Trade Ideas For The BOC Rate Decision

All the focus will be on the Bank of Canada and European Central Bank this week. 

It should be a good example of monetary policy divergence. The BOC is expected to hike rates and the ECB set to hold. 

It will also be a moment of truth for the USD. We will get a first look at the Q3 GDP numbers. 

In this article we’ll go through important events that happened last week. We will also discuss events to look out for in the week ahead along with some trade ideas.  

Below are the countries we will discuss in this week’s article: 

United States Dollar
Canadian Dollar
Great British Pound
Australian Dollar
New Zealand Dollar
Euro
Japanese Yen
Swiss Franc

 United States Dollar

What Happened Last Week? 

The Dollar started the week on the back foot following the prior week’s softer CPI numbers. Some analysts also attributed the weakness to renewed US budget deficit concerns. 

The Retail Sales numbers for September had a big miss on Monday. Retail Sales MM came in soft at 0.1% versus a forecast of 0.6% and Core Retail Sales MM came in at -0.1% versus expectations of 0.4%. 

The USD remained pressured following the weaker Retail Sales after a miss on CPI the prior week as well. 

According to Well Fargo, the Retail Sales numbers were not as bad as they seemed. They explained the soft data. It was due to big drops of 0.8% in gas station sales and a 1.8% drop in sales in bars and restaurants. 

 

The chart above shows the big drop in the YoY number following the recent Retail Sales report. This is something that needs to be carefully watched going forward. 

On Tuesday, President Trump continued his criticism of the FED by saying ‘my biggest threat is the Fed‘. The report didn’t send the USD any lower, but Trump’s growing criticism should be noted. 

The USD gained strength after FOMC minutes affirmed expectations of further rate hikes. The reaction was muted as there was no new info shared in the minutes. 

Scotiabank noted that the FED flagged dollar strength as a risk in a number of spots in the minutes. Attention on the FED’s reaction towards continued USD strength needs to be monitored. 

The Week Ahead 

The biggest event for the dollar will be on Friday 26 October with the release of the Advance GDP QQ. The prior Q2 GDP of 4.2% was the fastest rate of growth since 2014. 

 

Markets consensus is for Q3 GDP to slow to 3.3% from the high 4.2% print in Q2. 

ING investment bank expects a slightly higher number at 3.6%. They base this on solid consumer confidence, spending and high corporate profitability. 

Another important data point on Thursday 25 October will be Durable goods. After a 4.4% rise in August the market expects Durable goods to slow to -1.3% in September. 

According to IHS, the recent slowdown in the US Services PMI will also be in focus this week.

 

The Services PMI has been steadily slowing from June and reached an eight-month low in September. Markets are expecting the PMI to bounce back to 54.0 in October. 

Trade Ideas 

US GDP is due on Friday. There are no other tier one data points to drive the USD in the week ahead. Even though the US economy is doing fantastic, some recent macro data has been soft. 

The prior CPI, Retail Sales and Services PMI releases missed expectations. When macro data points miss expectations, it can put pressure on the USD in the short term. 

The Fundamental picture for the USD remains bullish. This means any sell opportunities resulting from data misses should be short lived. 

 Canadian Dollar 

What Happened Last Week? 

The week started out with a lot of positive news for the CAD. Our previous article explained the significance of the recent BOC Business Outlook Survey.  

According to the recent survey, businesses were positive despite prior negative Nafta sentiment. The new USMCA was only agreed on 1 October 2018.  

This means businesses saw themselves increasing investment even when Nafta risks were high. The BOC would be very happy with this survey and it’s no surprise markets had a bullish response to the report. 

On Wednesday the CAD was pressured after Crude stocks showed a surprise build of 6.49M barrels. Markets were only expecting a build of 2.167M barrels and as a result WTI fell over 3% on the day. 

Friday was a bad day for the CAD with both CPI and Retail Sales data missing market expectations. 

Headline CPI YY dropped unexpectedly to 2.2% from a forecast of 2.7% and CPI MM were softer at -0.4% versus consensus of 0.0%. 

 

Retail Sales MM missed at -0.1% versus expectations of 0.3% and Core Retail Sales came in softer at -0.4% versus a forecast of 0.2% 

It was no surprise for the CAD to sell off following the release of the soft data points. The BOC’s preferred CPI readings are the CPI Trim, CPI Median and CPI Common. 

