AUD/USD, EUR/AUD, EUR/CAD Ready for Next Moves Around BoC, ECB
- EUR/CAD vulnerable to shifting Canadian policies, ECB this week.
In what is justly called a disinteresting week for US economic data, it seems destined that exogenous influences will be the catalysts for USD-pairs, and central banks other than the Federal Reserve will be responsible for supporting risk appetite. With the Bank of Canada set to meet tomorrow and the European Central Bank on Thursday, there will be plenty of central bank fodder for traders to work with.
No three pairs may be more primed to move than AUD/USD, EUR/AUD, and EUR/CAD. AUD/USD continues to coil in an intramonth symmetrical triangle; EUR/AUD is threatening to break its uptrend from the April, May, and June lows; and EUR/CAD, having already broken its year-long uptrend, now attempts one more pass at former resistance before turning lower.
The Canadian Dollar is an interesting creature at this moment, and it may be evolving before our very eyes. Oil prices have stabilized in the short-term, which is allowing currencies across the commodity and EM spectrum to recover; concerns over flailing global growth are abating. But perhaps the biggest development from a longer-term policy perspective is the election of Justin Trudeau as the new Canadian prime minister.
Under the Mundell-Fleming model (or the IS-LM-BoP model), exchange rates are expected to depreciate when central banks ease or fiscal spending drops, and exchange rates are expected to appreciate when central banks tighten policy or fiscal spending increases. Now that a controversial, tight-pursed Conservative government is being swept from power, replaced by a Liberal government inclined to increase fiscal spending, there is an increasing probability that the BoC won't be the only institution attempting to stimulate the economy anymore (as is the case in the United States, Britain, and the Euro-Zone).
Accordingly, if fiscal spending is going to go up, the BoC might not need to ease further to stem off the recession; a shift away from dovish rhetoric could help the Canadian Dollar regain lost ground after a horrible first nine-plus months of 2015. The narrative for the Canadian Dollar is shifting to a more optimistic: earlier this year, it was all about weaker oil prices, a dovish BoC, and a government that was anti-fiscal stimulus; now it is about stable oil prices, a potentially neutralized BoC, and a government that is pro-fiscal stimulus. Now that the Fed is expected to keep rates on hold through Q1'15, the Canadian Dollar may see its own domestic influences fall into favor.
--- Written by Christopher Vecchio, Currency Strategist
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