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Dollar Rate Outlook Advantage Usurped by Loonie and BOC, ECB Likely a Contrast

Dollar Rate Outlook Advantage Usurped by Loonie and BOC, ECB Likely a Contrast

John Kicklighter, Chief Strategist

S&P 500, USDCAD, EURCAD, EURUSD, Dogecoin and Earnings Talking Points:

  • As we enter Thursday trade, risk assets have a short-term bullish bias to work with; but the lack of conviction favors range and discount like the Russell 2000
  • Top theme this past session was an unexpected interest in monetary policy triggered by a surprise shift from the BOC which jumps the bank ahead of the Fed in normalizing
  • Key event risk ahead in order of market moving potential is: the ECB rate decision; continuation of US earnings and the start of April PMIs

Even the Market’s Preferred Brand of Risk Spirits Is Fading

We head into Thursday’s trading session with risk appetite finding a short-term boost. By ‘short-term’, I consider the last 24 hours the appropriate time frame with contrast on ‘long-term’ stretching out months to years. With the S&P 500, Dow and other measures of the same ilk lining up both pictures of duration, it would seem a favorable environment to build a productive bullish trend. However, we have seen similar alignment come into view many times these past weeks without a marked change in tempo. It seems market conditions, which are crushed between seasonal downshift and structural air letting from the post-pandemic recovery, is still the determining feature of the landscape. Risk on may be the prevailing wind, but it will most likely be plagued by chop and reticence. Though lower probability, if risk aversion were to catch, it would likely generate a much stronger downdraft. I don’t believe in waiting for ideal scenarios to come by, so looking for risk assets that aren’t as stretched is more appealing. So, rather than the S&P 500 or DAX; I keep tabs on the Russell 2000, CADJPY or even crude oil.

Chart of S&P 500 with 100-Day Mov Avg and 20-Day ATR and Historical Range (Daily)

Dollar Rate Outlook Advantage Usurped by Loonie and BOC, ECB Likely a Contrast

Chart Created on Tradingview Platform

Looking for sparks in risk trends, some of the preferred outlets for stoking enthusiasm seem to have ebbed somewhat as we have passed through the middle of the week. The cryptocurrency market as a recent concentration of wayward capital has lost traction with Bitcoin repeatedly dunked back below 56,000 while the charge around Dogecoin seems to have held on to volatility while losing a clear chart bearing. Earnings is another potential fundamental motivator with the right mix. The pickup from afterhours Tuesday releases from key companies offered a two speed view for speculators. On the one hand, railroad shipping company CSX managed to leverage its reporting to new highs. The company is ‘closer to the ground’ on growth, but that doesn’t impressive market participants that have flooded the system just recently looking for ‘disruptors’. Meanwhile, Netflix’s significant miss in new clients led to the biggest bearish gap since March 16th, 2020. Ahead, we have Intel, Snap, Travel Zoo and American Airlines among other lesser tickers.

Chart of the Netflix with Daily Gaps Overlaid with CSX (Daily)

Dollar Rate Outlook Advantage Usurped by Loonie and BOC, ECB Likely a Contrast

Chart Created on Tradingview Platform

Monetary Policy is Suddenly Interesting Again – Thanks to the BOC?

In 2021, the world’s largest central banks have tried to step back from the spotlight so that massive stimulus endeavors could take up the cause of funding a strong economic recovery in the aftermath of the pandemic. However, the policymakers have made very clear that they intend to be a constant source of support with their policy mix set at the most accommodative settings on the scale. Yet, everyone realizes that eventually the system will need to normalize. Small, almost imperceptible changes have been made to move back from crisis-era policies such as the open liquidity lines the Fed adopted during last year’s shutdown. I thought we would need to interpret extremely subtle changes for some time before a key official would have to eventually admit that a move to normalize would need to come within a reasonable time frame (eg six months). The Bank of Canada (BOC) seemed to pull the pin with no warning this past session. Against expectations of no change, the group stated it would reduce its weekly asset purchases from C$4 billion to C$3 billion. That is an outright taper and pushes the Canadian group out ahead of the curve relative to the Fed.

Graph of Relative Monetary Policy for Major Central Banks

Dollar Rate Outlook Advantage Usurped by Loonie and BOC, ECB Likely a Contrast

Graph Created by John Kicklighter

With the news that the BOC was throttling back and subsequently the belief that the Canadian Dollar is looking at a more generous yield forecast than major counterparts, the Loonie would enjoy a rally across the board. For USDCAD, this sudden shift in fortune would once again undermine a 13-month breakout transition. It would have been far out of character for this pair to establish a major reversal and trend where the rest of the market is simply spinning its tires. It is worth watching the progress marked by CAD moving forward relative to the Yen as a carry pair and more stoic counterparts like the Sterling in order to gauge the sheer appetite.

Chart of USDCAD with 50 and 100-DMA with 1-Day Rate of Change (Daily)

Dollar Rate Outlook Advantage Usurped by Loonie and BOC, ECB Likely a Contrast

Chart Created on Tradingview Platform

Monetary Policy and Dollar Potential Ahead

If the BOC hadn’t upended the perspective of global monetary policy this past session, I wouldn’t have held out much expectation for the European Central Bank (ECB) rate decision due later today. However, whatever this sizable authority does will be drawn into greater contrast relative to the Canadian group. The ECB is unlikely to relent from its persistent drive in accommodation as the struggle to push its vaccination timetable with accompanying economic closures will likely demand greater support. That said, I will be keeping close tab on the likes of EURUSD relative to yield differentials between German and US 10-year yields. EURCAD would be another interesting cross to keep notes on.

Chart of EURUSD Overlaid with German-US 10-Year Yield Spread (Daily)

Dollar Rate Outlook Advantage Usurped by Loonie and BOC, ECB Likely a Contrast

Chart Created on Tradingview Platform

While the central bank activity around EURUSD and USDCAD draws scrutiny for the active policy events this week, it is important to evaluate the base currency even if just for a stable backdrop to evaluate more active fundamental matters. In reality, however, I believe the Greenback is more than capable of determining our course without an active Fed rate decision (which is actually next Wednesday). Implied yield forecasts in the US have dropped according to Fed Fund futures and US 10-year Treasuries. That seems to have had a significant impact on the currency’s withdrawal. As for the ‘risk’ correlation via a measure like the S&P 500, I believe that is more correlation than causation.

Chart of DXY Dollar Overlaid with Implied Fed Rates, S&P 500 with Correlations (Daily)

Dollar Rate Outlook Advantage Usurped by Loonie and BOC, ECB Likely a Contrast

Chart Created on Tradingview Platform

In the spirit of tracking the US currency, there are some crosses that have a better mix of technicals and fundamentals versus others. EURUSD for example has a very choppy technical backdrop which makes it difficult to spin a break into a more meaningful move – much less a lasting trend. USDJPY on the other hand is a more nuanced measure between two potential funding currencies. That makes the eight-consecutive day slide from this benchmark pair the longest unbroken drop since March 2017. To find a longer stretch, you’d need to look all the way back to August 2011.

Chart of USDJPY with 50 and 100-Day Moving Averages, Consecutive Candles (Daily)

Dollar Rate Outlook Advantage Usurped by Loonie and BOC, ECB Likely a Contrast

Chart Created on Tradingview Platform

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