BOC: No fireworks expected on Wednesday – BofA
Analysts at Bank of America (BofA) offer a sneak peek at what to expect from Wednesday’s Bank of Canada’s (BOC) monetary policy decision.
Key quotes
"We expect the BoC to remain on hold at this meeting with the policy rate at 0.25% and with bond purchases at C$2bn per week. Despite high inflation, the economy is still too weak to withdraw stimulus, and the US Fed is providing room to wait. A Federal Election on 20 September may be one more consideration to wait.”
"A potentially dovish tone to the statement suggests idiosyncratic downside risks to the Canadian dollar as relative monetary policy drivers remain alive and well. Still, CAD will continue to be influenced by terms of trade developments (i.e. commodity prices) and global risk appetite, both of which have rebounded of late on expectations that Fed accommodation will persist as US data have softened. We see limits to this. Per our recent forecast revision, we expect USDCAD at 1.30 at end-year."
Analysts at Bank of America (BofA) offer a sneak peek at what to expect from Wednesday’s Bank of Canada’s (BOC) monetary policy decision.
Key quotes
"We expect the BoC to remain on hold at this meeting with the policy rate at 0.25% and with bond purchases at C$2bn per week. Despite high inflation, the economy is still too weak to withdraw stimulus, and the US Fed is providing room to wait. A Federal Election on 20 September may be one more consideration to wait.”
"A potentially dovish tone to the statement suggests idiosyncratic downside risks to the Canadian dollar as relative monetary policy drivers remain alive and well. Still, CAD will continue to be influenced by terms of trade developments (i.e. commodity prices) and global risk appetite, both of which have rebounded of late on expectations that Fed accommodation will persist as US data have softened. We see limits to this. Per our recent forecast revision, we expect USDCAD at 1.30 at end-year."
USD/CAD: Ready, Steady, Fade; What's The Trade? - Credit Suisse
Credit Suisse discusses USD/CAD outlook and likes selling the pair on a rally into 1.28.
"Our stance on CAD has been to look for a retracement in USDCAD above 1.2800, above which we said we would look to go tactically short again, aiming for a 1.2450: we do not see a reason to change approach for now. The view priced into markets that the BoC will taper asset purchases again to C$1bn/week at the 27 Oct decision still seems correct; similarly, while the most recent BoC meeting failed to excite, it also provided no new reasons to second-guess the currently priced-in rates outlook, with lift-off expected to take place in Q3 2022," CS notes.
. The election, while in our view not terribly consequential for the broader CAD outlook, might nevertheless provide a catalyst for the retracement we’ve been looking for, as an example if the NDP were to perform better than expected. We stand ready to sell a spike in USDCAD to 1.2800, with a 1.2450 target and would add a stop loss to the position at 1.2950, just above the mid-Aug highs," CS adds.
Credit Suisse discusses USD/CAD outlook and likes selling the pair on a rally into 1.28.
"Our stance on CAD has been to look for a retracement in USDCAD above 1.2800, above which we said we would look to go tactically short again, aiming for a 1.2450: we do not see a reason to change approach for now. The view priced into markets that the BoC will taper asset purchases again to C$1bn/week at the 27 Oct decision still seems correct; similarly, while the most recent BoC meeting failed to excite, it also provided no new reasons to second-guess the currently priced-in rates outlook, with lift-off expected to take place in Q3 2022," CS notes.
. The election, while in our view not terribly consequential for the broader CAD outlook, might nevertheless provide a catalyst for the retracement we’ve been looking for, as an example if the NDP were to perform better than expected. We stand ready to sell a spike in USDCAD to 1.2800, with a 1.2450 target and would add a stop loss to the position at 1.2950, just above the mid-Aug highs," CS adds.
USD/JPY: Unlikely To Regain Its YTD High Of Around 111.70; Expecting A Pullback Towards 109.10 - Citi
Citi discusses the USD/JPY outlook and sees scope for a pullback towards 109.10.
"USDJPY climbed above 110.6 last week on the Fed’s more hawkish than expected statement, while the concern for the Chinese property markets eased somewhat. We don’t think the pair can regain its YTD high of around 111.7 registered in July easily and expect a pullback to around 109.1," Citi notes.
"Regarding the LDP presidential election on September 29 this week, we do not expect USDJPY to be much affected by the outcome in the near term," Citi adds.
Citi discusses the USD/JPY outlook and sees scope for a pullback towards 109.10.
"USDJPY climbed above 110.6 last week on the Fed’s more hawkish than expected statement, while the concern for the Chinese property markets eased somewhat. We don’t think the pair can regain its YTD high of around 111.7 registered in July easily and expect a pullback to around 109.1," Citi notes.
"Regarding the LDP presidential election on September 29 this week, we do not expect USDJPY to be much affected by the outcome in the near term," Citi adds.
USD/JPY: A Break Of Above 115 Possible But Risks Of An Abrupt Correction Lower Increasing - MUFG
MUFG Research warns of the scope for an abrupt correction lower in USD/JPY.
"The scale of JPY selling is looking excessive and while a breakthrough 115.00 is still possible the risks of an abrupt correction lower are increasing," MUFG notes.