 

All three of these measures slowed during September’s release but remain within the BOC’s 2% target range. Scotiabank notes that markets would fade the soft data as focus turns to the BOC’s next rate decision. 

The Week Ahead 

Wednesday 24 October is the BOC interest rate decision and press conference. With the recent developments for the CAD this is set to be the major event in the week ahead. 

There are a few reasons for the BOC to be upbeat about the Canadian economy: 

  1. Previously theBOC raised NAFTA concernsas a big reason for cautious policy changes. With the new USMCA agreed, that should be a big relief for the BOC. 
  2. The recent Business Outlook survey showed business were optimistic about future economic growth. This optimism preceded the USMCA which means businesses were positive despite trade concerns.
  3. Even though headline CPI had a big miss, the BOC’s preferred Core CPI measures are still on the 2% target.

Scotiabank noted that BOC’s Poloz should not be too concerned with the drop in headline CPI. They explain that Poloz did argue the upside swing in headline CPI was transitory and would fade. 

Both Wells Fargo and ING investment banks believe a rate hike is a done deal but expect a dovish stance from the BOC.  

As always, the biggest focus on Wednesday will on the rate statement and press conference. 

Trade Ideas 

Scotiabank’s opinion is to fade the selloff in CAD following last week’s softer CPI and Retail Sales data. They believe other data still supports a stronger CAD. 

It would be prudent to keep out of CAD pairs until Wednesday’s rate decision. The market is pricing in a 78% chance for a hike. All focus will be on the statement and press conference. 

Poloz is known for his unpredictability. Be careful with reading too much into the actual hike. Keep a close eye on the market’s reaction to any comments from the press conference. 

 Great British Pound 

What Happened Last Week? 

The GBP started the week pressured. This came from news that EU and UK negotiators paused discussions until the outcome of the EU summit. 

There was also news that PM May labelled a draft Brexit treaty from Brussels as a non-starter. Bad news increased as the likelihood of a special November summit decreased. 

Donald Tusk added to the panic as he explained that a no-deal Brexit was “more likely than ever before”. The Pound did receive a boost from better than expected Wage inflation data on Tuesday. 

 

Average Earnings YY (Ex-Bonus) reached its highest level in almost a decade. Wage inflation reached a high of 3.1% versus expectations of 2.9%. 

BNZ investment bank explained the recent uptick in UK data. It points to a higher rate path once Brexit is out of the way. 

On Wednesday 17 Oct the GBP was pressured after the release of softer than expected Sep CPI numbers. 

 

CPI YY and Core CPI YY came in softer at 2.4% and 1.9% versus expectations of 2.6% and 2.1% respectively. This means Core CPI YY has moved below the BOE’s 2% inflation target. 

The Pound retreated even further on Thursday on the back of softer Retail Sales data. Retail Sales YY came in lower at 3.0% versus consensus of 3.6%. 

The MM number for Retail Sales were also down at -0.8% versus a forecast of -0.4%. 

Apart from economic data, the Brexit saga continued throughout the week. The Pound stayed week following the EU summit where the UK and EU failed to make progress on Brexit talks. 

Wells Fargo states that officials only expect a deal by December at the earliest. Reports also stated the U.K. parliament would not approve the current withdrawal deal. 

This means even if a deal can be struck between the EU and the UK that the UK parliament might not accept it. 

The Week Ahead 

There are no significant data points scheduled for the Pound this week. With no economic data the main driver will remain Brexit developments in the week ahead. 

Trade Ideas  

ING explains that Brexit “sentiment seems to be shifting every day”. Until there are concrete developments with Brexit the Pound is a risky currency to trade. 

For the moment, make sure to have the news squawk on to take advantage of any Brexit headlines. Recent Brexit related movements have been largely short lived so keep that in mind. 

 Australian Dollar 

What Happened Last Week? 

The Australian Dollar had both up and down movement last week.  

On Tuesday 16 October the RBA minutes provided a muted response with no new info being shared. The RBA restated that their next interest rate move is still likely to be up. 

The first big mover for the AUD was the September jobs report released on Thursday. Overall the report was mixed. 

