This week our currency strategists focused on the Bank of Canada rate of interest statement and the Euro Area PMI survey updates for potential high-quality setups.
Out of the eight scenario/price outlook discussions this week, two discussions arguably saw each fundie & technical arguments triggered to turn out to be potential candidates for a trade & risk management overlay. Take a look at our review on those discussions to see what happened!
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CAD/JPY: 1-Hour Forex Chart by TradingView
On Tuesday, our strategists had their sights set on the BOC monetary policy statement and its potential impact on the Canadian dollar. Based on our Event Guide, expectations were for a 50 basis point rate cut to three.75%, with markets on the lookout for signals on future easing.
With those expectations in mind, here’s what we were considering:
The “Loonie Lift” Scenario:
If the BOC delivered a smaller 25 bps cut or signaled a pause in its easing cycle, we anticipated this might support CAD. We focused on CAD/CHF for potential long strategies if risk sentiment was positive, especially given the pair’s position near rising trend line support. In a risk-averse environment, EUR/CAD short was our pair of alternative given the ECB’s recent dovish signals about potential December rate cuts.
The “CAD Crash” Scenario:
If the BOC cut rates by 50 bps and maintained a dovish stance suggesting further aggressive easing, we thought this might weigh heavily on CAD. We eyed CAD/JPY for potential short strategies in a risk-off environment, particularly given rising tensions within the Middle East and Japanese officials’ recent warnings about potential currency intervention. If risk sentiment leaned positive, AUD/CAD long made sense given Australia’s recent strong employment data supporting the potential of the RBA leaning less dovish ahead.
What Actually Happened
The BOC delivered the expected 50 basis point rate cut, lowering its overnight rate to three.75%. This marked their fourth consecutive rate cut since June.
Key points from the BOC statement:
- Inflation hit the two% goal with core inflation falling below 2.5%
- Labor market remained a priority with population growth outpacing modest hiring
- Growth expected to slow in H2 2024 but strengthen regularly as rates declined
- BOC expects to “reduce policy rate further” if economy evolves as forecast
- Emphasized decisions can be taken “one meeting at a time”
In his press conference, Governor Macklem notably shifted tone, emphasizing that “we’re back to low inflation” and that risks around their inflation forecast are “reasonably balanced.” His key message: “Now our focus is to take care of low, stable inflation. We want to stay the landing.”
Market Response
This end result fundamentally triggered us to look towards CAD/JPY for opportunities, especially given the arguably broad market weakness within the front half of the week.
CAD/JPY saw immediate selling pressure when the BOC announced its jumbo rate cut, dropping steadily after running up the event. The BOC cut and profit taking were likely in play, pushing CAD/JPY lowering in the next two sessions from roughly 110.50 to 109.50 before the market stabilized.
By Friday’s close, CAD/JPY was hovering around 109.60, having found support on the rising 100 SMA and 109.50 minor psychological area.
The Verdict
So, how’d we do? Our fundamental evaluation appropriately anticipated a bearish move in CAD/JPY on the bearish BOC decision, but our technical argument was no where in sight because the market rallied higher even before the BOC event.
Still, if a bearish position was taken after the BOC event and because the bears rejected the bulls on the 110.50 minor psychological level, a move might have been caught who adapted to what the market was giving them.
With that perspective, we expect that this discussion was “likely” supportive of a net positive end result as CAD did fall after the bearish BOC event, but again, probably only by those that adapted the unique technique to the brand new market picture.
EUR/AUD: 1-Hour Forex Chart by TradingView
On Wednesday, our strategists had their sights set on the upcoming Euro Area PMI updates for October 2024 and their potential impact on the euro. Based on our Event Guide, expectations were for slight improvements within the manufacturing and services sectors, with Euro Area Manufacturing PMI forecast at 45.1 (vs. 45.0 previous) and Services PMI at 51.5 (vs. 51.4 previous).
With those expectations in mind, here’s what we were considering:
The “Euro Rally” Scenario:
If the PMI data got here in stronger than expected, particularly in Germany’s numbers, we anticipated this might ease concerns concerning the region’s economic outlook. We focused on EUR/JPY for potential long strategies in a risk-on environment as JPY tends to underperform in that scenario. In a risk-off environment, EUR/CAD long was our pair of alternative given the dovish expectations for the upcoming Bank of Canada meeting and/or any weakness in oil demand.
The “Euro Retreat” Scenario:
If the PMI readings dissatisfied, mainly showing deteriorating business conditions within the region’s largest economies, we thought this might weigh on the euro. On this case, we considered EUR/AUD for potential short strategies if broad risk sentiment was net positive, particularly given the recent strong Australian jobs data and improving Chinese economic indicators. In a risk-off environment, EUR/CHF short made sense given the Swiss franc’s safe-haven appeal and up to date dovish ECB commentary.
What Actually Happened
The Euro Area PMIs painted a mixed picture on Thursday. The French data dissatisfied with Manufacturing PMI falling to 44.5 (vs. 44.9 forecast) and Services PMI dropping to 48.3 (vs. 49.8 expected). Nonetheless, German numbers surprised to the upside with Manufacturing PMI jumping to 42.6 (vs. 40.7 forecast) and Services PMI rising to 51.4 (from 50.6).
These mixed results brought the general Euro Area Manufacturing PMI as much as 49.9 (vs. 45.1 forecast) and Services PMI barely all the way down to 51.2 (vs. 51.5 forecast). We’d say that this was barely net bearish, especially with the underlying data showing businesses continuing to scale down output amid weakening demand, with latest orders falling for the fifth consecutive month.
Market Response
Broad risk sentiment was beginning to look up on Thursday as bond yields retreated and a few progress was announced towards a Israel-Hamas ceasefire. This prompted a better have a look at EUR/AUD and when taking a look at the chart, we are able to see that the pair showed immediate volatility following the French PMI release, with an initial drop from around 1.6220 (pivot point). The pair also sustained trade below the ‘falling highs’ trendline, making an argument for shorting the pair.
Nonetheless, the euro was already in rebound mode due to some disagreement brewing between ECB members on the following rate of interest move, and with stronger German data to assist, the euro continued to trek higher.
The Verdict
So, how’d we do? In our original discussion, we mentioned potential EUR/AUD short setups if Euro Area PMIs dissatisfied and risk sentiment stayed positive. In our opinion, this was the end result however the market moved higher, which we expect was some pullback of aggressive rate cut betting prompted by ECB members speak on the IMF’s annual meeting.
Overall, it’s pretty clear that this discussion didn’t support a positive end result, even with fundamental support and a solid technical setup. Once more, that’s the way it goes sometimes: even once we discover the proper catalysts, the worth motion doesn’t align with our expectations. That’s why proper trading and risk management stays crucial for long-term trading success.