"As can be seen below, the 1mth percentage change in USD/JPY divergence with the percentage change in DXY is at an extreme that looks unsustainable. A degree of USD/JPY correction lower and DXY higher tends to be the end result when these extreme divergences in performance emerge. In June 2020, a technical break of 110.00 fuelled the divergence, similar to the technical break of 112.00 on this occasion," MUFG adds.
MUFG Research warns of the scope for an abrupt correction lower in USD/JPY.
"The scale of JPY selling is looking excessive and while a breakthrough 115.00 is still possible the risks of an abrupt correction lower are increasing," MUFG notes.
"As can be seen below, the 1mth percentage change in USD/JPY divergence with the percentage change in DXY is at an extreme that looks unsustainable. A degree of USD/JPY correction lower and DXY higher tends to be the end result when these extreme divergences in performance emerge. In June 2020, a technical break of 110.00 fuelled the divergence, similar to the technical break of 112.00 on this occasion," MUFG adds.
Free Signal
✅Pair: USDJPY
⤵️Sell at 114.35
🔴 Stop Loss: 114.60
🟢 Take Profit: 113.20
✅Pair: USDJPY
⤵️Sell at 114.35
🔴 Stop Loss: 114.60
🟢 Take Profit: 113.20
USD: Fed Leadership Uncertainty Continues To Pose Risk Of Setback For USD - MUFG
MUFG Research discusses the USD outlook in light of the recent reports that the nomination of Fed Chair Powell for a second term is far from a done deal.
"The correction lower for the US dollar since the end of last week has been reinforced by reports overnight that Fed Governor Lael Brainard was interviewed for the position of Fed Chair when she visited the White House last week. If Fed Governor Lael Brainard was put forward to be the next Fed Chair market participants are likely to at least initially anticipate a more dovish outlook for Fed policy," MUFG notes.
"The building risk of a dovish outcome will encourage market participants to cut long US dollar positions," MUFG adds.
MUFG Research discusses the USD outlook in light of the recent reports that the nomination of Fed Chair Powell for a second term is far from a done deal.
"The correction lower for the US dollar since the end of last week has been reinforced by reports overnight that Fed Governor Lael Brainard was interviewed for the position of Fed Chair when she visited the White House last week. If Fed Governor Lael Brainard was put forward to be the next Fed Chair market participants are likely to at least initially anticipate a more dovish outlook for Fed policy," MUFG notes.
"The building risk of a dovish outcome will encourage market participants to cut long US dollar positions," MUFG adds.
EUR/USD: Caution Here But Down Move May Have Further To Run - MUFG
MUFG Research discusses EUR/USD outlook and shifts into a cautious bias in the very near term.
"While the scale of the move lower in such a short period of time suggests caution, there remain factors that could encourage further declines going forward," MUFG notes.
"Our FX forecasts have shown EUR as the laggard over the forecast horizon given the scope for the ECB to remain well behind most other G10 central banks in hiking rates. In October, there was a notable shift in rate expectations higher that dragged even EUR rates higher. The 3-year forward OIS for EUR turned positive in October but economic developments in the euro-zone lately and ECB communications have driven rates back into negative territory," MUFG adds.
MUFG Research discusses EUR/USD outlook and shifts into a cautious bias in the very near term.
"While the scale of the move lower in such a short period of time suggests caution, there remain factors that could encourage further declines going forward," MUFG notes.
"Our FX forecasts have shown EUR as the laggard over the forecast horizon given the scope for the ECB to remain well behind most other G10 central banks in hiking rates. In October, there was a notable shift in rate expectations higher that dragged even EUR rates higher. The 3-year forward OIS for EUR turned positive in October but economic developments in the euro-zone lately and ECB communications have driven rates back into negative territory," MUFG adds.
Free Signal
✅Pair: USDJPY
⤵️Sell at 114.70
🔴 Stop Loss: 115.15
🟢 Take Profit: 113.60
✅Pair: USDJPY
⤵️Sell at 114.70
🔴 Stop Loss: 115.15
🟢 Take Profit: 113.60
EUR: Pausing For A Breather, But Still Vulnerable - ING
ING Research maintains a bearish bias on EUR/USD in the near term.
"EUR/USD continued its fall, now trading in the lower half of the 1.12/1.13 range. While widespread dollar strength was mostly behind yesterday’s leg lower in the pair, the common currency is also dealing with a worsening of the Covid situation in Europe," ING notes.
"The data-flow is also looking unlikely to come to the rescue of the EUR. A potential pause in the dollar’s appreciation today may give EUR/USD some rest, but the risks remain skewed to the downside and the recent break below 1.1250 may have paved the way for another leg lower to the 1.1170 support in the coming days," ING adds.
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ING Research maintains a bearish bias on EUR/USD in the near term.
"EUR/USD continued its fall, now trading in the lower half of the 1.12/1.13 range. While widespread dollar strength was mostly behind yesterday’s leg lower in the pair, the common currency is also dealing with a worsening of the Covid situation in Europe," ING notes.
