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USD Archives - The Industry Spread
June 24, 2019 by Reg Hub Leave a Comment Filed Under: Central Bank Annoucements, Central Bank News Tagged: Bank of Canada, Canadian dollar, USD
It is a pleasure to be in Alberta for my speech today, given the importance of commodities, including oil, and their prices to the Albertan and Canadian economies.
While it may seem that many of us think about the value of the Canadian dollar only when we are about to travel, at the Bank of Canada, we view it as the most important price facing our economy because it directly affects much of what we produce, consume and trade.
That’s why this is the right place to explore the critical role our flexible exchange rate plays in Canada’s economy. And the time is right as well. Canada has just entered its 50th consecutive year with a floating currency, the longest of any country, dating from when it was last unpegged from the greenback in May 1970.
This is my second speech in our public engagement campaign called “Toward 2021.” We call it that because 2021 is the next renewal date for our five-year inflation-control agreement with the Government of Canada, first adopted in 1991. For the renewal, we’ve committed to a wide-ranging review of our monetary policy framework to ensure it best achieves our mandated goal of price stability and thereby promotes strong and sustainable output and employment growth for the benefit of all Canadians. The framework has two components: our 2 per cent inflation target and our flexible exchange rate.
The inflation target normally gets most of the attention, so the value of our floating dollar risks being overlooked at a time when the performance of flexible exchange rates is coming under greater scrutiny in international policy circles.
My purpose today is to review the evidence and make the case that Canada and many other open economies have been well-served by a market-determined flexible exchange rate. In particular, Canada’s experience with inflation targeting underpinned by a floating currency is an instructive example of the most durable monetary policy framework in the post-war period.1 The flexible exchange rate has helped our economy adjust to external shocks, primarily changes in commodity prices. Although our floating currency does not completely offset the impact of all of these shocks, it has complemented the Bank’s inflation target to help achieve low and stable inflation and keep our economy functioning well.
While we’re not going to alter the flexible exchange rate component of our monetary policy framework, it is incumbent on policy-makers to review even successful regimes regularly to ensure that they are serving the best interests of Canadians. To this end, it’s worthwhile to explore the four main benefits of our floating dollar:
It allows monetary policy independence to achieve domestic price stability.
It facilitates adjustment to external shocks, thereby buffering their impact on economic activity.
It contributes to policy clarity and effectiveness.
It promotes financial sector development.
We also examine recent criticisms of flexible exchange rates. Because exchange rates are market prices that trade daily, they are intrinsically volatile. This volatility increases the cost of making international transactions and poses risks that have to be managed, especially by exporters and importers. Nonetheless, we come down squarely on the side that the benefits of a flexible exchange rate for Canada far exceed any such costs.
Canada exports a wide range of commodities, representing about 45 per cent of our exports (Chart 1 and Chart 2). Consequently, their prices, whether it is for oil, gold or wheat, are critically important, both to the success of Canadian exporters and to the Canadian economy more broadly. Their prices, however, are largely determined by the global market forces of demand and supply. Most of Canada’s key commodity exports are also priced in US dollars-a point I will come back to later.
Canada’s flexible exchange rate is also determined by market forces, though the Bank of Canada clearly has some influence on it through our policy interest rate. When we raise interest rates, or raise expectations for higher interest rates, the loonie tends to appreciate against other currencies-and vice versa. In this way, the dollar is an important channel for the transmission of monetary policy.
We typically measure the value of the Canadian dollar relative to the US dollar, since the US dollar is widely used in the valuation of both commodities and other currencies. That’s because of its dominant place in the global economy and its widespread use as a global reserve currency.
But, as important as the currency’s value is to exports, imports and the overall economy, the Bank of Canada does not have a specific target for the dollar. The flexible exchange rate works best when it is determined by market conditions within a credible policy framework. Consequently, we haven’t intervened in currency markets on our own behalf in more than 20 years.
Our analysis of exchange rate fluctuations indicates that major movements in the dollar are largely driven by the market forces theory would predict, namely movements in commodity prices and in interest rate differentials.2Fortunately, deep and liquid financial markets have developed to help Canadian trading firms manage at low cost the risk associated with such volatility.
Price stability, not a fixed exchange rate, is our main monetary policy objective. Maintaining low and stable inflation around 2 per cent provides a credible nominal anchor. Well-anchored inflation expectations allow monetary policy and our flexible exchange rate to respond to external shocks and help shelter the Canadian economy and its workforce from excess fluctuations.
