Decision Time for Risk, USD-pairs; CAD-crosses at Inflection Points
- As market volatility rises, it's a good time to review the "Traits of Successful Traders" series.
There are several US data on the economic calendar today, but none are of too great importance. So, while each individual print may not prove to be market moving in isolation, in aggregate, they carry a good deal of weight. It's important to keep in mind the forest from the trees: US economic data is off to its worst start relative to the past 10 years, and the US Dollar desperately needs improved near-term fundamentals to help turn market sentiment around.
Market participants may be overreacting. Perception is greater than reality, after all: despite US data momentum being so weak, the Federal Reserve Bank of Atlanta's GDPNow forecast is still calling for Q1'16 growth at +2.6% (annualized). Markets are behaving like the Fed is on the cusp of a major policy mistake (tightening too fast and pushing the US economy into a recession, without policy recourse thanks to continued austerity on the fiscal side), although such sentiment is understandable in a consistently negative news cycle. To name a few of the prominent stories circulating: the US/Russian proxy war in Syria; refugees pouring into Europe through Turkey; North Korea's growing nuclear ambitions; concerns over Chinese economic growth; a potential break up of the European Union in its current form after a 'Brexit'; and the vicious, populist US presidential election cycle.
Against all of this, risk markets have been perking up the past few days. Now, several of the USD-pairs are at technically significant levels, particularly the commodity currencies; and it appears the event horizon for determining the next direction in the volatile risk on/risk off paradigm is approaching fast. While markets are justly questioning the efficacy of the BOJ's new negative interest rate policy (NIRP) program, there is still hope for more easing from the European Central Bank in March as well as for the Federal Reserve to keep rates on hold; both of which may start to come into greater focus as we move through the ides of February.
Aside from the obvious risk barometers that are AUD/USD, NZD/USD, and the S&P 500 - all of which are at significant near-term resistance (watch the video above) - it's increasingly important to monitor the CAD-crosses and Crude Oil. We've previously made the case that further losses in Crude Oil would have less of an impact on the Canadian Dollar; but in an environment in which energy prices are rallying and the US Dollar is struggling, we maintain the view that the Canadian Dollar could outperform thanks to recent policy shifts. Now, the continuation effort lower by USD/CAD draws our attention to the impending triangle break in EUR/CAD, as well as the potential major topping effort in GBP/CAD.
--- Written by Christopher Vecchio, Currency Strategist
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