With two major central bank statements this week, it was easy for our forex strategists to focus on the Loonie and euro this week as the main markets to watch.
Out of the four scenario/price outlook forecasts discussions, two arguably saw both fundie & technical arguments triggered to become a potential candidate for a risk management overlay. Check out our review on that discussion to see what happened!
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AUD/CAD 1-Hour Forex Chart by TradingView
On Tuesday, the upcoming monetary policy statement from the Bank of Canada was our first target catalyst to focus on, an event that almost always gets the Loonie moving as soon as the statement is released.
In our Event Guide for the BOC statement, we noted the market was pretty confident of an interest rate cut from the BOC, which was supported by recent Canadian CPI readings event falling short of estimates for four consecutive months. But we also noted that leading indicators were signaling a rebound in inflation rates, clouding the odds on the event outcome a bit.
Overall, though, the odds favored a scenario where the event was going to be net dovish for the Loonie, and in that case we saw potential long biased setups on AUD/CAD, discussing both upside breakout price action and pullbacks around the event.
Now, if the event surprised markets and turned out to be net neutral-to-hawkish for the Loonie (e.g., strong rhetoric of sticky inflation; openess to hiking rates again, etc.), then we took a look at setups on EUR/CAD for potential short-term long Loonie plays in that scenario.
As expected, the BOC cut its interest rates by 25 basis points on Wednesday, with the statement immediately drawing in a sell reaction from forex traders. That pump higher in AUD/CAD was limited to the first 15-minute candle and reversed, as traders likely took profit ahead of the BOC press conference.
At the press conference, BOC Gov. Tiff Macklem shared his openness to further rate cuts, but also that the BOC is “going to be taking our interest rate decisions one meeting at a time.” He also commented on how far the BOC policy rates can diverge with the U.S., but that they are “not close to those limits” at the moment.
His comments were measured and arguably net neutral, which is likely why we saw CAD recover during his appearance. But they weren’t strong enough to overshadow the fact that the BOC is more likely to move away from restrictive policy going forward, making it a net dovish outcome and fundamentally triggering our AUD/CAD long bias.
Following the BOC event through the closely watch Canadian jobs report, AUD/CAD spent the majority of the time above post press conference prices (roughly around 0.9095), raising the odds of this discussion being supportive of a net positive outcome. The pair actually saw two rallies from that area giving traders multiple chances to play that fundamental bias.
On Friday, though, trade management decisions would have been a big factor in the outcome. The upcoming Canadian employment update was right around the corner to spark big CAD volatility, and depending on whether or not a trader managed the position to lock in profits / reduce risk would have changed the outcome significantly given the reaction to a surprise positive jobs headline/Loonie’s spike higher.
Overall, given that AUD/CAD spent most of the week above BOC event prices, we’d argue this discussion as “likely” supportive of a positive outcome, but would have heavily depending on risk/trade management decisions on Friday ahead of the major event from Canada.
EUR/USD 1-Hour Forex Chart by TradingView
On Wednesday, the upcoming monetary policy statement from the European Central Bank was our second catalyst of choice to focus on,
In our Event Guide for the ECB statement, we discussed the high (and long priced in) expectations of an interest rate cut, but with signs of green shoots from Euro area leading indicators in recent months, it was likely we’d also see rhetoric signaling caution from cutting interest rates too aggressively.
So, the market’s reaction would likely hinge on the ECB press conference, with traders watching for signs of strong conviction a cut in July or September is warranted as the main cue to remain bearish on the euro. In that dovish scenario, we looked to EUR/JPY as a way to express a bearish euro bias given recent signals of the BOJ tapering its bond-buying program sometime soon.
In the event the ECB downplays future cuts and the euro rallies on that rhetoric, then we threw a long bias on EUR/USD as that market could potentially draw in buyers in this scenario, given the disappointing early jobs reads from the U.S. up to that point.
As expected, the ECB cut its interest rates by 25 basis points on Thursday, sparking an instant spike higher in the euro, partly due to a “buy-the-rumor, sell-the-news” reaction, but also possibly a reaction to the ECB upgrading economic growth and inflation forecasts as well, conflicting with expectations/hope of further rate cuts ahead.
The ECB press conference soon followed with ECB Governor Christine Lagarde holding back on forward guidance on policy moves, which overall, did nothing to strongly signal against their upgraded forecasts. We took this as a “hawkish cut” outcome, arguably triggering our EUR/USD long bias discussion.
Following the event, EUR/USD did trend higher, but the volatility was limited, likely due to traders hitting the sidelines ahead of the always anticipated monthly U.S. government employment situation update just a day ahead.
That massive event risk made trade/risk management a crucial component as to whether or not this discussion resulted in a net positive outcome, and for those who longed EUR/USD after the ECB event and took profits ahead of the U.S. NFP data likely did okay with small gains.
But for those who took a gamble on arguably one the most volatile events every month and stuck with the long positions, very likely did very poorly on this discussion.
So overall, we’d rate this discussion as “neutral” in its potential support of a positive outcome given the low volatility post ECB event, and the large factor or risk/trade management decisions going into the U.S. jobs update.
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