Weekly Recap: Upbeat Results centered on a Volatile USD

The week ended March 20 witnessed abnormal volatility in the FX markets, with FOMC’s dovish statement nourishing huge US dollar swings and emerging as the highlight last week. Apropos to the weekly review, all the three macro reports published last week turned out to be in line with the analysis and projections.

The first macro report titled “Where is USD/JPY heading?” published on March 17, analysed USD/JPY outlook in reference to the FOMC statement which was due for release on March 19. The given analysis provided both upside and downside targets which were subject to the Fed statement coming out hawkish or dovish respectively. The Federal Reserve (Fed) negatively surprised as the FOMC statement was dovish, while investors had been anticipating slightly hawkish jargon. The "patient" phrase was removed, although the FOMC revised inflation and growth forecasts, while the central bank still want to see further improvements in the labour market, implying that current labour market conditions are not sufficient for the Fed to raise rates.

On the release of the statement, USD/JPY slumped from 121.10 levels and plummeted to fresh two week lows at 119.38 levels. The anticipated levels were almost achieved, just falling 38 pips shy of the expected target of 119 levels contingent on a dovish FOMC. As quoted in the report, “By contrast, if the Fed disappoints the markets and the statement reads dovish or fails to provide any hint on the rate‐hike timing, the USD bears are expected to take total control and drown the pair to test support at 120.35 (20‐DMA), below which a fresh sell‐off may trigger pushing the pair to 119 levels where 50‐DMA and 100‐DMA converge.”

The second report titled “EUR/JPY: 128.40 a key Reversal point?” published on March 19, also played out well as anticipated. The major support mentioned in the report at 128.40 did emerge as a key reversal point as the EUR/JPY cross has not seen that level again till date. The cross extended its upward trajectory and reached highs of 130.70 levels, 30 pips short of the anticipated 131 target. Hence, the view that 128.40 levels would act as crucial support and a major reversal was poised to 131 levels by Friday turned out to be successful. As anticipated, euro turned out to be a winner amongst all currencies and the shared currency displayed a solid recovery versus the US dollar, regaining 1.08 handle. The dovish FOMC statement triggered a massive‐sell off in the USD across the board and the yen also managed to regain 121 barrier and scored a high of 121.20 levels on Friday.

Finally, the last report titled “Weak Canadian data likely to lift USD/CAD to 1.2750” published on March 20 also fared well as the report was contingent on the Canadian CPI and retail sales data coming in below estimates. While, January's CPI was unchanged in February, the Bank of Canada's (BOC) core index ticked down a notch. The BOC's year‐on‐year core CPI, which excludes eight volatile components, edged down to 2.1% as expected. Canadian retail sales fell more‐than‐expected to ‐ 1.7% in January, from ‐1.8% in December. Sales fell in seven of 11 retail subsectors, representing 83% of retail trade. The USD/CAD pair did witness a spike above 1.2700 on the weak data release as anticipated and extended gains to 1.2725 levels, almost close to the expected target of 1.2750.

The pair bounced‐off 1.2725 levels and extended losses thereon, falling back on 1.25 handle as broad based USD sell‐off capped the upside and eventually knocked‐off the pair to 1.2533.

The USD/CAD idea worked well as anticipated, “A sustained break above 1.2700 may be witnessed on disappointing Canadian economic data, opening doors for further upside testing 1.2750 levels. However, the upside in USD/CAD looks limited as the US dollar remains subdued across the board.”