This week our currency strategists focused on the Canadian CPI update and the Australian employment update for potential high-quality setups.
Out of the four scenario/price outlook discussions this week, two discussions arguably saw both fundie & technical arguments triggered to become potential candidates for a trade & risk management overlay. Check out our review on those discussions to see what happened!
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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USD/CAD: Monday – September 16, 2024
USD/CAD 1-Hour Forex Chart by TradingView
On Monday, our forex strategists had their sights set on the upcoming Canada CPI release and its potential impact on the Canadian dollar. Based on our Event Guide for the Canada CPI update, the markets were expecting a slight easing in inflation, with headline CPI forecasted at 0.3% m/m and 2.4% y/y, below the previous reads of 0.4% m/m and 2.5% y/y.
With those expectations in mind, here’s what we were thinking:
The “Loonie Bounce” Scenario
If the CPI came in higher than expected, we figured this could ease the recent rise of dovish BOC expectations to potentially draw in short-term net buying for the CAD. We thought this scenario could lead to a “buy the rumor, sell the news” reaction for NZD/CAD, especially given its recent bounce from channel lows and retest of channel highs, potentially drawing technical sellers this week.
The “Loonie Bounce” Scenario
If Canada’s inflation data came in weaker than expected, we anticipated this could weigh on the CAD and reinforce dovish BOC expectations. We eyed USD/CAD for potential long strategies, particularly as the pair was approaching a support area around 1.3550, which aligned with an ascending trendline and the 50% Fibonacci retracement level.
What Actually Happened
Well, folks, Tuesday rolled around, and the August CPI figures came in significantly net weaker than expected, with the headline reading dropping 0.1% m/m versus the expected 0.3% increase. The year-on-year rate eased to 2.2%, below the forecasted 2.4% rate.
Other key points from the CPI report:
- Core CPI (excluding food and energy) fell 0.1% m/m, compared to expectations of a 0.2% rise
- The Bank of Canada’s preferred measures of core inflation also eased, with trim CPI at 2.5% y/y and median CPI at 2.4% y/y
- Gasoline prices were a major contributor to the decline, falling 7.3% in August from July
Adding to the mix, U.S. retail sales data released at the same time showed a 0.6% m/m increase, surpassing the expected 0.2% rise, which provided additional support for the U.S. dollar.
Market Reaction
The initial market reaction to the CPI data release was decisively bearish for the Canadian dollar. Looking at our USD/CAD chart, we can see that the pair saw an immediate jump following the CPI release, climbing from around the 1.3580 level towards the R1 pivot point at 1.3620.
The pair chopped around ahead of the highly anticipated FOMC statement, which unsurprisingly sparked massive movement in USD/CAD following the release. The pair actually dipped all the way to our targeted long entry area around 1.3550 (Fibs and S1 Pivot area), where it immediately found support and bounced quickly. This was possibly due to USD strength, likely due to comments from Fed Chair Powell that the U.S. economy is still doing well and that the Fed will likely take a gradual approach to easing.
The Verdict
So, how’d we do? In our original discussion, we mentioned potential long setups on USD/CAD if Canadian inflation data came in weak, which it did. We also mentioned to watch out for bullish behavior patterns below market around the 50% Fibonacci retracement level and S1 (1.3550) before considering a long bias.
If that strategy was followed, it’s “likely” that it supported a net positive outcome, given that the market found a bottom in that area multiple times, presenting multiple long opportunities. The upside bounces were pretty limited though, so trade planning and management would have been a large factor in the outcome, which is why we rated the strategy as “likely” overall.
EUR/AUD: Wednesday – September 18, 2024
EUR/AUD 1-Hour Forex Chart by TradingView
On Wednesday, our strategists had their sights set on the Australia Employment Update for August 2024 and its potential impact on the Australian dollar. Based on the leading indicators discussed in our Event Guide, expectations were mixed, with the net employment change seen at +28.0K (previous +58.2K), unemployment rate expected to steady at 4.2%, and full-time employment projected at -7.0K.
With those expectations in mind, here’s what we were thinking:
The “Aussie Advance pt. 1” Scenario:
If the employment data came in stronger than expected, particularly with higher net job gains and steady or lower unemployment rate, we anticipated this could potentially draw in fundamental AUD buyers. We focused on EUR/AUD for potential short strategies, especially given the pair’s recent downward momentum and the formation (and possible neckline break) 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, this may only have a temporary effect on AUD. Our studies have shown that unless the data outcome is extremely divergent from forecasts, the Aussie will quickly return to taking cues from the broad market.
In the case where data is slightly weak but broad market sentiment is leaning positive, we considered AUD/NZD for a potential bounce strategy, given its recent uptrend and the possibility of bullish reversal behavior developing after pullback.
What Did the Data Say
The Australian jobs data was arguably a net a positive surprise, with the economy adding a net 47.5K jobs in August, higher than the expected 28.0K increase. 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: Edged higher from 64.2% to 64.3%
Overall, this update was generally perceived as more positive than the markets expected, supporting the RBA’s case against the need for a short-term interest rate cut.
Market Reaction
The initial market response to the Australian jobs data was decisively positive for the Aussie against all major currencies, aligning with our “Aussie Advance” scenario for EUR/AUD.
Looking at our EUR/AUD chart, we can see that 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 strong jobs report triggered a sharp decline, pushing the pair towards the S2 support level at 1.6353.
EUR/AUD found its bottom of the week at the S2 level, with the pair consolidating between 1.6360 and 1.6400 in the following sessions. The 100 SMA and 200 SMA on the 1-hour chart have now crossed bearishly, further confirming the downtrend.
It’s worth noting that the market’s reaction to the Australian jobs data was somewhat tempered by the broader market dynamics following the Fed’s 50bps rate cut announcement in the previous U.S. session. This likely explains why the EUR/AUD didn’t see a more extended decline below the S2 level.
The Verdict
So, how did we do? In our original discussion, we mentioned 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 even before the data release, possibly due to positioning ahead of the event.
For those who leaned bearish on EUR/AUD right when both fundamental and technical arguments were triggered, they likely saw the best opportunity to catch the strong downward momentum. But for those who waited before shorting, it’s highly likely they either broke even or took a small loss.
Overall, we’d rate this discussion as “neutral” in supporting a potential positive outcome because while the strategy did yield immediate positive results, real-time reaction and trade management would have been important factors in determining the outcome.