added that recent data on prices confirmed that inflation is running between +2-3%, reiterating it would also be consistent with the target over the next two years.
Loonie Sinks to Five-Year Low
The ongoing selloff in crude oil looks set to keep the CAD under pressure ($1.1382). Crude prices closed yesterday atop of multiyear lows and again this morning is showing little sign of stabilizing with front-end Brent ($82.10) and West Texas Intermediate ($76.08) on the back foot. Prices have buckled on news that Saudi Arabia intends to cut prices for its North American customers. This would suggest that the Saudi kingdom is content with much lower prices as long as it can increase its market share.
Lower energy prices will obviously have a knock-on effect. A continuation of the weak price trend will weigh further on the already low inflation dilemma and inflation expectations in the U.S., the U.K., and the eurozone. No inflation pressures should keep both the Fed and Bank of England in check, allowing policymakers to continue to signal that they are in no rush to begin a “normalizing” interest rate policy. For the European Central Bank (ECB), the rules are different. Faced with a deflation overhang scenario, the ECB will be under pressure to deliver further stimulus at its rate-setting meeting on Thursday. The market expects the ECB to provide further details on its asset-backed securities purchasing program too, while next month providing further tinkering to the terms of its TLTRO (targeted long-term refinancing operations). If the eurozone economy happens to take another turn for the worse, then there is a strong chance for full-blown quantitative easing to be introduced in the first half of next year.
For USD/CAD, market focus continues to favor the upside with a risk of breaking through the five-year high ($1.1385) posted over a week ago. The market remains long U.S. dollars, similar to other current major positioning. The techies are looking for a medium-term move to $1.1650, though there is a significant amount of “wood to chop” before achieving this. There is rumored to be a plethora of USD/CAD offers touted pre-$1.1400 (option barrier level) and all the way up to $1.1450, just ahead of some weak USD short stop-losses. Bank of Canada Governor Stephen Poloz continues to fret about downside inflation risk. He is due to testify, along with Senior Deputy Governor Carolyn Wilkins, before the House of Commons Standing Committee on Finance in Ottawa this morning two hours after Canadian and U.S. trade numbers are released. It was only a matter of weeks ago that Poloz indicated that a weaker CAD was good for exporters. With commodity prices taking a beating, other exporters need support.