Three Pertinent Price Action Themes for This Week

2016-10-24 13:09:00 James Stanley

Talking Points:

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- This week brings a heavy batch of U.S. economic data, and the U.S. Dollar is holding on to recent gains after an extremely bullish month of October.

- Markets may have seen the introduction of a ‘workable theme’ last week when the Bank of Canada mentioned the prospect of monetary stimulus.

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USD Breakout – Does it Have Room to Run?

One of the more pertinent issues across capital markets at the moment is a recent top-side breakout in the U.S. Dollar. October’s price action in the Greenback has been very similar to price action in May of this year and November of 2015. Of course, in both instances the Fed was talking up the prospect of rate hikes in the following month; with November 2015 actually leading to a hike whereas June of 2016 saw an abysmal NFP print in the early portion of the month send a knock-out punch to those rate hike hopes.

The exception here from those prior two instances is the fact that few are expecting any moves next month, with markets pricing in an approximate 9.3% chance of a hike in November. More likely would be December, which is currently showing a 63.6% chance of a rate hike from the Federal Reserve. Given that U.S. Presidential elections take place just one week after that November Fed meeting; this expectation makes sense.

This expectation also opens up the possibility of considerable speculation around the matter as we move towards that December rate decision. While US Dollar strength in May was very much driven by the Fed’s insistence that they could hike in June, few are expecting a hike out of the Fed in November. This could lead to a scenario in which markets may be a bit more forgiving of slightly-weaker US data prints while considerable focus is still-paid to strong prints that allude to a greater probability of a December hike.

This week happens to bring a litany of US economic data points, with high-impact data to be released each of the last four business days of this week (Tuesday-Friday). We looked at this theme in-depth on Friday in the article, U.S. Dollar Breakout to Face Pivotal Test Next Week, and below we take a look at the updated chart incorporating this Friday’s price action as well as this week’s open.

Chart prepared by James Stanley

Will CAD Weakness Be a ‘Staying’ Theme?

One of the most attractive parts of trading currency pairs is the potential for one-sided biases. This would be similar to Yen weakness from 2012-2015 and then Yen strength from 2015-present day; or as another example Euro weakness from July 2014-March 2015. Of course, in each of these scenarios, one-sided moves were kick-started and driven further by the representative Central Bank.

Last week may have potentially given currency traders such a driver in the Canadian Dollar.

Coming into 2016 the Canadian Dollar was incredibly weak after the Bank of Canada had tried various forms of monetary stimulus to middling results. In January, the Bank had said that they were going to take a back-seat away from monetary stimulus in order to allow the newly-installed government of Justin Trudeau to try their hand at fiscal stimulus. This helped to arrest the CAD weakness that had begun to bring unsavory inflationary pressure into the Canadian economy, and since January markets have evaluated results in the effort of discerning how impactful Mr. Trudeau’s fiscal stimulus efforts might be.

So far, the results haven’t shown much. While Oil prices have put in healthy gains since January, a strengthening Canadian Dollar has offset a large portion of that benefit for the Canadian economy. Canadian exports are struggling at a historic rate, and of recent markets have built-in the expectation that the Bank of Canada may be coming back with more monetary stimulus.

At last week’s Bank of Canada meeting, BoC Governor Stephen Poloz mentioned that monetary stimulus was discussed by the bank at the most recent decision, and this has fired fresh-hopes that more accommodation may be coming out of the Bank of Canada. This has sent the Canadian Dollar to a 7-month low against the Greenback, and should these expectations continue to build, we’re likely going to be seeing more weakness in the weeks/months ahead.

Chart prepared by James Stanley

Gold Prices – Is the Pain Over?

One of the biggest losers in this recent run of USD strength has been Gold. Gold prices have taken a serious punch in the month of October as the top-side move in the Greenback has hastened, and this very much further the theme in Gold this year in which prices have popped aggressively-higher as the Fed has backed away from rate hikes; only to grind lower as the Fed then takes on a hawkish stance.

As hawkish Fed commentary grew more prominent in the early portion of October, Gold prices put in a significant break of support at the $1,300-level and then again at the $1,285 level. Prices ran all the way down to the $1,240.58 Fibonacci level, which is the 50% of the 2013-2015 major move in Gold; after which price action climbed above the pre-Brexit low of $1,250 and began moving-higher. The past week of price action in Gold has given a bullish appearance, but traders would likely want to scroll out to take a bigger-picture, longer-term look at Gold prices before getting too certain that the top-side move is ready to continue.

Just above current price action there is a confluent zone of potential resistance. Traders can use this as a way-mark for the bullish move, mandating that price action must break above this ‘line-in-the-sand’ before looking at pressing the bullish approach. Until that takes place – price action is still subdued below the ‘lower-highs’ of the past few months.

The really attractive scenario for Long Gold positions is when the Fed is backing away from rate hikes; and it doesn’t appear that this is what we have just yet. So, as the Fed is continuing to talk up the prospect of a December rate hike, Gold prices will likely remain under some element of pressure. But when they capitulate (whether that be in December, or early 2017), Gold prices could catch a major bid to the top-side.