To illustrate how the flexible exchange rate fits with the inflation target within our monetary policy framework, consider Figure 1. Our monetary policy framework has two pillars: the inflation target and the flexible exchange rate.3
Figure 2 illustrates the framework in action. The policy interest rate is controlled by the Bank of Canada and is primarily influenced by our outlook for economic activity and inflation. In contrast, the exchange rate is determined by global market forces, both real and financial, that encompass the global demand and supply for Canadian goods and services as well as assets.4 Because our flexible exchange rate responds to and helps absorb those external forces, it allows us to target inflation with the policy rate.
Our success, and that of similar countries that also target inflation, speaks for itself. Our inflation target of 2 per cent within a 1 to 3 per cent range has been jointly reviewed and renewed by the Bank and the government five times since 1995.
While the value of the loonie has ranged from a value in the low 60 cents US to above parity with the US dollar during that quarter century, inflation has remained within the 1 to 3 per cent range roughly 80 to 85 per cent of the time,5with an overall average of just below 1.9 per cent. That price stability came despite the financial crises of the 1990s in emerging-market economies, the strong expansion at the turn of the millennium, the global financial crisis, the Great Recession and the subsequent slow recovery-all of which have generated large fluctuations in commodity prices.
Our monetary policy framework is supported by several critical advantages we have as a nation that enhance its credibility and effectiveness. They include sustainable fiscal policy, which the Canadian government has followed since the mid-1990s.6 Such a policy leaves space to stimulate the economy in the event of an economic downturn, through countercyclical fiscal measures, such as regional transfers. It also includes a flexible labour market and a high degree of internal economic integration and capital mobility as well as a resilient financial system, which I’ll circle back to later.7
Given this context, let’s turn to the four benefits of our flexible exchange rate.
Through its history, Canada has relied on foreign trade and investment for its economic prosperity. But this economic openness leaves Canadians vulnerable to events in the rest of the world. Like a freighter ship, which benefits from trade, Canada is exposed to the winds of global economic storms. The best strategy to minimize this vulnerability is to keep our own ship in good order, including a monetary policy aimed at achieving price stability.
How does a flexible exchange rate give us the leeway to set our own course for monetary policy and inflation? To illustrate, it’s worth going back to September 1950, when Canada first abandoned the post-war Bretton Woods pegged exchange rate. The decision was widely criticized-it was seen as a radical move because Canada had been one of the original signatories to the post-war system. The passage of time has proven it was a trail-blazing policy shift. It demonstrated the value of a flexible exchange rate, likely sparing Canadians several years of double-digit inflation.
At the time, the US economy was growing strongly, fuelled by military spending for the Korean War. Because of the increased US demand, inflationary pressure was building and commodity prices were rising. In Canada, foreign exchange rate reserves were accumulating under the pegged exchange rate. Rather than continue to allow US inflationary pressure to spill over to Canada, authorities allowed the exchange rate to float-in other words, to be determined by market forces. The Canadian dollar rapidly appreciated, helping stem the inflationary pressure.8
It’s insightful to compare our experience with Mexico’s over the same period. In contrast to Canada, Mexico maintained the peg of the peso to the US dollar. We can see what happened by looking at Chart 3a. Canada’s flexible exchange rate absorbed the inflationary spillover, and we had much lower rates of inflation.
Canada returned to a pegged rate for the period from 1962 to 1970 but left the Bretton Woods system for good in 1970. The circumstances were similar to those in 1950. Replace the Korean War with the Vietnam War, and the same story can be told for Canada and Mexico, so I won’t repeat it, except to draw your attention to Chart 3b.
Similar lessons can be drawn when we compare Canada with Latin American countries from 1970 to the mid-1990s. It was a relatively unstable period, both economically and politically, yet many Latin American countries tried to maintain pegged exchange rates to the US dollar. Consequently, they experienced frequent exchange rate crises as their pegs became untenable and collapsed.
With pegged rates, their monetary policy was being largely driven by US monetary policy, which often proved inappropriate for domestic circumstances. In contrast, Canada’s floating currency allowed our policy to deviate from US monetary policy as needed, and this contributed to our better economic performance.