"The data-flow is also looking unlikely to come to the rescue of the EUR. A potential pause in the dollar’s appreciation today may give EUR/USD some rest, but the risks remain skewed to the downside and the recent break below 1.1250 may have paved the way for another leg lower to the 1.1170 support in the coming days," ING adds.
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GBP: Starting To Look Expensive Vs EUR and USD S/T - Credit Agricole
Credit Agricole sees GBP as a little expensive around current levels against both the USD and EUR.
"Our short-term FX fair value analysis further suggests that, after the latest FX market moves, the GBP is starting to look expensive vs both the EUR and the USD. Moreover, we expect two rate hikes from the BoE this year and doubt that the MCP will be able to meet the market expectations of almost four rate hikes," CACIB notes.
"With many positives seemingly in the price of the GBP, the currency could struggle to extend its recent gains in the absence of further support from the UK rates market," CACIB adds.
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USD: Here Is Why Betting On risk Aversion And THE next Big USD Rally Is Risky - Credit Agricole
Credit Agricole CIB Research discusses the market outlook and argues that a sustained spike in risk aversion is unlikely.
"We doubt that the Fed will be considerably more hawkish than expected by the markets, in part because we believe that US inflation peaked in March-April – a view that is expected to be confirmed by the US CPI data on Friday. In addition, global PMIs outside China are not suggesting that a global downturn is imminent, while the outlook for the Chinese economy itself could improve now that the pandemic lockdowns are being lifted.
Last but not least, a record amount of USD cash is sitting on the sidelines. In turn, this could mean that buyers on dips could emerge to prop up both the stock and FI markets," CACIB notes.
"We, therefore, doubt that we will see a sustained spike in risk aversion and thus the next big rally of King USD in the near term. The only exception to that could be USD/JPY where the lack of meaningful FX intervention threat seems to have emboldened the bull," CACIB adds.
Credit Agricole CIB Research discusses the market outlook and argues that a sustained spike in risk aversion is unlikely.
"We doubt that the Fed will be considerably more hawkish than expected by the markets, in part because we believe that US inflation peaked in March-April – a view that is expected to be confirmed by the US CPI data on Friday. In addition, global PMIs outside China are not suggesting that a global downturn is imminent, while the outlook for the Chinese economy itself could improve now that the pandemic lockdowns are being lifted.
Last but not least, a record amount of USD cash is sitting on the sidelines. In turn, this could mean that buyers on dips could emerge to prop up both the stock and FI markets," CACIB notes.
"We, therefore, doubt that we will see a sustained spike in risk aversion and thus the next big rally of King USD in the near term. The only exception to that could be USD/JPY where the lack of meaningful FX intervention threat seems to have emboldened the bull," CACIB adds.
JPY: New Day, New Lows; Increased Speculation On Japan Intervention To Slow The Move - MUFG
MUFG Research discusses the JPY outlook and flags a scope for increased speculation on Japan intervention.
"The speed of the move in yen depreciation is certainly now on a par with what we had during much of March and April and at higher levels, there will be inevitable increased speculation on Japan intervention to at least slow the move," MUFG notes.
"Governor Kuroda did say today that rapid yen selling is “undesirable” but it would be difficult at this juncture for the MoF to justify yen buying intervention given the actions of the BoJ. If US yields remain underpinned over the short-term yen selling momentum will likely persist," MUFG adds.
MUFG Research discusses the JPY outlook and flags a scope for increased speculation on Japan intervention.
"The speed of the move in yen depreciation is certainly now on a par with what we had during much of March and April and at higher levels, there will be inevitable increased speculation on Japan intervention to at least slow the move," MUFG notes.
"Governor Kuroda did say today that rapid yen selling is “undesirable” but it would be difficult at this juncture for the MoF to justify yen buying intervention given the actions of the BoJ. If US yields remain underpinned over the short-term yen selling momentum will likely persist," MUFG adds.
USD/JPY: Rally To Accelerate Further If USD/JPY Breaks Above 135.15 - MUFG
MUFG Research discusses USD/JPY outlook and sees a scope for further gains in the near-term.
"The BoJ’s contrasting stance with other major central banks leaves JPY vulnerable to further weakness in the near-term at least while the sell-off in global equity markets has paused for now. It has been notable that renewed yen selling pressure in recent weeks has also coincided with a relief rally for global equity markets," MUFG notes.
"Yen weakness is likely to accelerate further if USD/JPY breaks above 135.15. BoJ Governor Kuroda is not convinced though that there is much further room for the USD/JPY to continue marching higher unless the Fed to delivers faster and more rate hikes than currently planned," MUFG adds.
MUFG Research discusses USD/JPY outlook and sees a scope for further gains in the near-term.
"The BoJ’s contrasting stance with other major central banks leaves JPY vulnerable to further weakness in the near-term at least while the sell-off in global equity markets has paused for now. It has been notable that renewed yen selling pressure in recent weeks has also coincided with a relief rally for global equity markets," MUFG notes.
"Yen weakness is likely to accelerate further if USD/JPY breaks above 135.15. BoJ Governor Kuroda is not convinced though that there is much further room for the USD/JPY to continue marching higher unless the Fed to delivers faster and more rate hikes than currently planned," MUFG adds.