Premium Watchlist Recap: Oct. 22-23, 2024

This week our currency strategists focused on… Interest rate statement from the Bank of Canada and Eurozone PMI survey updates For potentially high quality settings.

Of the eight scenario/price forecast discussions this week, Arguably, two discussions saw both financial and technical arguments raised They become potential candidates for overlay trading and risk management. Check out our review of those discussions to find out what happened!

Watchlists are price predictions and strategy discussions supported by fundamental and technical analysis, and are a crucial step towards creating an account High quality discretionary business idea Before working on a risk management and trading plan.

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On Tuesday, our strategists set their sights on the Bank of Canada’s monetary policy statement and its potential impact on the Canadian dollar. Based on our event guide, expectations were for a 50 basis point rate cut to 3.75%, with markets looking for signs of future easing.

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

“Color lift” scenario:

If the Bank of Canada (BOC) makes a smaller 25 basis point cut or signals a pause in the easing cycle, we expected this could support the Canadian dollar. We focused on CAD/CHF for potential long strategies if risk sentiment is positive, especially given the pair’s position near rising trend line support. In a risk averse environment, selling EUR/CAD has been our favorite pair given the recent dovish signals from the European Central Bank on potential interest rate cuts in December.

“CAD Collapse” scenario:

If the Bank of Canada cuts interest rates by 50 basis points and maintains a dovish stance suggesting more aggressive easing, we thought this could weigh heavily on the Canadian dollar. We were looking at potential selling strategies for CAD/JPY in a risk-off environment, especially in light of rising tensions in the Middle East and recent warnings from Japanese officials about potential currency intervention. If risk sentiment is positive, AUD/CAD has long made sense given recent strong employment data in Australia supports the possibility of the RBA being less dovish in the future.

What actually happened

The Bank of Canada lowered its expected interest rate by 50 basis points, bringing the overnight rate to 3.75%. This is the fourth consecutive cut in interest rates since June.

Key points in the Bank of China statement:

• Inflation reached 2% target with core inflation falling below 2.5%
• The labor market remained a source of concern as population growth outpaced modest employment rates
• Growth is expected to slow in the second half of 2024, but will gradually strengthen as interest rates decline
• The Bank of Canada expects to “cut interest rates further” if the economy develops as expected
• Confirmed decisions will be made “one meeting at a time”

In his press conference, Governor Macklem noticeably changed his tone, emphasizing that “we are back to low inflation” and that the risks surrounding the inflation outlook are “reasonably balanced.” His main message is: “Now our focus is on maintaining low and stable inflation. We need to stick to the downside.”

Market reaction

This result has us fundamentally looking towards the CAD/JPY for opportunities, especially given the broad market weakness in the first half of the week.

The CAD/JPY pair saw immediate selling pressure when the Bank of Canada announced a major interest rate cut, as it fell steadily after the event began. The BoC cut and profit taking likely had an impact, pushing the CAD/JPY lower in the next two sessions from around 110.50 to 109.50 before the market stabilized.

By Friday’s close, the CAD/JPY pair was hovering around the 109.60 level, having found support at the bullish 100 SMA and the secondary psychological zone at 109.50.

Judgment

So, how do we do? Our fundamental analysis correctly predicted a downward move in the CAD/JPY after the bearish BoC decision, but our technical argument was not in sight with the market rallying even before the BoC event.

However, if a bearish stance is taken after the Bank of Canada event and with the bulls rejecting the bulls at the minor psychological level of 110.50, it is possible that a move of those adjusting to what the market is offering them could be detected.

From this perspective, we believe this discussion was “most likely” supportive of a net positive outcome as the Canadian dollar fell after the bearish BOC event, but again, perhaps only by those who adapted the original strategy to the new market picture.

On Wednesday, our strategists set their sights on the upcoming updates to the Eurozone PMI for October 2024 and their potential impact on the Euro. Based on our Events Guide, expectations were for slight improvements in the manufacturing and services sectors, with Eurozone Manufacturing PMI forecast at 45.1 (vs. 45.0 previously) and Services PMI at 51.5 (vs. 51.4 previously).

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

“Euro rising” scenario:

If the PMI data comes in stronger than expected, especially in the German numbers, we expect this to ease concerns about the region’s economic outlook. We focused on EUR/JPY for potential long strategies in a risky environment as the Japanese Yen tends to underperform in this scenario. In a risk-off environment, long EUR/CAD has been our preferred pair given the dovish outlook for the upcoming Bank of Canada meeting and/or any weakness in oil demand.

“Euro retreat” scenario:

If the PMI readings are disappointing, which mainly show deteriorating business conditions in the region’s largest economies, we thought this could weigh on the euro. In this case, we looked at EUR/AUD as potential short strategies if broad risk sentiment is net positive, particularly in light of recent strong Australian jobs data and improving Chinese economic indicators. In a risk-off environment, trading EUR/CHF made sense given the safe-haven appeal of the Swiss franc and the European Central Bank’s recent dovish comments.

What actually happened

Eurozone PMIs painted a mixed picture on Thursday. French data disappointed with manufacturing PMI falling to 44.5 (vs. 44.9 expected) and services PMI falling to 48.3 (vs. 49.8 expected). However, German numbers surprised to the upside as the Manufacturing PMI jumped to 42.6 (vs. 40.7 expected) and Services PMI rose to 51.4 (from 50.6).

These mixed results led to the euro area’s overall manufacturing PMI rising to 49.9 (vs. 45.1 expected) and the services PMI falling slightly to 51.2 (vs. 51.5 expected). We could say this was a bit bearish, especially with fundamental data showing companies continuing to cut production amid weak demand, with new orders falling for the fifth month in a row.

Market reaction

Broadly risk sentiment began to improve on Thursday with bond yields falling and some progress towards a ceasefire between Israel and Hamas announced. This prompted a closer look at the EUR/AUD pair, and looking at the chart, we can see that the pair showed immediate volatility following the release of the French PMI, with an initial decline from around 1.6220 (pivot point). The pair also maintained trading below the ‘lower highs’ trend line, creating an argument to sell the pair.

However, the Euro was already in bounce mode thanks to some Disagreements are brewing among European Central Bank members over the next move for interest ratesWith stronger German data to help, the Euro continued to rise.

Judgment

So, how do we do? In our original discussion, we mentioned potential short setups for EUR/AUD if Eurozone PMIs disappoint and risk sentiment remains positive. In our opinion, this was the result but the market moved higher, which we believe was a retreat from the strong bet on lower interest rates as a result of the ECB members speaking at the IMF annual meeting.

Overall, it is very clear that this discussion did not support a positive outcomeeven with basic support and strong technical setup. Again, this is how things sometimes go: even when we identify the right triggers, the price action does not match our expectations. That’s why proper trading and risk management remain crucial to long-term trading success.