As mentioned, Canada adopted its current monetary policy framework with an inflation target and flexible exchange rate in 1991. Right from the outset, it was successful in lowering inflation and making it more stable. This experience was shared by the other early adopters of inflation targeting, including New Zealand (1990) and Sweden (1995). With the success evident, other countries with close ties to the United States followed suit: Brazil (1999), Chile (1999), Colombia (1999), Mexico (2001) and Peru (2002), and their adoption-along with broader reforms-also led to much lower and stable rates of inflation.
In summary, Canada and many other countries, almost 40 in total, have been able to successfully chart an independent course for monetary policy and exert domestic control over inflation because of the leeway provided by a flexible exchange rate.
And yet the events leading up to the global financial crisis and its aftermath have led some observers to question the value of the flexible exchange rate in insulating the domestic economy against external financial forces and providing sufficient monetary independence.9 According to these observers, domestic financial conditions were largely determined by global forces, irrespective of the exchange rate regime, thereby rendering domestic monetary policy ineffective. Consequently, to increase monetary policy control, they recommend using capital controls, particularly in emerging-market economies. Imposing capital controls, however, would distort incentives and likely hinder financial sector development, which is necessary for the effective transmission of domestic monetary policy.
The theoretical backdrop for this thinking is known as the impossible trinity, or Mundell’s trilemma. Simply put, it means that a country that wants monetary policy independence and free capital movement cannot also have a fixed exchange rate. It can have only two of those three things. In other words, a flexible exchange rate is necessary for achieving monetary independence and influence over domestic monetary conditions.
Rey (2013) has recently argued that the trilemma is no longer appropriate because a global financial cycle drives capital flows, and these flows primarily determine domestic financial conditions, not domestic monetary policy. Therefore, policy-makers face only a dilemma (between free capital movement and independent monetary policy), and countries would need capital controls to conduct independent monetary policy.
However, Shambaugh (2004) and Obstfeld, Ostry and Qureshi (2019) show that exchange rate regimes do matter, even for emerging-market economies, when it comes to the transmission of global financial shocks. Both studies find that flexible exchange rates provide greater monetary independence and are consistent with the trilemma.10
More fundamentally, in a world of open capital markets, the Mundell framework would imply that, while the impact on interest rates from monetary policy actions may be more muted, more of the transmission of monetary policy will take place through the exchange rate. Simply put, flexible exchange rates still preserve some degree of monetary policy independence.
In summary, for commodity exporters like Canada, the need to chart a course for domestic monetary policy independent of that in the United States typically arises when there are large swings in commodity prices. Because the United States is a net commodity importer, such movements have a large differential impact on the two countries, necessitating a different monetary policy, made possible by a flexible exchange rate, to maintain price stability.11
A flexible exchange rate helps attain price stability not only by allowing domestic monetary policy to focus on this goal but also by facilitating the domestic economy’s adjustment to external shocks. Whether that shock is a global trade war or a recession in a key trading partner, commodity prices are typically hit first. They are the bellwether for global economic conditions because they are actively traded in global markets where new information is rapidly processed and embedded in their prices.
Chart 4 shows how commodity prices respond to global forces. For example, the entry of China into the World Trade Organization and into the global economy sparked a run-up in the demand for commodities and their prices from 2002 to 2007, while the opposite occurred during the Great Recession of 2008-09. In both cases, the exchange rate moved largely in tandem with the index of commodity prices.
But how does our flexible exchange rate actually smooth economic adjustment to a commodity price shock? Let’s analyze a recent example in more depth.
During the oil price shock of 2014-15, the price of West Texas Intermediate declined by about 67 per cent, from US$103 per barrel in the second quarter of 2014 to US$34 in the first quarter of 2016. Over the same period, the Canadian dollar depreciated by about 20 per cent from 92 cents US to 73 cents US.
But what if we had attempted to hold the Canadian dollar steady, even as our key export commodity was dropping in value? It wouldn’t have been easy. The obvious way to limit the fall of the dollar would have been for the Bank to raise interest rates. We estimate that propping up the loonie-avoiding that 20 per cent depreciation-would have required us to increase the policy rate to 6.75 per cent in 2015 and by an additional 25 basis points in early 2016.12You will recall that in 2015 we actually cut our policy rate twice, by 25 basis points each time, from 1.0 to 0.5 per cent.
Those hypothetical rate increases to hold the dollar fixed would have had tremendous adverse effects on the real economy. Instead of stimulating growth with our rate cuts, our rate increases would have lowered the level of gross domestic product (GDP) by $60 billion by early 2016-3.1 per cent below what was actually achieved.