Headline employment came in lower at 5.6k versus forecasts of 15.0k. But the more important full-time employment increased by 20.3k which was a positive. 

The most surprising number in the labour report was the Unemployment rate which fell to 5.0% from 5.3%. According to the RBA 5% is the current natural rate of unemployment in Australia. 

According to Westpac, the main reason for the sudden drop was due to a lower participation rate. They noted the report was in line with a sound labour market but the fall in unemployment was a bit too aggressive. 

Even though it was a mixed report, the AUD strengthened across the board on Thursday on the back of the jobs report. 

On Friday things turned a bit negative for the AUD again as China released its Q3 GDP numbers. Chinese GDP YY came in softer than expected at 6.5% versus forecasts of 6.6%. 

 

The GDP YY came in at the lowest level after the global financial crisis. Even at historical levels going back to 1992 the current GDP is very low. 

According to IG, the soft GDP is due to macroeconomic headwinds and lower sentiment due to the trade war. 

As Australia sends over 30% of their exports to China a slower growth rate for China is negative for the AUD. The AUD finished the week softer on the back of the Chinese data. 

The Week Ahead 

There are no tier one economic data points on the calendar for this week. 

As a proxy for risk, the AUD normally depreciates and appreciates based on risk sentiment. With no other drivers we expect the main driver for the AUD to be risk sentiment this week. 

Trade Ideas  

Keep a close eye on things like equities and commodities for signs of risk sentiment in the market. 

Risk sentiment can be fickle so make sure to manage your risk with any risk-based trades. 

Keep the news squawk on and tuned in for any risk correlated news. 

 New Zealand Dollar 

What Happened Last Week? 

The New Zealand dollar had a very good start to the week when Q3 CPI numbers smashed market expectations. 

CPI QQ came in at 0.9% versus a consensus of 0.7% and CPI YY surprised higher at 1.9% versus a forecast of 1.7%. Both numbers beat the highest expectations of 10 analysts interviewed by Reuters. 

 

The latest CPI moved much closer to the high end of the RBNZ’s 1.0% to 2.0% inflation target band. But, the RBNZ’s preferred inflation sectoral factor model came in unchanged from Q2 at 1.7%. 

Currently the RBNZ’s dovish focus is on diminishing growth and business confidence. Thus, some analysts say the higher CPI is less likely to change the RBNZ’s outlook. 

According to BNZ, the likelihood of an OIS rate cut has been diminished after the beat on Q3 CPI and GDP. It’s important to note that the recent beats should not alter the RBNZ’s current rate path. 

The New Zealand dollar found some much needed relief from the beat on CPI and was the G7 outperformer last week. 

The Week Ahead 

The biggest event for the NZD this week will be the Trade Balance on Wednesday 24 October. 

In our article last week we noted that there is record short positioning on the NZD. What’s interesting is that the short positioning increased again last week. 

 

It’s important to note that the CFTC data released on a Friday only includes data from that Tuesday. NZD CPI was only released on the Monday. 

This means Friday’s CFTC data might not include changes in positioning after the CPI data. 

For this reason, the CFTC from Friday 26 October will be important. Look out to see whether short positions were pared following the beat on CPI. 

Trade Ideas  

With no tier one data there is not a lot to drive the NZD this week. As there are no data drivers there is a possibility of a short squeeze on the NZD so keep an eye on that. 

As a commodity currency the NZD is affected by risk sentiment. Keep a close eye on the risk tone in the market as sudden changes can affect the NZD. 

The Fundamentals for the NZD are still dovish so keep that in mind with short term trades against the trend. 

 Euro 

What Happened Last Week? 

Italy’s budget was front of mind again for the EUR as the EU responded to Italy about the proposed budget. On Thursday, the EU sent a formal letter to Italy stating the budget is an ‘unprecedented’ breach of EU rules. 

The letter was brushed off by Italy who defended their budget and showed no signs of backing down. In the wake of this Italian bond yields soared to four-year highs of 3.752% 

EU commissioner Moscovici attempted to ease tensions with Italy on Friday. He said Italy “was committed to the EU and the Euro”. 

Moscovici said he wanted to reduce tensions with Rome. He also said Brussels would not interfere in Italy’s economic policies.  

