Watch out FX traders. Wednesday was another tumultuous day in the currencies following BoC hike and US dollar initially continued to wilt but caught a strong bid late in the evening. Overnight, Aussie jobs slowed to a higher level than was expected but unemployment edged up, capping AUD at 0.80. Earlier today, US Philly Fed survey eased as well as US jobless claims. Here is a chart suggesting a possible January-February seasonality in Bitcoin's price change. Could it be a result of Chinese selling Bitcoin in January to help Chinese New Year purchases?
The Bank of Canada delivered a rate hike that was 90% priced in but left the market with few clues about what's coming next and when. The initial reaction in USD/CAD was higher on talk of a dovish hike but the commentary from Poloz didn't back that up. He spoke about wanting to get back to 2.50%-3.50% and increased confidence the economy was on track. At the same time, he spent half the press conference talking about NAFTA risks.
After hitting 1.2520 USD/CAD slowly reversed down to the lows of the day at 1.2370 but part due to a broad US dollar selloff. At the same time, cable soared to a post-Brexit high of 1.3940 as part of a rout on the dollar.
However the selling stopped after the Beige Book. It offered a slightly more-optimistic take on wages and the economy. Earlier in the day, Dallas Fed President Kaplan also made a hawkish shift, saying that his base case is now three hikes this year with the possibility of more.
With that, the dollar began a broad reversal and cable fell back to 1.3820 – more than 120 pips from the high. The euro also fell below 1.22 and USD/JPY rose to 111.30. As part of the same move, bonds sold off and US 10-year yields rose to 2.59% while gold suffered a $10 decline, which is the worst in five weeks.Through it all, the S&P 500 ripped another 26 points higher to close just below the record high.
Sorting through all the 'why' in the market right now is a mammoth task. More important is the 'what' and that's heightened volatility. It was evident in FX lately and it could spread. If so, that's a broader negative for stocks and risk appetite.
It's getting close to the time for caution.
Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts.
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