In addition, total hours worked would have been 4.7 per cent lower in early 2016. That translates into about 900,000 fewer jobs-increasing the unemployment rate by up to 4 percentage points in 2016. In addition, nominal wages would have been 2.5 per cent lower. Finally, inflation would have been 0.8 percentage points lower in 2016.13
But how did the 20 per cent depreciation of the dollar facilitate economic adjustment? Because the dollar declined less than the price of oil, the relative price of other goods and services rose compared with oil. This relative price change provided a strong signal to firms to allocate people and capital away from the oil sector and toward other sectors of the economy. The depreciation also made foreign goods and services more expensive, causing Canadian firms and households to switch their spending away from foreign goods and services toward those that are domestically produced. Therefore, the flexible exchange rate doesn’t absorb the commodity price shock as much as it helps the economy adjust more easily to the shock by smoothing the adjustment in relative prices.14
This relatively smooth adjustment is in stark contrast to the counterfactual exercise where the relative price adjustment occurred from a sharp fall in output, a pronounced rise in unemployment and lower wages and prices.
In Alberta, you’ve seen both sides of this adjustment. When oil prices rose between 2002 and 2008, the Canadian dollar soared alongside to reach parity with the US dollar. Ontario’s manufacturing sector lost competitiveness as its goods became more expensive overseas, and investment and workers flowed into the energy sector in Alberta and Saskatchewan.
Of course, the flow reversed in 2014-15 as oil prices fell and the dollar depreciated. Alberta’s economy ebbed while other regions expanded, and the Canadian economy was forced to adjust.15
Recently, some economists have argued that this adjustment benefit of a flexible exchange rate is less than advertised, in part because the US dollar has become the dominant currency in pricing many goods that are traded between countries. Consequently, exchange rate movements may not affect the relative price of imports and exports (also known as the terms of trade). This, in turn, would reduce the role of exchange rate movements in facilitating adjustment.16 For example, because commodity exports are typically priced in US dollars, an exchange rate depreciation would not have a large impact on their US-dollar price and thus not lead to more export sales.
However, the evidence for Canada does not support this argument. Even though more than 80 per cent of our imports and more than 90 per cent of our exports are priced in US dollars, exchange rate movements have played a critical role in helping the Canadian economy adjust to large commodity price movements.17
Recent work by Gopinath (2017), for example, maintains that the prevalence of US-dollar pricing implies that export prices in US dollars do not fall when a country’s currency depreciates, so the traditional stimulative effect on exports does not occur. But her evidence is based on exports of non-commodities. Such differentiated goods normally carry profit margins that can be used to absorb exchange rate movements. Consequently, her argument is less relevant for Canada and other major commodity exporters because their exporters will see their profits rise with a depreciation and will tend to expand production and exports. Moreover, US-dollar pricing does not necessarily entail fixed US-dollar prices in all cases; large and persistent exchange rate depreciations may encourage exporters to reduce their US-dollar prices to expand sales.
Clarifying and enhancing roles
Before the adoption of our current inflation-targeting framework, the goals of monetary policy were unclear.18Market participants often perceived that the Bank of Canada placed some weight on stabilizing the exchange rate as an objective for monetary policy, clouding its role and diminishing its ability to respond to external shocks.
However, the primary goal of monetary policy became much clearer once inflation targeting was adopted, especially as the 2 per cent target gained credibility. With monetary policy now more clearly and credibly focused on price stability, the role of the exchange rate also became sharper-specifically responding to external shocks, and, in particular, commodity price movements.19
The most compelling evidence of this clarification of roles comes from recent research conducted at the Bank. This research finds that, before 1991, the Bank’s policy rate responded to movements in both the exchange rate and the US Federal Reserve funds rate in addition to economic conditions.20 Since 1992, however, the reaction of the policy rate to the exchange rate essentially disappeared. Simply, inflation targeting allowed the Bank to focus its monetary policy on price stability.
This finding is corroborated by evidence that suggests that the exchange rate became more sensitive to commodity price movements after inflation targeting was adopted. In Chart 4 and Chart 6, the correlation between the exchange rate and country-specific commodity price indexes increased in Canada, in Australia and in Chile, for example, after inflation targeting was introduced.21
Chart 7 illustrates the success of our framework. When inflation targeting was adopted in 1991, inflation became low and stable. At the same time, the flexible exchange rate helped facilitate adjustment to commodity price movements and other global shocks.
