FX and Fixed Income trading: Bank of Canada

We had a busy week in terms of news and economic releases. The UK CPI and the European CPI were in line with the expectations. The Bank of Canada raised the interest rates. We saw a better than expected building permits in the US. Maybe the biggest surprise on Friday was the UK Retail Sales that show the third-worst figure in the last 5 years. On the other hand, the speculation of the government shut down drove the USD down. Sadly, now it’s official, as it happened yesterday night.

Interest Rate decision

Source: TradingView, USD/CAD (FXCM), 15 min

As you can image, the CAD went up with the interest rate decision. The market participants expected a hawkish statement considering that the Canadian economic outlook is expected to keep strong and allow to raise the interest rates in the future. Sadly, the BOC showed its dovish side confirming that some monetary accommodation will be needed.

Source: TradingView, USD/CAD (FXCM), daily

We can see that the USD recovered in the last 2 trading days after the dovish comments of the Bank of Canada and the uncertainty about NAFTA.

US Dollar Index

Source: TradingView, US Dollar Index, daily

The USD has been falling during the last 3 months while the bond yields have been raising. If we only consider the FED policy, the dollar should be going up. On the other hand, and in my humble opinion, some policies are not coordinated to meet certain economic targets. In addition, some political issues such as the government shut down are reflected on the USD.

Unstoppable Indexes

DAX

Source: TradingView, DAX future, daily

The Dax is trading on its all-time highs and seems that it´s not going to stop. The European indexes are not as directional as the American indexes. One of the biggest risks, in my opinion, is an expensive euro because this will slow down the trading with other economic areas. The ECB will hold a meeting next week that will guide the traders about the future economic policy.

FTSE

Source: TradingView, FTSE future, daily

The FTSE is another example of great performance. The recovery since the Brexit referendum has been incredible. The uncertainty of the possible split up with Europe hasn´t affected the index. It´s true that after the referendum the British Pound fell a lot and helped some funds to take bigger positions in the stock market.

US indexes

S&P 500

Source: TradingView, SP500 future, daily

Source: TradingView, Dow Jones future, daily

The last 2 charts are identical. If an investor opened positions in 2013, now he would have doubled his investment. Some of the biggest investments banks have warned their clients about a possible big sell off to take profits. One of the reasons behind this is that these indexes have never been overbought in their history. In addition, we have seen the largest inflows ever in equity funds. When everyone is buying after the biggest rally ever, it´s better to take profits while we can. If you don’t believe in this theory, ask the bitcoin investors that bought the cryptocurrency at 19000$.

Opinion

We have seen interesting movements this week. Everyone is monitoring the Central Banks statements. We need to focus on the Bank of Japan and the European Central Bank next week. I would like to see how the ECB deals with a strong Euro. I don’t think that the US government shut down will last long. About the stock markets… well, I said before. These things don’t end well.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

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Introduction

I’m going to compare the USD with the Canadian Dollar. These two economies are performing well. Each one has its own problems. Both central banks, Fed and BoC, are rising interest rates.

Fundamentals

Let’s start with the fundamentals. As you know I like to have a big picture where I can highlight the risks.

United States

Its economy is showing strength. The GDP has been growing since June 16. It´s not as high as someone would like but considering that it’s a developed economy is very good. The US CPI is surging as well and this with the strong labor market can lead to more interest rate hikes in the near future. The last unemployment rate reading was 4.2%. The ISM Manufacturing PMI is really high. Some fund managers and traders would prefer to sell some assets considering the high level in the ISM PMI, and statistically speaking I agree (always with a good risk management and considering the size of their portfolios).

Source: Investing, ISM Manufacturing PMI historical

The Federal Reserve is ready to hike interest rates and stop the asset purchases to support the economy. The election of a new FED president can help to do it quicker. On other hand, if the tax proposal is successful, the stock market could continue the upside trend.

Canada

It’s been a busy year for the members of the Bank of Canada. The housing bubble and the high household debt made it even more difficult. All of these facts with the good macroeconomic data obliged the central bank to raise the overnight rate to 0.75% from 0.50%. This was very significant because it was the first hike after the financial crisis. This helped the Canadian Dollar. The BoC raised interest rates in early September for the second time this year. Canada’s economy is dependent on the heavily indebted household sector to support economic growth. According to some BoC employees, we can see more hikes in 2017, but I have my doubts about it. I understand that they need to hike interest rates to cold the housing market but the main problem is how to do it without affecting the economic growth. The property sales have decreased but the valuations are still high. It’s expected that the Canadian overnight rate will be around 1.75% by the end of 2018.

USDCAD

USDCAD year to date

Source: TradingView, USDCAD FXCM CFD, daily

The most part of the year has been falling. It was bouncing from 1.3023 and 1.35169 in the first four months. It broke the resistance at 1.3517, and it set up the highs of the year, but this movement finished around 1.3800. The BoC raised the overnight rate in July, it was the first time in seven years, this was a boost for the CAD. It fell until September, the last downside move was due to the second interest rate hike of the year in Canada. It´s been a tough year for the dollar. One of the reasons is that there is a high probability that the Federal Reserve will hike interest rates before the final the year.

The most important levels, in my opinion, are the following:

Resistance 4	1.3516
Resistance 3	1.3321
Resistance 2	1.3023
Resistance 1	1.2764
Support 1	1.2437
Support 2	1.2110

Relevant levels, own elaboration

I think that the USD will keep raising and test the resistance 1 (1.2764)

USDCAD daily from the middle of July

Source: TradingView, USDCAD FXCM CFD, daily

Here, we can see how the dollar lost its strength in the middle of August. The probability of an interest rate hike in Canada increased. As a result of the speculation of a rate hike and the performance of the economy, the Bank of Canada rose the 0.25% the interest rate at the beginning of September. The CAD strength was temporarily boosted but it didn’t last for long. Since then, the USD has been rising. The reasons are: the high probability of another rate hike in the United States before 2018, the possibility of electing a hawkish Fed president and the tax proposal. As I said I think the USD will rise vs the CAD at least in the short term. It hasn’t crossed the support at 1.2437 and it´s above the 20 and 50 exponential moving average.

Conclusion

This is a good example of two economies in which their central banks are tightening for different reasons. We have seen one of the longest bullish markets, because it had the support from the central banks around the world. I think that the USD will be stronger than the CAD in the short to medium-term. I hope you like the article.

Have a good trading!