Premium Watchlist Recap: Oct. 29 – 30, 2024

This week our currency strategists focused on the Australian CPI report and the Bank of Japan’s monetary policy statement in search of potential high-quality setups.

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 Australian CPI report (Q3 2024) and its potential impact on the Australian dollar. Based on our event guide, expectations were for headline CPI to come in at 2.4% y/y and 0.4% q/q, both lower than the previous two readings.

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

“Australian Progress” scenario:

If the CPI comes in hotter than expected, we expect it to weigh on expectations for near-term rate cuts from the RBA, which could give the Australian dollar some wings against its peers. We focused on the AUD/NZD for potential long strategies if broad risk sentiment leans net bullish, especially in light of the RBNZ’s recent interest rate cut. If risk sentiment is broadly positive, AUD/CHF has looked promising for extended periods given the SNB’s recent dovish stance and interest rate cuts.

“Australian collapse” scenario:

If Australian inflation data shows a significant slowdown in price growth, we believe this could attract Australian dollar bulls. In this case, we viewed the AUD/USD pair as potential selling strategies in a broadly risk-hostile environment, particularly in light of the pair’s recent downtrend and the low likelihood of significant Fed rate cuts in the future. In a risk-laden environment, the AUD/CAD pair made sense given the Bank of Canada’s recent comments suggesting that interest rate cuts would be to “sustain the decline” rather than combat high inflation.

What actually happened

Inflation data for the third quarter of 2024 showed consumer price increases slower than expected, with the quarterly CPI falling from 1.0% to 0.2% versus market expectations of 0.3%. The annual rate fell from 2.7% to 2.1%, lower than expectations of 2.3%.

Key points from the CPI report:

• This slowdown is due to a 17.3% drop in electricity prices due to government subsidies
• Fuel prices fell 6.2% in the quarter
• Services inflation rose from 4.5% to 4.6%, remaining a key concern for the RBA
• Food and non-alcoholic beverages (+0.6%), and entertainment and culture (+1.3%) saw notable increases

Market reaction and outcome

With headline inflation slowing and fundamental measures falling short of expectations, this has essentially triggered our bearish scenarios for the Australian dollar. With the risk environment tilted to the upside from Tuesday into Wednesday, the AUD/CAD was the pair to watch for potential high-quality technical sell-offs.

Looking at the AUD/CAD chart, we can see the pair falling on the news, but bouncing back during the Wednesday session, likely supported by weak oil prices weighing on the Canadian dollar and the broad risk environment lifting the Australian dollar. We discussed this possible scenario in our original discussion, and if it bounces, we saw that the pair could reach the broken support area around 0.9160 before returning lower.

Looking at the AUD/CAD pair above again, we can see that the pair tested that area several times, with the best bearish reaction coming after the first touch, falling all the way back to 0.9100 (lows for the week) before attracting Canadian dollar bears next. Weak GDP data in Canada.

Judgment

In our original discussion, we mentioned a potential sell-off on the AUD/CAD if Australian inflation data disappoints, which it certainly has. The fundamental drive was evident with the significant loss in the quarterly and annual CPI readings, while our technical analysis correctly identified the 0.9160 level as a key area to watch for a continued decline.

If this strategy was followed, it would have happened “possible” It supports a net positive outcome, but with volatile price action after the event, Strong trade management skills and execution practices were needed to ensure a net positive outcome on the AUD/CAD this week.

On Wednesday, our strategists set their sights on the Bank of Japan’s monetary policy statement and its potential impact on the Japanese yen. Based on our events guide, expectations were for the Bank of Japan to maintain its short-term interest rate target below 0.25%, with markets looking for signals on future policy direction and updated economic forecasts.

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

“Yen Bulls Rise” Scenario:

If the Bank of Japan strikes a less pessimistic tone or shows increased concern about excessive volatility in the currency market, we would expect this to support the yen. We focused on NZD/JPY for potential short selling strategies if risk sentiment turns negative, especially in light of the Reserve Bank of New Zealand’s recent dovish shift with a 50 basis point interest rate cut. In a risk-on environment, selling CHF/JPY was our favorite pair given the SNB’s plans to cut interest rates in the coming quarters.

“Yen takes responsibility” scenario:

If the Bank of Japan maintains its accommodative stance without showing too much concern about a weaker yen, we thought this could weigh on the currency. In this case, we viewed AUD/JPY as potential long strategies in a broad-based risk environment, especially in light of the recent strong jobs data in Australia. If risk sentiment leans more negative, CHF/JPY has long made sense given the pair’s upside and the SNB’s recent comments about remaining active in currency markets.

What actually happened

the The Bank of Japan kept its short-term interest rate target steady at below 0.25%. In a unanimous decision, with several notable modifications to their outlook:

• Core inflation expectations for fiscal year 2025 shrank to 1.9% from 2.1%.
• The Bank of Japan expects inflation to remain at around 1.9% during fiscal year 2026
• Economic growth expectations were maintained at 0.6% for the current fiscal year
• Growth expectations of 1.1% and 1.0% for fiscal years 2025 and 2026, respectively.

And most importantly, Governor Ueda struck a noticeably less cautious tone at the press conferenceabandoning the previous position that the Bank of Japan could “afford to spend some time” assessing risks. He specifically noted that “wages and prices are moving in line with expectations” and that downside risks to external economies are beginning to fade.

Market reaction

The JPY bulls crushed the bears, sending the JPY higher against all major currencies. With the broader markets showing risk-off behaviour, we thought NZD/JPY was the pair to watch.

The NZD/JPY pair saw immediate selling pressure following the policy announcement and subsequent press conference, with Ueda’s less cautious tone and unanimous decision being interpreted as paving the way for possible action in December.

However, downside momentum was limited as Ueda later clarified that there were no pre-set expectations for a rate hike, leading to some profit-taking during the London session. The pair found support near the minor psychological support level (90.387) and 90.50 before stabilizing.

During the US trading day, there was widespread risk aversion which usually helps boost the yen’s strength, but the yen fell before Friday. This was probably profit taking from short positions after a strong intraday decline and ahead of a very busy Friday session for forex traders (US monthly jobs report is coming).

Judgment

Looking back at our original discussion, the strategy was… “possible” Supportive of a net positive outcome as a less dovish stance from the BoJ combined with risk off flows led to a very bearish reaction for NZD/JPY. But we only rated it as “probable.” Active risk management was needed given the reversal that occurred late on Thursday, meaning the trade plan used would have been a big factor in the potential outcome.

For those who executed short trades around the pivot point and took profits at the S1 pivot support area/minor psychological level, they likely saw the best results.