Hence, monetary policy became more effective with the adoption of inflation targeting because the roles of monetary policy and the exchange rate became clearer and more credible.
Promoting financial development
But even with independent monetary policy and a flexible exchange rate buffering the worst of the economic storms, sustaining strong economic growth in Canada requires a well-developed financial sector. Over our history, our financial markets and institutions have developed to support the free flow of capital and trade. A strong macrofinancial policy framework and our flexible exchange rate have contributed importantly to this financial deepening. Moreover, this financial deepening has, in turn, enhanced the transmission of monetary policy and improved the functioning of the flexible exchange rate.
Our financial system has evolved to provide the safe and efficient intermediation of foreign capital flows. In addition, the stability of the Canadian financial system and the credibility of Canadian economic and political institutions has allowed domestic firms and governments to issue debt abroad in Canadian dollars.
With the adoption of a flexible exchange rate in 1950 and again in 1970, financial markets in Canada came into being not only to trade currencies, but also to help manage the risk associated with the floating currency. These markets remained relatively thin in the 1970s and 1980s, and the Bank of Canada had to intervene on an ongoing basis to provide liquidity and reduce volatility. However, by the 1990s, this intervention ended as the foreign exchange market and forward FX and FX swap and interest rate swap markets all became much deeper and more liquid.22These markets allow Canadian firms to manage exchange rate risk and other risks associated with international transactions at relatively low cost.
Canada’s experience indicates that having a market-determined exchange rate, especially with an inflation target-in conjunction with a robust financial regulatory and supervisory framework and sustainable fiscal policy-fosters financial development. In other words, markets become more complete. The intermediation of foreign capital flows becomes safer and more efficient and a country’s ability to issue debt in its own currency increases, thereby reducing the likelihood of currency mismatches on its balance sheet.23
The lesson is not unique to Canada. There is much evidence of such financial deepening as countries adopted monetary policy frameworks that target inflation. Recent Bank research finds that adopting a monetary policy framework consisting of an inflation target and a more flexible exchange rate has led to an increase of about 10 to 20 per cent in measures of financial development.24 This finding is illustrated in Chart 8.
Some observers have expressed concerns about the impact of a flexible exchange rate on financial stability, especially in emerging-market economies. They argue these countries should more actively manage their exchange rates or impose capital controls because of their underdeveloped financial sectors, their lack of credibility in monetary and fiscal policy and their widespread use of the US dollar in debt issuance and trade. Consequently, they are exposed to balance sheet currency mismatches and broader currency risk and are thus vulnerable to wide swings in their exchange rates. In these circumstances, exchange rates should be managed judiciously to limit extreme volatility in thin markets. Active use of exchange rate intervention or capital controls, however, risks reinforcing this second-best argument for such market intervention by distorting market incentives and inhibiting the development of financial markets and institutions that are best suited to mitigate these risks. Clearly, the best solution would be to work toward addressing these shortcomings as Canada and other similar countries have done.
Let me conclude. Canada’s long-standing commitment to a flexible exchange rate has served us well. It has contributed importantly to low and stable inflation and strong and sustainable output and employment growth. It has done this by supporting and enhancing the effectiveness of independent monetary policy and by helping the economy adjust to external shocks, primarily significant fluctuations in commodity prices.
As you know, we are conducting a formal review of our monetary policy framework leading up to the 2021 renewal of our inflation-control agreement with the federal government. As part of this review, we are engaging with academics and other central banks as well as a wide range of private sector stakeholders and interested Canadians.
While the inflation target gets most of the attention, our flexible exchange rate is a critical component of the framework and is necessary for its success. We have operated with a largely market-determined flexible exchange rate for 61 of the past 69 years-by far the longest of any country.25
At the same time, we know that the ingredients that have contributed to the success of Canada’s system are not in place everywhere. Emerging-market economies may need more time to develop well-functioning financial markets and institutions and to achieve sufficient policy credibility to realize the benefits of a floating exchange rate.26
But Canada’s experience is not unique. Many other countries have learned from our experience and have realized many of the same benefits I have described today by adopting a framework anchored on a flexible exchange rate and an inflation target. Just as the gold standard was once accepted as orthodoxy, this monetary policy framework has proven to be the most durable monetary policy standard in the post-war period. None of the 40 or so countries that have credibly adopted it has subsequently abandoned it. It has truly withstood the test of time.
