BoC Ends QE, Mulls Rate Rise: CAD soars; FX stirred, not shaken

Euro Dips, Dovish ECB Expected, US Bond Yield Spread Narrows

Summary: The Canadian Loonie finished as best performing major after the Bank of Canada announced that it would end its weekly purchases of government bonds and signalled it could hike rates sooner than it thought.  The BoC stirred up FX markets, which saw a burst of volatility before steadying. USD/CAD plunged to an overnight low at 1.2300 from a 1.2387 open yesterday, before bouncing to settle at 1.2360 in late New York. Earlier in the day, the Australian Dollar (AUD/USD) jumped to 0.7536 after Australia’s Q3 Trimmed Mean CPI climbed 0.7%, higher than median expectations at 0.5%. At the close of trading in New York, the Aussie (AUD/USD) eased to 0.7518 (0.7505 yesterday). The Kiwi (NZD/USD edged up to 0.7172 from 0.7163. The Dollar Index (USD/DXY), which measures the value of the Greenback against a basket of 6 major currencies, dipped to 93.88 from 93.93 yesterday. Ahead of today’s ECB policy meeting, the Euro finished flat at 1.1600. Sterling (GBP/USD) gradually lost ground against the US Dollar, settling at 1.3737 (1.3762). UK Chancellor Sunak unveiled the UK budget which according to market, amounted to little. The Greenback was lower against the Japanese Yen, settling at 113.85 from 114.13 yesterday. Against the Asian and Emerging Market currencies, the Dollar saw modest gains. USD/SGD (US Dollar-Singapore Dollar) closed at 1.3487 (1.3475) while USD/THB (US Dollar-Thai Baht) was last at 33.30 (33.22 yesterday. The Greenback rallied against the Chinese Offshore Yuan (USD/CNH) to 6.3940 from 6.3775.
In the Treasury markets, the US 10-year bond yield tumbled 7 basis points to 1.54% while Japan’s 10-year JGB rate was last at 0.09% from 0.10%. Germany’s 10-year Bund yield fell 6 basis points to -0.18% (-0.12%). Two-year US Treasury bond rates though climbed to 0.50% from 0.45% yesterday. The sharp narrowing of the 2-year vs 10-year US bond yield spread indicative of heightened expectations of a Fed rate hike next year.

Among data released yesterday, New Zealand’s Trade Deficit rose to -NZD 2.171 billion from -NZD 2.139 billion. Australia’s Headline Q3 CPI printed at 0.8%, unchanged from the previous 0.8%, matching forecasts at 0.8%. The Australian Q3 Trimmed Mean CPI, which is the RBA’s preferred measure of inflation, rose to 0.7% from 0.5% (q/q) and at an annual 2.1% from 1.6%, higher than estimates of 1.8%. Germany’s GFK Consumer Confidence Index climbed to 0.9% from a previous 0.3%. Switzerland’s Economic Sentiment Index for October eased to 15.6 from 25.7 in September, but bettering forecasts at 8.7. US September Headline Durable Goods Orders eased to -0.4% from 1.8%, but higher than estimates at -1.1%. September Core Durable Goods Orders were flat at 0.4%. The Bank of Canada kept its Overnight rate unchanged at 0.25%.

• USD/CAD – The Dollar vs Canadian Loonie had a roller coaster ride in choppy trade. Opening at 1.2387 yesterday, USD/CAD tumbled to 1.2300 following the BoC rate decision and statement. The Greenback rebounded against the Loonie to finish at 1.2360 after hitting an overnight high at 1.2432.
• EUR/USD – Ahead of today’s ECB meeting the Euro closed flat at 1.1600. Overnight high traded for the EUR/USD pair was at 1.1626. The shared currency traded to a low of 1.1585 before settling at the 1.1600 level. Euro traders are expecting the ECB to maintain a dovish bent at the conclusion of today’s interest rate policy meeting (10.45 – 11.30 pm Sydney).
• AUD/USD – The Aussie Battler rose to an intraday high at 0.7536 following the release of a higher Australian Trimmed Mean CPI. AUD/USD slipped back to finish the New York session at 0.7518/ Overnight low traded for the AUD/USD pair was at 0.7487.
• USD/JPY – Against the Japanese Yen, the US Dollar slipped to 113.85 from 114.13. The fall in the US 10-year bond yield to 1.54% from 1.61% weighed on the USD/JPY pair. The rise in shorter curve of the US treasury rates pared any further falls for the Greenback against the Japanese currency. The Bank of Japan also meets on interest rates today.