After Moscovici’s comments the Euro found some reprieve as Italian bond yields retreated. 

The markets were unfazed by Italy being downgraded to baa3 from baa2 status by Moody’s late on Friday. According to ForexLive the fact that Italy was viewed as stable should be good news for the markets. 

The Week Ahead 

On Wednesday 24 October we will see the latest French, German and EU Flash PMI numbers. Markets are expecting Manufacturing PMI to slow to 52.9 from 53.2 and forecasting Services PMI to drop to 54.5 from 54.7. 

There has been a steady decline in the Manufacturing PMI while Services has held up better. Wells Fargo notes that despite softer numbers both “remain firmly in expansion territory”. 

On Thursday 25 Oct we have the ECB rate decision and press conference. The ECB is expected to be on autopilot mode for this rate decision and no massive reactions are expected. 

Asset purchases are set to end after December and the first rate hike are forecasted at the end of 2019. Thus, there are no need for the ECB to change their policy or rhetoric from the last meeting. 

Core inflation will be the elephant in the room at the press conference. ECB members have remained very positive on inflation expectations despite disappointing data. 

 

The above chart shows Core CPI has been stuck in a range for the past 5 years. September Core CPI YY decreased to 0.9% from 1.1% in July. 

Markets still await the EU’s verdict on the proposed Italian budget draft. Danske Bank expects the EU to issue a negative opinion and request for a revision. 

Trade Ideas 

Recent soft economic data has pushed back EU interest rate hike expectations to Q4 2019. IHS explains that further decline may push hikes out even further. 

Thus, watch out for further softer PMI numbers for short term opportunities. 

The rate decision is the main event this week. Waiting for the ECB press conference before looking for trades would be prudent. 

Stay close to the news squawk to take advantage of any Italian budget developments in the short term. Remember to evaluate any trades with the bigger picture in the markets for the EUR. 

 Japanese Yen 

What Happened Last Week? 

The JPY started the week strong as Asia-Pac stocks had jitters over the global trade war. 

On Wednesday the selloff in some equities continued which gave further strength to the JPY. 

The Week Ahead 

There is a very light calendar for Japan this week. 

On Wednesday 24 October we will see October’s Manufacturing Flash PMI. Markets are expecting a print of 52.6. 

 

According to IHS, trade jitters and bad weather were probably the main drivers for the slower PMI. The PMI will show to what extent Japan’s exports has been affected by trade tensions.  

On Friday 26 October Japan will release its October Tokyo Core CPI numbers. Markets are expecting the CPI to come in flat at 1.0%. 

Trade Ideas 

ING said any upward surprises in CPI can spur “subtle hawkish BOJ sentiment” before the meeting. Watch out for unexpected surprises on the PMI or CPI releases for trade opportunities. 

As a safe haven currency, the JPY depreciates and appreciates based on risk sentiment. With the most recent fall in US equities the JPY gained strength across the board due to a risk off environment. 

With the lack of any major news events we expect the main driver for the JPY to be risk tones in the week ahead. 

 Swiss Franc 

What Happened Last Week? 

Last week was another example which saw CHF weakness despite risk off sentiment in the market. 

We highlighted the same occurrence in our article last week. 

According to ING, it’s been a bit puzzling why the CHF has not appreciated on the back of Italian budget issues. 

The Swiss Franc remained soft for the majority of last week. 

The Week Ahead 

There is no tier one data for the CHF this week. 

The biggest catalyst for the CHF could come from further Italian budget developments. 

Trade Ideas  

As a safe haven currency, the CHF can depreciate and appreciates due to risk sentiment. This is not always the case though as the markets can move opposite to popular correlations. 

Keep the news squawk on a ready to take advantage of risk tone trades this week. 

As there are no clear catalysts driving the Swiss Franc at the moment we don’t see any clear trades for CHF pairs.  

Wrap Up 

Highlights for this week are the BOC and ECB rate decisions and press conferences. 

In terms of politics, watch out for the EU’s response to the Italian budget. 

There is a very light economic calendar in the markets this week. The most important are US Q3 GDP, US and EU PMI’s. 

Make sure to have your news squawk on and ready to jump when the opportunity presents itself. 

Please feel free to leave your comments or questions below.

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