I would like to thank Minnie Cui, Hélène Desgagnés, Edouard Djeutem, Jacob Dolinar, Wei Dong, Geoffrey Dunbar, Natasha Laponce, Amy Li, Eric Santor and Jing Yang for their help in preparing this speech.
June 20, 2019 by Nikolas Papas Leave a Comment Filed Under: Market News - European Open Tagged: EUR, FED, USD
Asian indices finished higher today for the second day in a row on dovish Central Banks across the globe. The Nikkei225 finished 0.60 percent higher to 21,462 the Hang Seng benchmark in Hong Kong, finished 0.98 percent higher at 28,476. The Shanghai Composite finished 2.26 percent higher to 2,983, while in Singapore the FTSE Straits Times index finished 0.77 percent higher to 3,313.
Australian equities finished higher for the third day and hit fresh 11 year highs, with the ASX200 adding 39.3pts or 0.59 percent to 6687.4. The index is just shy from hitting its all-time high level from November 2007 before the financial crisis.
European session started higher today as low-interest rates support stock bids across the globe. DAX30 is adding 0.74 percent to 12,399 CAC40 is 0.59 percent higher at 5,550 while the FTSE MIB in Milan is trading 0.70 percent higher at 21,372. The London Stock Exchange is 0,23 percent higher to 7,420 amid Brexit uncertainty.
In commodities markets, crude oil continues the rally that started from recent low up to 55.61 despite geopolitical tensions around the globe. Brent oil also adds one dollar to $63,54 per barrel as major oil producers have yet to agree on adjustments on output. Gold breaks higher at 1,383 a level that we haven’t seen since 2013, as bulls are in full control. The precious metal holds above all the major daily moving averages and strong resistance will be met at 1,393 the high from the Asian session.
In cryptocurrencies market, bitcoin (BTCUSD) continues higher today at 9,302 approaching the yearly high, the daily low for BTC was at 9,126 and the daily high at 9,354. Immediate support for BTC stands now at $9,000 round figure while next support stands at 8,500 the previous week high. On the upside, strong resistance now stands at 9,477 the high from Monday while I expect extra pressure from sellers at 9,600 and then at 10,000. Ethereum (ETHUSD) trades flat at 268, with capitalization now to 28.7 billion, on the upside the immediate resistance stands at 287 the recent high while the support stands at 250 round figure, Litecoin (LTCUSD) also trades flat to 135. The crypto market cap now stands above $284.0B.
On the Lookout: Yesterday the Fed left the interest rates unchanged but in the minutes sounded more dovish than the last policy meeting. Earlier today ECB’s Vice President Luis de Guindos noted that Eurozone economic risks clearly tilted to the downside. Bank of England expected to leave its bank rate at 0.75% in its policy meeting later today.
The New Zealand Gross Domestic Product, year on year, came in at 2.5%, better than analyst’s forecasts of 2.4% in the first quarter of 2019.
In macro news from America, we await the Philly Fed Manufacturing Index, weekly Jobless Claims, and Q1 Current Account. In Canada will be released the ADP Employment Change figures.
Trading Perspective: In forex markets, USD trades lower at 96.22 after the Fed policy meeting, while the Aussie dollar continues higher for the second day at 0.6912, while Kiwi also trades higher at 0.6583.
GBPUSD trades higher today breaking above 1.27 as it continues the rebound from 1.25, getting a hand from dovish FED. Major support now stands at 1.2641 (200h MA) which if broken might accelerate the slide further towards 1.26 round figure. On the upside immediate resistance now stands at 1.2827 the 50-day moving average while more offers will emerge at 1.2931 the 200-day moving average.
In Sterling futures markets the open interest shrunk by 35,000 contracts while the volume increased by 16.100 contracts.
EURUSD trades higher at 1.13 amid broad USD weakness. The pair broke above the 100-day moving average and that attracted extra bids that pushed the pair up to 1.13 round figure resistance. A convincing break above 1.13 can lead prices to 1.1353 the 200-day moving average. Support now stands at 1.1250 round figure, while more bids will emerge at 1.12.
In euro futures markets, the open interest shrunk by 54.500 contracts while volume shrunk by 77,000 contracts.
USDJPY is under pressure for one more day down to 107.50, as traders dumping USD across the board. The pair hit the low at 107.46 and the high at 108.13. The pair will find support around 107.43 daily low and then at 107. On the upside, immediate resistance for the pair now stands at 108 round figure.
