Premium Forex Watch Recaps: Sept. 2 – 3, 2024

Our currency strategists this week focused on the US ISM manufacturing PMI data and the Bank of Canada (BOC) monetary policy statement for potential bullish setups.

Of the four scenario/price outlook discussions this week, It can be said that both discussions witnessed the raising of fundamental and technical arguments. To become a potential candidate for Trade and Risk Management. Check out our review of these discussions to see what happened!

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On Monday, our forex strategists focused their attention on the upcoming US ISM Manufacturing PMI release and its potential impact on the US dollar. Based on our ISM Manufacturing PMI update event guide, markets were expecting a slight improvement in the index, although the reading still likely reflects a contraction in manufacturing.

With these expectations in mind, here’s what we were thinking:

“Dollar Fall” Scenario:

If the PMI reading comes in as expected or lower, we would expect the Fed to lean more toward an aggressive rate cut in September, which would be a larger 50bp move. We believe this could attract core USD sellers, and we have our eyes on USD/CHF for potential short selling strategies to watch as the recent bounce to the downside could attract technical swing sellers, especially in a risk-off environment.

“USD Gain” Scenario:

If the US PMI surprises the markets with a rise, we might imagine that this could ease recession fears in the US and boost the dollar in the near term. We have been watching the USD/JPY pair to see if this scenario plays out, as the pair’s recent behavior has shown signs of a potential reversal from its recent downtrend, not to mention the wide divergence in interest rate policy between the Fed and the Bank of Japan which could eventually attract carry traders.

what really happened

Well, ladies and gentlemen, Tuesday is here, and the U.S. Institute for Supply Management’s manufacturing PMI decided to give us a mixed bag of results. The August reading came in at 47.2, up from 46.8 the month before, but below the consensus of 47.5. While that still points to a contraction in the manufacturing sector, there were some interesting details in the report:

• The price index rose from 52.9 to 54.0.
• The employment index improved from 43.4 to 46.0.
• New orders saw another monthly decline.
• Production also declined.

“Demand remains weak, output has declined, and inputs have remained accommodative,” said Timothy Fiore, chair of the Institute for Supply Management’s Manufacturing Business Survey Committee. He also said businesses have shown a reluctance to invest in capital and inventory due to current federal monetary policy and election uncertainty.

Market reaction

The initial market reaction was rather muted as traders digested the mixed signals from the report. Looking at the USD/CHF chart, we can see that the pair initially saw a small recovery after the PMI release, rising from the 0.8460 level towards the 38.2% Fibonacci retracement level near 0.8480.

However, the pair’s upward momentum was short-lived. A slightly better-than-previous but still contractionary PMI reading, coupled with a decline in new orders and output, seemed to reinforce the narrative of a slowing US economy. This in turn fueled speculation about a possible interest rate cut by the Federal Reserve, putting pressure on the dollar.

As the week progressed, the USD/CHF pair continued its decline, breaking the S1 pivot level (0.8427) and heading towards the S2 level (0.8358). The pair found some support around the psychological level of 0.8400, but the overall trend remained bearish.

Interestingly, the USD/CHF downtrend was reinforced by additional US economic data released later in the week:

1. U.S. business job openings figures released on Wednesday came in weaker than expected, and were revised downward from the previous report.

2. Thursday saw the release of a disappointing Challenger job loss report and a lower-than-expected ADP nonfarm payrolls change number.
3. Friday’s much-anticipated US employment report initially caused some confusion in markets. While weaker-than-expected job growth and downward revisions initially supported the narrative of a 50 basis point rate cut by the Federal Reserve, falling unemployment and rising wage growth have shifted expectations toward a 25 basis point cut.

The verdict

So, how did we perform? In our original discussion, we mentioned potential short selling on USD/CHF if the US manufacturing PMI came out weak, which it did (although with some mixed components). If this strategy is followed, This is very likely to support a net positive outcome, given that the market saw strong bearish momentum and closed below the discussion and event price areas at Friday’s close.

For those who expected USD/CHF to fall when the fundamental and technical arguments were raised on Tuesday, they likely saw the best possible risk-reward. Strong downside momentum presented multiple opportunities to capitalize on the move:

1. An initial entry could have been taken in case of failure to break above the 38.2% Fibonacci retracement level, with a stop loss above the recent swing high.
2. Traders could have added to their positions or entered on a break below the S1 pivot point (0.8427).
3. More conservative traders could have waited for a break below the 0.8400 psychological level before entering, and still managed to make some pips before the weekend.

