Bank of Canada surprises market with less-dovish than expected assessment of global economy

SUMMARY

ANALYSIS

USDCAD

The Bank of Canada formally killed the USDCAD uptrend yesterday with a surprisingly hawkish, less-dovish than expected, assessment of the global economic situation.  In the span of just two weeks, the Canadian central bank has gone from “THE GLOBAL CONTEXT HAS WORSENED, INCREASING RISK TO GLOBAL EXPANSION AND CHANCES OF FINANCIAL STRESS THAT COULD SPILL OVER INTO CANADA” to “NASCENT EVIDENCE" GLOBAL ECONOMY IS STABILIZING” and “GLOBAL ECONOMIC GROWTH APPEARS TO BE INTACT”.  What?  It honestly feels like the Bank of Canada is on tape-delay.  It’s dovish comments at the end of October were a month outdated in our opinion, and its relatively more hawkish comments about global growth yesterday garnered a collective “no-duh” from traders in our opinion.  What the heck is the Bank of Canada looking at when it talks about the global economy?  Our hope was that deputy governor Timothy Lane would shed some light on this “nascent evidence” during his speech this morning before the Ottawa Board of Trade, but in typical central bank form, his comments were cryptic.  He actually tried to walk back yesterday’s press release a little bit by stating: 

GLOBAL ECONOMIC UNCERTAINTY LIKELY TO PERSIST EVEN IF U.S AND CHINA REACH A TRADE DEAL

GLOBAL UNCERTAINTY IS LIKELY TO HAVE A LASTING EFFECT; QUESTIONS REMAIN ABOUT WHETHER MARKET PRICING FULLY REFLECTS RISKS

Taken at face value, these comments should have been USDCAD bullish this morning, but then Timothy Lane said this:

THERE IS NO REASON FOR THE BANK OF CANADA TO MOVE IN STEP WITH THE U.S. FEDERAL RESERVE WHEN IT COMES TO RATE MOVES

So instead, the OIS market has now priced out a January 22nd rate cut and USDCAD has now extended its losses from yesterday to trade just above chart support in the 1.3150-60s.  All eyes are now on the bi-annual OPEC ministerial meeting, which has begun in Vienna.  OPEC+ (which includes Russia) will join the discussion tomorrow after which a final decision will be made with regard to the cartel’s current 1.2M bpd production cut quota.  The Iraqi oil minister started floating rumors earlier this week of a 400k bpd deepening of output cuts, and the rumor mill today is talking about a “Saudi surprise” 800k bpd cut.  This probably explains large part of the oil market’s violent 4.5% rally yesterday.  Stay tuned for more @EBCTradeDesk on Twitter.

USDCAD DAILY

USDCAD HOURLY

JAN CRUDE OIL DAILY

EURUSD

Euro/dollar struggled with the 1.1100 chart resistance yesterday despite weaker than expected headline prints for the US ADP and US Non-Manufacturing PMI reports.  It’s almost as if the stronger than expected sub-components of the ISM report (New Orders, Employment, Prices Paid) were enough for traders to cast doubt over the seriousness of the miss on the headline.  The market slipped back below the 1.1080s heading in the NY close, which wasn’t a great technical development, but the rise in the US 10yr yield since the European open today has helped repair the EURUSD chart a little bit.  Over 3.4blnEUR in options expire between the 1.1090 and 1.1125 strikes this morning at 10amET, a factor which is also probably helping to keep spot EURUSD prices supported here for the moment.  Traders completely ignored Germany’s much weaker than expected Industrial Orders report for October this morning (-0.4% MoM vs +0.3%), which we find a bit surprising.

EURUSD DAILY

EURUSD HOURLY

FEB GOLD DAILY

GBPUSD

Sterling has risen to a new 7-month high against the dollar this morning as the Savanta ComRes poll showed the Tories maintaining a 10pt lead over the Labour party heading into next week’s election.  The options market, on the other hand, continues to show traders hedging their bets…perhaps because so much good news is already priced into the GBPUSD market and perhaps because it’s so cheap to do so.  The widely followed 2-week GBPUSD risk-reversal is showing a new 8-month high in the premium for 25-delta (equidistant vs spot) puts over calls, meaning traders are willing to pay even more now for downside insurance in GBPUSD vs upside insurance.  This is not an entirely shocking development, especially if this hedging is coming from players who have been long GBPUSD up until this point.  We have to now look further left on the Weekly charts to find the next major resistance level for GBPUSD which, believe it or not, is still 40-50pts higher than here in our opinion (1.3170-80s).

GBPUSD WEEKLY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Australian dollar was knocked down again in Asian trade last night; this time after Australia reported weaker than expected Retail Sales growth for the month of October (0.0% MoM vs +0.3%).  To make matters worse, the market’s downside move also coincided with another upside rejection of the 0.6850s.  AUDUSD now sits back within yesterday’s overnight 0.6810s-0.6830s price range, ahead of the US Factory Orders report at 10amET.  Off-shore dollar yuan (USDCNH) has fallen back below the 7.0500 support level this morning, which has us pondering…is there a positive US/China trade headline to come?

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

Dollar/yen bounced higher with US yields in NY trade yesterday after the US Non-Manufacturing PMI report came out, but the market rejected overhead chart resistance at the 108.90s three times since then.  Over 1.4blnUSD in options will expire shortly at 10amET between the 109.00 and 109.15 strikes, which could be providing some lift to the market for the moment.   Watch US 10yr yields as usual today.  We could argue that nothing overtly positive has transpired over the last 24hrs when it comes to the US/China or the US economic data narratives, but yields have rallied strongly back above the pivotal 1.7550% level and look poised to try and erase the negative, head & shoulders, pattern we identified on Twitter on Tuesday.

USDJPY DAILY

USDJPY HOURLY

US 10YR BOND YIELD DAILY

Charts: Reuters Eikon

About the Author

Erik Bregar - Director, Head of FX Strategy

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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