In Yen futures markets, the open interest shrunk by 37.800 contracts while volume also shrunk by 34.500 contracts.
USDCAD is pressured today down to 1.3212 as the sharp rebound in crude oil prices, Canada’s main export item seems to have added further strength in the Canadian Dollar (CAD). The pair will find immediate support at the 200-day moving average around 1.32 while extra support stands at 1.3150 round figure. On the upside immediate resistance now stands at the 1.33 zone before an attempt to 1.3450 recent high from 31st May.
June 1, 2019 by Karthik Subramanian Leave a Comment Filed Under: Market News - US Open Tagged: AUD, AUD/USD, EUR-USD, investor sentiment, risk aversion, trade war, US Market, USD
Trump tantrums affect market activity yet again with actions this time around likely to cause US markets to suffer sharp loss immediately. Recession fears likely to cap any prospect for gains in risk assets.
Summary: Asian market saw major assets on all key markets decline owing to fears of recession. US President Donald Trump’s threats to impose tariffs on Mexico and macro data from China hinting at impact of trade war and suggesting stimulus from Chinese central bank has had little effect on the country’s economy triggered a fresh wave of bearish price action in the global market. As tensions surrounding trade war continue to escalate, safe haven asset boom while risk assets bleed and decline at fast pace. Trump’s tweet tantrums has been increasing off-late and his latest tweet stating that his mindset is shifting ever farther from reaching trade deals just days after treasury department listing nine allied nations as potential target for economic warfare has caused global market to see a meltdown on last trading session of the week. Forex market is also seeing dovish activity on risk averse investor sentiment.
Precious Metals: Precious metals continue to trade positive on risk aversion fuelled investor sentiment. However, neither gold nor silver has made any solid gains so far owing to other safe haven instruments eating away at market demand. Precious metals denominated in USD are costly for investors who hold other currency resulting in precious metals failing to make serious headway to the upside.
Crude Oil: As trade war woes and fear of global economic recession grips investor sentiment across all major markets, crude oil price fell sharply. Major crude oil benchmarks WTI and Brent are down more than 1.5% on the day as economic slowdown would mean less demand for crude oil.
AUD/USD: The pair lost all gains made in previous session as risk aversion peaked in market today. Increased trade war woes and disappointing Chinese macro data weighed down investor sentiment adding bearish pressure to AUD bulls. Sell-off of major global currencies in forex market fuelled USD bulls adding strength to US Greenback causing pair to reverse yesterday’s price action and decline sharply.
On The Lookout: All eyes remain on US President Donald Trump as his antics continue to greatly affect activity in global market so far this week. China has made an announcement today hinting at unprecedented list of firms being targeted for retaliatory tariffs in response to USA’s bullying activity. As per statement from Chinese commerce ministry, companies who violate market rules and spirit of contracts, block supply to Chinese companies for non-commercial reasons are deemed target for this tariff list but no particular company has been named heightening tensions in the global market. Meanwhile, Trump is back to his old hobby of bullying neighboring nations hinting at tariffs on Mexico unless illegal immigration stops despite their co-operation and patient approach towards USA during recent NAFTA negotiations which displayed a clear tinge of America first attitude. While focus remains on geo-political events, traders look to macro data updates for short term profit opportunities.
Trading Perspective: US Wall Street is likely to see bearish activity as Trump’s antics are likely to inspire risk averse activity even in US market. While Trump may seem oblivious to implications of his actions, investors handle the scenario differently. As wave of bearish influence assaults the market from different angles, today’s North American market hours are likely to be filled with risk-off trading activity.
US Market: China’s threat of retaliation on US imports and Trump’s threats on tariff over Mexico has caused investor sentiment to turn sour in international market. This was clearly visible in activity surrounding US index futures trading in the international market which saw sharp declines ahead of Wall Street opening hinting at bearish cues for activity in American market later today.
EUR/USD: Despite prevalent risk-off mood in the global market, Euro managed to trade positive across Asian market hours and has retained strength in European market hours as spread widening between government bonds remains in favor of EURO. This resulted in EURO remaining immune to dovish macro data. Traders now await US macro data updates for short term profit opportunity as trading session closes for the week.
USD/CAD: US dollar capitalized on sharp decline in crude oil price gaining much needed bullish trigger to see upward price action. Further, risk-averse investor sentiment induced sell-off of major currencies also weighed down on Canadian Loonie bulls favoring sharp upside move so far today. Traders now await Canadian GDP update, Budget balance update and US Chicago PMI update for short term profit opportunity as trading session closes for the week.
