Talking Points:
- This week’s calendar is a bit less busy than the prior two weeks, but what we do have on the docket could be significant and market moving.
- Key rate decisions out of the Fed (Wednesday) and the BoJ (Thursday) will likely dominate market focus throughout the early portion of the week.
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As we move into mid-month , the economic calendar begins to narrow a bit. While we don’t have as many high-impact events as the past couple of weeks, what we do have on the docket is a key rate decision out of the Federal Reserve scheduled for Wednesday. While there are little hopes for any actual adjustments to rates, the big question here is whether the Fed announces the start of balance sheet reduction and perhaps more importantly, how markets respond.
Also on the calendar is a Bank of Japan rate decision for Thursday morning. The BoJ has had short-term rates at -.1% since last year, and given the continued scope of expansion in the Japanese economy, questions have begun to populate as to whether the BoJ might nudge rates higher in response. Inflation remains subdued, so we probably won’t see anything drastic on Thursday; but if the Bank of Japan does begin to lay the groundwork for tighter policy options should GDP growth remain brisk, volatility could show in the Yen.
Below, we look at three of the more pressing price action themes across the FX market as we move into this week’s data.
U.S. Dollar: Have We Hit Bottom Yet?
This has been a rather constant question throughout 2017 as the down-trend in USD just has not stopped. We did spend most of August with DXY digging-out higher-lows, but that was all snuffed out by another sell-off around the Jackson Hole Economic Symposium. DXY drove down to set another fresh-low two weeks ago, with prices running into the 50% Fibonacci retracement of the 2014-2017 major move, and last week saw price action remain supported above this level.
Chart prepared by James Stanley
After spending most of last week moving higher, a CPI report released on Thursday helped to bring in short-term resistance. The inflation report wasn’t even all that bad, as we saw the second consecutive month of growth in prices in the U.S. economy, with inflation reading 1.9%, just below the 2% target of the Fed. But given the price action response, we can surmise that that report did little to send the pulses racing of dollar bears as another leg of weakness showed, and continued, after that print.
U.S. Dollar via ‘DXY’: Resistance, Reversal Around Last Week’s CPI Report (in red)
Chart prepared by James Stanley
Japanese Yen: Yen Weakness Remains, but Does This Have Continuation Potential?
Just two weeks ago, USD/JPY broke below the four-month range that had built in the pair, and it very much looked like we could be on the cusp of a new trend. But support came-in around the 107.30 level, and since then we’ve seen the pair run-higher by the tune of ~400 pips. But now we’re entering a resistance zone ahead of this week’s BoJ meeting, and continued advances could face enhanced selling as deeper resistance levels are tested. We’re now trading above 111.15, which is the 38.2% retracement of the June-December, 2016 major move. The 23.6% retracement of that study comes in at 114.03, and this has helped to establish resistance in the now five-month old range in the pair.
USD/JPY Daily: Fresh Monthly Highs After Down-Side Range Break Two Weeks Ago
Chart prepared by James Stanley
On shorter-term charts, we can see where traders are working around this 111.15 level. After gapping up to this level on Sunday’s market open, bulls have kept support with a minimal amount of gap remaining. This is considerably different from last week’s runaway gap, which has yet to close.
USD/JPY Four-Hour: Gap-up to Resistance/New Highs After Last Week’s Runaway Gap (in blue)
Chart prepared by James Stanley
While the Dollar has been weak for much of the year, Canadian Dollar strength has absolutely taken over since July. This is when the BoC staged their first rate hike in over seven years, and since then we’ve had another one. The Bank of Canada remains persistently hawkish, and this has kept the Canadian Dollar bid for most of the past four months. USD/CAD recently broke below a long-term trend-line around that second rate hike from the BoC, and bulls have continued to press the move down to fresh two-year lows.
USD/CAD Weekly: Four Months of CAD-Strength Breaks Trend-Line, Finds 61.8% Support
Chart prepared by James Stanley
But Friday brings a CPI report that will likely help to shape just how hawkish the BoC might be at upcoming rate decisions, and with a market so heavily short, we might not need much to lead to a deeper retracement in the pair. On the chart below, we’re looking at four potential resistance areas to follow USD/CAD short-side continuation.
USD/CAD Four-Hour: Potential Resistance Levels Applied
Chart prepared by James Stanley
--- Written by James Stanley, Strategist for DailyFX.com
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