In all cases, the continued downward momentum provided a great opportunity to trail stops and capture a significant portion of the move.

On Tuesday, our FX strategists focused their attention on the upcoming Bank of Canada monetary policy statement and its potential impact on the Canadian dollar. Based on Babypips.com’s event guide for the BoC decision, markets were pricing in a 25 basis point rate cut, with hints of further easing likely to follow.

With these expectations in mind, here’s what we were thinking:

“Canadian Dollar Recovery” Scenario:

If the BoC cuts rates by just 25bp without strong dovish signals, we believe this could trigger a “buy the rumors, sell the news” reaction, which could support the Canadian dollar. This scenario is consistent with the recent downtrend in GBP/CAD and the standard directional behavior pattern on the hourly chart.

“Canadian Dollar Diving” Scenario:

If the Bank of Canada cuts interest rates and signals a more aggressive easing cycle ahead, we expect this to weigh on the Canadian dollar. We have been watching the EUR/CAD pair as a potential long-term strategy, especially given its position near a long-term support area and consolidation formation that could lead to buying momentum in the event of an upside breakout.

what really happened

Well, ladies and gentlemen, it’s Wednesday and the Bank of Canada has decided to serve up a mixed bag that will make even the most seasoned forex experts scratch their heads. As expected, The Bank of Canada cut its overnight interest rate target by 25 basis points to 4.25%.marking the second consecutive interest rate cut in the monetary policy cycle.

Key points from the Bahrain Olympic Committee statement and press conference:

• The global economy grew by about 2.50% in the second quarter, in line with July expectations.
• Canada’s economy grew by 2.1% in the second quarter, slightly above expectations.
• Inflation slowed to 2.5% in July, with core inflation measures averaging around 2.5%.
• Rising house prices remain the largest contributor to overall inflation but have begun to slow.
• Bank of Canada Governor Tiff Macklem stressed that the risk of significantly weaker inflation is now a factor in interest rate decisions.
• Macklem added that the Bank of Canada is “prepared” to take a “more aggressive step” on cutting interest rates if necessary.

Market reaction

The initial market reaction to the BoC statement saw a short-lived strengthening of the Canadian dollar across the board, suggesting a “buy the rumors, sell the news” reaction. However, this quickly reversed against most major currencies before the start of the next hour.

Looking at the EUR/CAD chart, we can see that the pair initially saw a slight decline after the BoC release, falling from the 1.4970 level towards the pivot point (1.4968). However, the pair’s downward momentum was short-lived here as well.

As the press conference progressed, Governor Macklem hinted at the possibility of more stringent easing.The EUR/CAD pair found support and started to rise. The pair broke above the pivot point (1.4968) and the 100-day simple moving average, which triggered our bullish scenario.

The bullish momentum continued, with EUR/CAD breaking the R1 pivot level (1.5049) and reaching the psychological level of 1.5100. This move was fully in line with the “Loonie bearish” scenario, as the market priced in the possibility of further rate cuts by the Bank of Canada.

Interestingly, the EUR/CAD bullish trend is being supported by broader market dynamics:

1. Risk flows accelerated later in the week.which favours the euro over the commodity-linked Canadian dollar.
2. Crude oil prices fell, putting additional pressure on the Canadian dollar.
3. Mixed Canadian employment data released on Friday, in contrast to a dominant U.S. jobs update, added to the overall risk-off sentiment.

The verdict

So, how did we do? In our original discussion, we mentioned the potential for a long EUR/CAD position if the BoC signaled a more aggressive easing cycle, which it did with Governor Macklem’s comments. If this strategy is followed, it is “highly likely” to support a net positive outcome, given that the market has seen bullish momentum with very few declines, and closed above the discussion and event price areas at Friday’s close.

For those who were bullish on EUR/CAD when the fundamental and technical arguments were raised on Wednesday, they likely saw the best possible risk-reward. The strong upside momentum presented multiple opportunities to capitalize on the move:

1. An initial entry could have been taken on a break above the pivot point (1.4968) and the 100 simple moving average, with a stop loss below the recent swing low.
2. Traders could add to their positions or enter on a breakout above the R1 pivot level (1.5049).
3. More conservative traders could have waited for a break above the 1.5100 psychological level before entering, and still managed to make some pips before the weekend.

In all cases, the continued upward momentum provided a great opportunity to trail stops and capture a significant portion of the move.