Forex Watch Recap: September 16

USD/CAD: Monday, September 16, 2024

On Monday, our forex strategists focused on the upcoming Canada CPI release and its potential impact on the Canadian dollar. According to our Event Guide for the Canada CPI update, the markets anticipated a slight easing in inflation, with headline CPI forecasted at 0.3% m/m and 2.4% y/y, compared to previous readings of 0.4% m/m and 2.5% y/y.

With those expectations in mind, here’s our analysis:

The “Loonie Bounce” Scenario

If the CPI exceeded expectations, we believed this could mitigate the recent dovish sentiment regarding the Bank of Canada, potentially leading to short-term net buying for the CAD. We anticipated a “buy the rumor, sell the news” reaction for NZD/CAD, particularly given its recent bounce from channel lows and retest of channel highs, which could attract technical sellers this week.

The “Loonie Bounce” Scenario

If Canada’s inflation data came in weaker than expected, we anticipated this could negatively impact the CAD and reinforce dovish expectations for the Bank of Canada. We were considering potential long strategies on USD/CAD, especially as the pair approached a support area around 1.3550, which coincided with an ascending trendline and the 50% Fibonacci retracement level.

What Actually Happened

On Tuesday, the August CPI figures were significantly weaker than expected, with the headline reading showing a 0.1% m/m decline instead of the anticipated 0.3% increase. The year-on-year rate also eased to 2.2%, falling short of the forecasted 2.4%.

Other Key Points from the CPI Report:

Core CPI (excluding food and energy) fell 0.1% m/m, against expectations of a 0.2% increase.
The Bank of Canada’s preferred core inflation measures also eased, with trim CPI at 2.5% y/y and median CPI at 2.4% y/y.
Gasoline prices significantly contributed to the decline, dropping 7.3% in August compared to July.

Simultaneously, U.S. retail sales data showed a 0.6% m/m increase, exceeding the expected 0.2% rise, which provided further support for the U.S. dollar.

Market Reaction

The initial market response to the CPI data was decisively bearish for the Canadian dollar. In our USD/CAD chart, the pair immediately surged after the CPI release, climbing from around 1.3580 to the R1 pivot point at 1.3620.

The pair then consolidated ahead of the highly anticipated FOMC statement, which triggered significant movement in USD/CAD. The pair dipped to our targeted long entry area around 1.3550 (the 50% Fibonacci retracement level and S1 Pivot area), where it found support and bounced back quickly. This uptick was likely driven by USD strength, influenced by comments from Fed Chair Powell about the U.S. economy’s resilience and the Fed’s gradual approach to easing.

The Verdict

How did we fare? In our earlier discussion, we noted potential long setups on USD/CAD if Canadian inflation data came in weak, which it did. We also advised monitoring for bullish behavior patterns below the market around the 50% Fibonacci retracement level and S1 (1.3550) before considering a long bias.

If that strategy was implemented, it likely led to a net positive outcome, as the market repeatedly found a bottom in that area, presenting multiple long opportunities. However, upside bounces were somewhat limited, making trade planning and management critical for the outcome. Thus, we rated the strategy as “likely” successful overall.

On Wednesday, our strategists focused on the Australian Employment Update for August 2024 and its potential impact on the Australian dollar. Based on the leading indicators outlined in our Event Guide, expectations were mixed, with a net employment change projected at +28.0K (previously +58.2K), an unemployment rate expected to remain steady at 4.2%, and full-time employment forecasted at -7.0K.

The “Aussie Advance pt. 1” Scenario:

If the employment data came in stronger than expected, particularly with higher net job gains and a steady or lower unemployment rate, we anticipated this could attract fundamental AUD buyers. We targeted EUR/AUD for potential short strategies, especially given the pair’s recent downward momentum and the formation of a head and shoulders pattern on the hourly chart.

The “Aussie Advance pt. 2” Scenario:

If the Australian jobs data disappointed, mainly showing lower net job gains or a higher unemployment rate, we believed this might have only a temporary effect on the AUD. Our studies indicated that unless the outcome was significantly divergent from forecasts, the Aussie would likely revert to broader market cues. In the event of slightly weak data paired with positive overall market sentiment, we considered AUD/NZD for a potential bounce strategy, given its recent uptrend and the possibility of a bullish reversal following a pullback.

What Did the Data Say

The Australian jobs data was a net positive surprise, with the economy adding a net 47.5K jobs in August, surpassing the expected increase of 28.0K. Here’s a breakdown of the key figures:

• Net employment change: +47.5K (vs. +28.0K expected)

• Unemployment rate: Steady at 4.2% (as expected)

• Full-time employment: -3.1K (vs. -7.0K expected)

• Part-time employment: +50.6K (vs. +35.0K expected)

• Labor force participation rate: Steady at a record high of 67.10%

• Employment-to-population ratio: Increased from 64.2% to 64.3%

Overall, this update was perceived as more positive than markets expected, bolstering the RBA’s case against a short-term interest rate cut.

Market Reaction:

The initial market response to the Australian jobs data was decidedly positive for the AUD against all major currencies, aligning with our “Aussie Advance” scenario for EUR/AUD.

In our EUR/AUD chart, the pair was already in a downtrend, having broken below the neckline of the head and shoulders pattern around 1.6440 (S1) before the data release. The robust jobs report triggered a sharp decline, pushing the pair toward the S2 support level at 1.6353.

EUR/AUD found its bottom of the week at the S2 level, consolidating between 1.6360 and 1.6400 in subsequent sessions. The 100 SMA and 200 SMA on the 1-hour chart have now crossed bearishly, further confirming the downtrend.

It’s important to note that the market’s reaction to the Australian jobs data was somewhat moderated by broader market dynamics following the Fed’s 50bps rate cut announcement in the previous U.S. session, likely explaining why EUR/AUD didn’t experience a more pronounced decline below the S2 level.

The Verdict:

So, how did we do? In our original discussion, we highlighted potential short setups on EUR/AUD if the Australian employment data came in stronger than expected, which it did. The head and shoulders pattern played out as anticipated, with the neckline break occurring before the data release, possibly due to positioning ahead of the event.

For those who adopted a bearish stance on EUR/AUD when both fundamental and technical factors aligned, they likely seized the opportunity to capitalize on the strong downward momentum. However, those who delayed their short positions may have either broken even or incurred a small loss.

Overall, we would rate this discussion as “neutral” in terms of supporting a potential positive outcome, as while the strategy yielded immediate positive results, real-time reactions and trade management were crucial in determining the final outcome.

Forex Watch Recap: September 16 – 18, 2024.

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