Premium Forex Watch Recaps: Sept. 16 – 18, 2024

Our currency strategists this week focused on the Canadian CPI update and the Australian employment update for potential high-quality 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!

Watchlists are discussions of price predictions and strategies backed by fundamental and technical analysis, and are a crucial step towards creating High quality business idea estimate Before working on a risk management and trading plan.

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On Monday, our forex strategists focused their attention on the upcoming Canadian CPI release and its potential impact on the Canadian dollar. Based on our event guide for the Canadian CPI update, markets were expecting a slight softening in inflation, with the headline CPI expected to rise 0.3% m/m and 2.4% y/y, down from the previous readings of 0.4% m/m and 2.5% y/y.

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

“Canadian Dollar Recovery” Scenario

If the CPI comes in higher than expected, we might conclude that this could temper the recent surge in dovish BoC expectations, which could attract net short-term buying of the CAD. We believed that this scenario could lead to a “buy the rumors, sell the news” reaction in NZD/CAD, especially given its recent bounce off channel lows and retest of channel highs, which could attract technical sellers this week.

“Canadian Dollar Recovery” Scenario

If the Canadian inflation data comes in weaker than expected, we expected this to weigh on the Canadian dollar and reinforce the Bank of Canada’s dovish outlook. We have been watching the USD/CAD pair as a potential long-term strategy, especially since the pair was approaching a support area around 1.3550, which coincides with the uptrend line and the 50% Fibonacci retracement level.

what really happened

Well, gentlemen, Tuesday came and the CPI numbers for August came in much weaker than expected, with the headline reading falling 0.1% month-on-month versus the expected 0.3% increase. The annual rate fell to 2.2%, below the expected 2.4%.

Other key points from the CPI report include:

• Core CPI (excluding food and energy) fell 0.1% on a monthly basis, compared to expectations for a 0.2% increase.
• The Bank of Canada’s preferred core inflation measures also eased, with the consumer price index falling to 2.5% year-on-year and the average CPI falling to 2.4% year-on-year.
• Gasoline prices were a major reason behind the decline, falling 7.3% in August compared to July.

Adding to the mix, US retail sales data released at the same time showed a 0.6% month-on-month increase, beating the 0.2% gain expected, providing further support to the US dollar.

Market reaction

The initial market reaction to the CPI release was decisively bearish for the Canadian dollar. Looking at our USD/CAD chart, we can see that the pair saw an immediate jump after the CPI release, rising from around the 1.3580 level towards the R1 pivot point at 1.3620.

The pair moved in a volatile manner ahead of the highly anticipated FOMC statement, which unsurprisingly sparked a massive move in the USD/CAD pair after the statement. The pair did indeed drop to the long target entry area at 1.3550 (Fibonacci area and S1 pivot point), where it immediately found support and quickly rebounded. This was probably due to the strength of the US dollar, and perhaps due to comments from Fed Chairman Powell that the US economy is still doing well and that the Fed is likely to adopt a gradual approach to easing.

The verdict

So, how did we do? In our original discussion, we mentioned potential long setups for USD/CAD if Canadian inflation data came in weak, which it did. We also mentioned that one should be wary of bullish patterns below the market around the 50% Fibonacci retracement level and S1 (1.3550) before considering a long bias.

If this strategy is followed, it is “likely” to support a net positive outcome, as the market has bottomed in that area multiple times, presenting multiple long-term opportunities. However, the upside bounces have been very limited, so planning and trade management were a big factor in the outcome, which is why we rate the strategy as “likely” overall.

On Wednesday, our strategists focused on the August 2024 Australian Employment Update and its potential impact on the Australian Dollar. Based on the leading indicators discussed in our event guide, the outlook was mixed, with net employment change expected at +28.0k (+58.2k previously), the unemployment rate expected to hold steady at 4.2%, and full-time employment expected at -7.0k.

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

“Australian Progress Part One” Scenario:

If employment data comes in stronger than expected, especially with higher net job gains and a flat or falling unemployment rate, we would expect this to attract fundamental buyers to the AUD. We have been focusing on the EUR/AUD pair for potential short selling strategies, especially given the pair’s recent bearish momentum and the formation (and possible break of the neckline) of a head and shoulders pattern on the hourly chart.

“Australian Progress Part Two” Scenario:

If the Australian jobs data disappoints, mainly showing a decline in net job gains or a rise in the unemployment rate, this could only have a temporary impact on the Australian dollar. Our studies have shown that unless the data results are very divergent from expectations, the Australian dollar will quickly return to taking cues from the broader market.

In case the data is slightly weak but the overall market sentiment is positive, we would consider the AUD/NZD pair as a potential bounce strategy, given its recent uptrend and the possibility of a bullish reversal behavior developing after the pullback.

What does the data say?

Australian jobs data was a positive surprise, with the economy adding a net 47.5k jobs in August, beating the expected 28.0k gain. Here’s a breakdown of the key figures:

• Net employment change: +47.5K (vs. +28.0K expected)
• Unemployment rate: steady at 4.2% (as expected)
• Full-time employment: -3.1K (vs. -7.0K expected)
• Part-time employment: +50.6K (vs. +35.0K expected)
• Labor force participation rate: Stable at a record high of 67.10%
• Employment to population ratio: increased slightly from 64.2% to 64.3%

Overall, this update was more positive than markets had expected, supporting the RBA’s case against the need to cut interest rates in the near term.

Market reaction

The initial market response to the Australian jobs data was decisively positive for the Australian dollar against all major currencies, in line with the “AUD advance” scenario for the EUR/AUD pair.

Looking at the EUR/AUD chart, we can see that the pair was already in a downtrend, having broken the neckline of the head and shoulders pattern at 1.6440 (S1) before the data release. The strong jobs report led to a sharp decline, pushing the pair towards the S2 support level at 1.6353.

The EUR/AUD pair found a weekly low at the S2 level, with the pair settling between 1.6360 and 1.6400 in the following sessions. The 100 and 200 SMAs on the hourly chart have crossed bearishly, further confirming the downtrend.

It is worth noting that the market reaction to the Australian jobs data was somewhat muted due to the broader market dynamics following the Fed’s announcement of a 50bp rate cut in the previous US session. This likely explains why the EUR/AUD pair did not fall below the S2 level for a longer period.

The verdict

So how did we do? In our original discussion, we mentioned a potential sell-off in EUR/AUD if Australian employment data came in stronger than expected, which it did. The head and shoulders pattern worked out as expected, with the neckline broken even before the data came out, probably due to positioning ahead of the event.

For those who were bearish on EUR/AUD when the fundamental and technical arguments came into play, they likely saw the best opportunity to capitalize on the strong downside momentum. But for those who waited before shorting, they very likely either broke even or took a small loss.

Overall, we would rate this discussion as “Neutral” in support of a potential positive outcome because while the strategy yielded immediate positive results, real-time reaction and trade management were important factors in determining the outcome.