This week our currency strategists focused on the RBNZ monetary policy statement and U.S. CPI update for potential high-quality setups.
Out of the eight scenario/price outlook discussions this week, none arguably saw BOTH fundie & technical arguments triggered to become potential candidates for a trade & risk management overlay. But here’s a quick look at the two scenarios with the closest fundamental triggers and see why we didn’t get the technical trigger.
Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.
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NZD/CHF: Tuesday – Oct. 7, 2024
NZD/CHF 1-Hour Forex Chart by TradingView
On Monday, our strategists had their sights set on the RBNZ Monetary Policy Statement and its potential impact on the New Zealand dollar. Based on our Event Guide, expectations were for a 50 basis point rate cut to 4.75%, with markets looking for signals on future easing.
With those expectations in mind, here’s what we were thinking:
The “Kiwi Climb” Scenario:
If the RBNZ delivered a smaller 25 bps cut or signaled a pause in its easing cycle, we anticipated this could support the NZD. We focused on GBP/NZD for potential short strategies, especially given the pair’s potential to reverse at a major resistance area and the recent dovish comments from Bank of England Governor Andrew Baily on potential rate cut path.
And in case of a less dovish RBNZ stance combined with positive risk sentiment, we considered NZD/JPY for potential long strategies. This scenario took into account the yen’s recent weakness and the interest rate differential that favored the Kiwi over the yen.
The “Kiwi Crumble” Scenario:
If the RBNZ cut rates by 50 bps and signaled further aggressive easing, we thought this could weigh heavily on the NZD. We eyed NZD/CHF for potential short strategies, given the Swiss franc’s safe-haven status and the pair’s recent downtrend.
But if we saw a net risk-on environment combined with dovish RBNZ action, we considered NZD/CAD for potential short strategies. This took into account the Canadian dollar’s relative strength, supported by oil prices rising on geopolitical drivers and a recently less dovish Bank of Canada.
What Actually Happened
The RBNZ delivered on market expectations by cutting its Official Cash Rate by 50 basis points to 4.75% on Wednesday, October 9. The central bank cited subdued economic activity, weak consumer spending, and softening employment conditions as key factors behind the decision.
Key points from the RBNZ statement:
- Annual consumer price inflation is assessed to be within the 1-3% target range and converging on the 2% midpoint.
- Global economic growth remains below trend, with expectations for slowdowns in the US and China.
- The New Zealand economy is now in a position of excess capacity, encouraging price and wage-setting adjustments to a low-inflation economy.
- The RBNZ signaled potential for further easing, stating that future OCR changes would depend on its evolving assessment of the economy.
Market Reaction & Outcome
With expectations of more rate cuts ahead and an uncertain economic outlook, it was no surprise that he initial market response to the RBNZ decision was a sharp drop in NZD across the board. This fundamentally triggered our NZD/CHF and NZD/CAD scenarios, and with the markets arguably feeling risk averse at the time thanks to China stimulus uncertainty, NZD/CHF short rose up to the top of the list.
But in our original discussion, our technical setup was to see if NZD would bounce up to potential technical resistance areas and wait for bearish reversal patterns before considering a short play. That was not the case as the market dropped right away, not giving us a fully triggered setup.
USD/CHF: Wednesday – Oct. 9, 2024
USD/CHF 1-Hour Forex Chart by TradingView
On Wednesday, our forex strategists had their sights set on the upcoming U.S. CPI update for September 2024 and its potential impact on the U.S. dollar. Based on our Event Guide, expectations were for headline CPI to come in at +0.1% m/m and +2.2% y/y, with core CPI at +0.2% m/m and +3.1% y/y.
With those expectations in mind, here’s what we were thinking:
The “Dollar Dive” Scenario
If the CPI came in lower than expected, we figured the markets may price in expectations that the Fed might lean towards a more aggressive rate cut in November. This could draw in fundamental USD sellers, and we had our eyes on EUR/USD for potential long strategies, especially given its position near long-term support and the possibility a rate cut from the ECB has been fully priced in for October.
If the CPI missed expectations and risk aversion took hold, we thought USD/JPY might present shorting opportunities. The pair was trading just below the major 150.00 psychological level, and potential Japanese intervention was a consideration.
The “Greenback Gain” Scenario
If U.S. inflation came in hotter than expected, we thought this could ease U.S. recession concerns and boost the dollar. We were watching USD/CHF for this scenario, as the pair was near a rising trend line and the 50% Fibonacci retracement level, potentially setting up for a bullish move if technical players jumped in to take control.
In case of a mixed neutral-to-higher CPI report but improving risk sentiment, we considered AUD/USD for potential short strategies. The pair was testing an ascending trend line, and if we saw weaker-than-expected Australian economic data, that could have sparked a technical downside break, especially with Chinese stimulus uncertainty at the time.
What Actually Happened
Well, folks, Thursday rolled around, and the U.S. CPI report decided to throw us a curveball. The September CPI report came in tad bit hotter than expected, with headline inflation rising 0.2% month-on-month (vs. 0.1% forecast) and 2.4% year-on-year (vs. 2.3% expected). Core CPI also surprised to the upside, increasing 0.3% m/m (vs. 0.2% forecast) and holding steady at 3.2% y/y (vs. 3.1% expected).
Key points from the CPI report:
- Shelter costs rose 0.2% m/m, contributing significantly to the overall increase
- Food prices climbed 0.4% m/m
- Energy index fell 1.9% m/m, providing some offset to other increases
Market Reaction
The initial market response to the slightly hotter-than-expected CPI data was mixed, with the market pushing USD up and down for the first 20 minutes of the release. This was likely due to traders also pricing in the weekly U.S. initial jobless claims, which came in much weaker than expected at 258K (231K forecast, 225K previous) for the week ending Oct. 3.
Economic activity seems to be bigger driver than inflation conditions these days, which is likely why we saw USD trade as a net loser for the rest of the week as rate cut odds still remain in favor of the 50 bps camp.
So our fundamental arguments for USD long was triggered due to higher than expected CPI reads, and with the market move towards broad risk-on vibes, we thought our USD/CHF made the most sense to watch for potential risk and trade management overlay.
The technical triggers for that pair was if USD/CHF pulled back to the resistance-turned-support zone near a rising trend line and the 50% Fib, we’d wait for bullish reversal patterns before considering a long, or if the pair broke above swing highs, a long play likely makes sense there.
Unfortunately for us, neither scenarios played out as volatility subsided, leaving us with no potential plays this week.
Overall, market volatility couldn’t stay elevated for both setups, which can happen quite often, and that’s just how it goes sometimes. The market is a living, breathing entity and doesn’t always behave as expected.
We can’t control that. But what we can control is that we stick to the highest quality setups as best we can and control/limit risk as much as possible for the times when we have risk exposure and that beast we call the market behaves way different than what we expect.