On the Lookout: Today’s risk event is the BOJ and ECB’s interest rate policy meetings. The Bank of Japan is not expected to maintain its BOJ policy rate at -010% and downgrade its economic assessment. Markets do not expect the Japanese central bank to hike rates in the foreseeable future. Economic data releases kick off with Japan’s September Retail Sales report (m/m no f/c, previous was -4.1%; y/y f/c -2.3% from -3.2% - ACY Finlogix). Australia releases its Q3 Export and Import Price Index. Export Price Index is forecast at 3% from previous 13.2% while the Import Price Index is forecast at 0.6% from 1.9% - ACY Finlogix). That’s a big difference between the quarters so be on the lookout for changes. Germany starts the European data reports with its October Unemployment Rate (f/c 5.4% from 5.5%). The German Jobless Change follows (f/c -20,000 from previous -30,000.), German Preliminary CPI (m/m 0.4% from 0.0%; y/y f/c 4.4% from 4.1% - ACY FInlogix). Italy releases its October Consumer Confidence (f/c 118.5 from 119.6). The Eurozone releases its October Final Consumer Confidence Index (f/c -4.8 from -4.0). Spain releases its Flash CPI (f/c 4.4% from previous 4.0%), Spanish Unemployment Rate (f/c 14.1% from 15.3%). The ECB is expected to maintain its Main Refinancing Rate at 0.00%. The US rounds up the day’s releases with its Advance Q3 GDP report (f/c 5.5% from 6.2%), US Q3 Advance GDP Price Index (f/c 5.5% from 6.2%). US Weekly Unemployment Claims (f/c 290,000 from 290,000) and finally September Pending Home Sales (f/c 0% from a previous 8.1%). Whew, another heavy data day ahead. Tin helmets on…

Trading Perspective: Today is just another day for you and me in the FX markets. The BOJ and ECB interest policy meetings will generate more interest as global central banks begin their tapering process. The next step is raising rates, and the question is, who goes first, and to what extent. What this all means is that we can expect FX volatility to pick up. Happy days!
FX traders would be wise to keep an eye on the bond markets. For now, it’s all about interest rates, yield differentials and curves.

• EUR/USD – The Euro traded in a lacklustre and relatively tight range overnight. The shared currency settled at 1.1600, exactly where it opened yesterday. The EUR/USD takes centre stage today with the ECB expected to keep its dovish bent at the conclusion of its meeting today. Which has kept the shared currency on the weak side. Don’t discount surprises, and we could be in for more choppy days ahead for the EUR/USD pair. Immediate resistance lies at 1.1625 (overnight high 1.1626). The next resistance level is found at 1.1655, and 1.1685. Immediate support can be found at 1.1585, 1.1555 and 1.1525. Likely range today 1.1560-1.1660. Trade, the range but get ready to rumble…

(Source: Finlogix.com)

• AUD/USD – The Australian Dollar continues to outperform, for now. Overnight the Aussie traded to a high at 0.7536. Immediate resistance lies at 0.7535. The next resistance level is found at 0.7555. Immediate support can be found at 0.7495 followed by 0.7470 and 0.7440. Look for the Aussie to consolidate in a likely range today of 0.7470-0.7540. Preference is to sell AUD/USD rallies, ideally near recent highs.
• USD/CAD – the Canadian Dollar went a bit looney last night after the Bank of Canada surprised markets, not necessarily with its decision to end QE. BoC Governor Tiff Macklem signalled that they could be ready to hike borrowing costs next year, as early as April. Overnight the USD/CAD rate tumbled to a low at 1.2300 (1.2387 yesterday) before rebounding to settle at 1.2360. Immediate resistance for today lies at 1.2395, 1.2435 and 1.2465. Immediate support can be found at 1.2335, 1.2305 and 1.2285. We could be for another looney session in the USD/CAD pair. Likely range 1.2290-1.2410. Tin helmets ready.
• GBP/USD – Sterling dipped to 1.3737 from 1.3762 yesterday. The British currency struggled to make headway against the Greenback and some other FX pairs. The GBP/JPY pair, a barometer of risk appetite, finished 0.5% lower to 156.40 (157.10 yesterday). UK Chancellor of the Exchequer Rishi Sunak unveiled a GBP 75 billion budget which failed to impress. UK economic data releases have underwhelmed which has weighed on the British currency. For today immediate support lies at 1.3710 (overnight low 1.3709). The next support level is found at 1.3680 followed by 1.3650. On the topside, immediate resistance lies at 1.3750, 1.3780 and 1.3810. Look for further choppy trade in this currency pair. Likely range 1.3685-1.3785.