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Has the Fundamental Fog Lifted for Canadian Dollar, Euro and Pound?

Has the Fundamental Fog Lifted for Canadian Dollar, Euro and Pound?

2018-10-19 03:36:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Fundamental overload and/or fixation can keep markets from productive movement and thereby seriously complicate trading
  • The EU Summit stopped the immediate clock for the Euro and Pound risk, but did not resolve their systemic risks
  • With the NAFTA renegotiations behind us, the Canadian Dollar's priorities are easier to ascertain

Do you want to learn how to trade event risk like Friday's Canadian CPI report or next week's ECB rate decision? Download the strategy guide on for trading news events on the DailyFX Trading Guides page.

Fundamentals Can Give Direction and Conviction, They Can Also Take It Away

It can be difficult for the market to commit to a particular direction - much less generate a persistent momentum - when there are high profile unresolved fundamentals in the mix. There are a number of ways this can manifest. In an ideal world, the motivation for a currency or market is founded on a single and easy-to-read metric. Yet, life and markets are so rarely that simple. There are hundreds of various themes that compete for traders' attention to establish value, but only a handful genuinely register. Nevertheless, that is still an overabundance of conflicting readings that can effectively draw all of the winds out of the bulls' or bears' sails. Another route to distraction comes from the frequent disruption represented by the anticipation of event risk. The build up to the monthly US NFPs (nonfarm payrolls) report is often a ghost town for active traders. Keeping the powder dry until the outcome is known is arguably a reasonable approach in risk terms, but the series has not been particularly effective as incurring wholesale change for the Dollar recently. Further, there is a short period of active trade following the release before the weekend liquidity drain fully sidelines traders from any serious attempt at turning volatility into trend. Therefore, one of the best things that we can do for our analysis and trading is to find markets or scenarios with as few open-ended variables as possible.

At the End of a Two-Day EU Summit, What Kind of Relief for Pound?

As of Thursday afternoon, we officially cleared the fog of a fundamental event that could reach the entire financial system. The two-day summit of European Union leaders was specifically focused on making critical progress on the Brexit negotiations with the UK (United Kingdom). Ultimately, that headway was not found, but neither did the other points of contention discussed on the sidelines find satisfactory conclusion. That certainly leaves open a degree of uncertainty, but the lack of a specific event to track out does offer some relief. For the British Pound, the ebb and flow of language used to describe the progress of Brexit negotiations has given some speculators whiplash. With this important EU summit on most Sterling traders' calendars for some time, it naturally called for a wind down on activity in anticipation. An ideal outcome would have been for a clear breakthrough on the impasse or the decision to simply commit to a no-deal or similar. Instead, the would offer words of optimism with a few key matters unresolved and no plans to hold the special November summit. This leaves the outlook uncertain, but the nature of the Brexit's complications as the cutoff date draws ever closer will lend a bearish drift. That said, if there are any sudden updates, they are more likely to be effective as a spark for a Sterling rally.I am particularly partial to the GBPUSD, GBPJPY and GBPAUD.

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Italy is Still a Clear and Present Danger to European Stability

Brexit wasn't the only uncertainty to be weighed at the EU meeting this week. Another very prominent issue that was addressed on the sidelines of the gathering was how to deal with Italy. The country has put the community to the fire by announcing its intention to boost public spending in defiance of the EU's rules. Given the media blitz of key Italian government officials this week, it seemed they wanted to force the topic find its way into the discussion at the leaders gathering. Not surprisingly, the EU rejected Italy's proposal to increase public spending by 2.7 percent and increase the structural debt as a percentage of GDP by 0.8 percent. Hope that this would end on a happy note was held particularly low. So, when the summit closed with a clear rebuke to Italy, there was little surprise. Similar to the Pound, the imminent threat fears have lifted as the specific date is now past. On the other hand, there is still a very explicit open-ended risk haunting the Euro. I think this imbues a distinct bearish sway over the Euro with fewer scenarios by which there would be a sudden break in the clouds to which it could mount a serious rally. In keeping tabs on the Euro, traders should keep a close eye on the 10-year Italian Treasury yield (as well as its spread to the German equivalent). For this second most liquid currency, better counterparts are safe havens (EURJPY) and peers with even greater liquidity (EURUSD).

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A More Reliable Canadian Dollar Trading Environment

With Brexit and Italy still hanging over our heads, a bias can form for the scenarios on the Sterling's and Euro's side. The environment can be traded thanks to the removal of timing to the otherwise chaotic backdrop, which is significant in itself. However, when looking for a currency whereby the same open-ended concern plagues trading intent, the Canadian Dollar certainly comes to mind. Canada's own dalliance with trade wars was limited to the metals tariffs until US President Donald Trump signaled his intent to escalate the situation even further. Yet, when all three participants of the NAFTA negotiations reportedly agreed to the replacement, we cleared a potentially devastating but certainly disruptive vigil on the currency. Now the currency can flip back to more quantitative and measured event risk in the form of the Canadian rate forecast. Friday offers last month's consumer inflation report which will tickle the Loonie's penchant to lean with rate forecasting - for better or worse, but definitely leveraged by rate hikes the group has already pursued outside the norm. We focus in on currencies whose fundamental outlooks have cleared for one reason or another and consider the trade implications in today's Quick Take Video.

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