May 30, 2019 by Karthik Subramanian Leave a Comment Filed Under: Market News - US Open Tagged: Bond Market, Crude Oil, EUR-USD, forex markets, rare earth metals, Recession, risk averse, safe haven, USD, USD/CAD, USD/JPY
Summary: As trade talk related tensions between US and China remain in a deadlock, traders worries about possibility of recession in global economic growth grows. This has resulted in bond market seeing a sharp spike in activity which is also reflected in Equity and forex markets across the globe which saw major risk assets bleed in red today. Risk averse investor sentiment is beginning to gain high level of market share with each passing day as political power struggle via economic means has taken a huge toll on major economies and emerging markets alike. Given USA’s unusually high dependency on import of rare earth metals from China, recent headlines from the country’s newspaper hinting at possibility of China cutting back on rare earth metal supply to US as a form of fighting back against US tyranny has caused fresh wave of bearish influence to hit market. European markets which have not yet recovered from possibility of EU imposing fine on Italy got additional pressure from Chinese headlines causing yet another session to fall under bears grip. As scenario progresses, unless one of the two parties involved in trade war decides to submit which seems highly unlikely at the moment, global economy is set for a long and hard summer ahead.
Precious Metals: As safe haven demand saw a boost influenced by headlines in Chinese daily newspaper, aside from bonds, precious metals also gained positive momentum. Both gold and silver traded with positive bias across Asian session and has managed to retain early gains for better part of European market hours which given the current market scenario and investor sentiment in the broad market is likely to continue for rest of the day.
Crude Oil: Crude oil price fell sharply in the international market as investor sentiment turned dovish and broad based market activity saw risk aversion owing to trade war woes escalating to new highs. Headlines hinting at China retaliating for US threats via rare earth metals exports caused risk aversion in market to outweigh positive influence from supply disruptions in middle east causing major international crude benchmarks to decline more than 1% today.
USD/JPY: The pair is experiencing see-saw pattern today as risk aversion induced demand for safe haven assets support bulls of both currency pairs. While JPY gains demand on its nature as a default safe haven currency, USD gains owing to sell-off in the broader forex market which is supporting bulls for both pairs resulting in deadlock scenario. While JPY may gain upper hand every now and then on risk aversion, unless 109 handle is breached and price declines further below, the pair is likely to regain momentum in favor of USD.
On The Lookout: Headlines on geo-political and economic issues retake centre stage post EU parliamentary elections result announcements made yesterday. While US has taken a direct approach on its threatening activities when it comes to U.S.A, China has taken a roundabout way to warn US on its sufferings should China choose to retaliate. US companies are already facing loss owing to trade war with China and given US economy’s reliance on unusually high imports of rare earth metals from China, a blockade of exports in rare earth metals combined with tariffs on US goods in China could cost US companies to lose several billion dollars in a matter of days which could be highly devastating for US economy. Meanwhile, political climate in Europe is no better with Brexit at standstill while Italian debt woes roil the market causing global economy to dive deep into bear’s territory. Investors’ main focus in short term is on Bank of Canada’s interest rate decision update which is scheduled to release later today and on US API weekly crude oil inventory data.
Trading Perspective: Given risk averse investor sentiment in the broad market and implications of what Chinese decision to retaliate could cost US economy, Wall Street is likely to see bearish price action while forex market sees bearish action continue across American market hours.
US Market: As trade tensions escalate over Chinese headlines, risk aversion rules broad market. Traders have opted to sell-off risk asset holdings and divert funds to safe haven assets and bond market. Meanwhile news that U.S. Treasury is targeting nine other nations over currency practises and trade deficit added to risk aversion. Benchmark index futures trading in international market ahead of Wall Street opening saw dovish price action suggesting subdued price action in Wall Street today with possible prevalence in bearish bias.
EUR/USD: The common currency fell against US Greenback in the broad market today on risk aversion over trade war woes. Trade war worries escalated on Chinese daily’s headlines hinting at retaliation against US in form of blockading rare earth metal exports. Further, warnings from ECB’s Rehn on further delay in rate hike plans and disappointing EU macro data caused the pair to see bearish nose dive. The pair is likely to retain bearish bias as trade war woes are likely to escalate in near future trading sessions.
USD/CAD: The pair gained positive momentum in the broad market as crude oil price fell sharply. Escalating trade war woes outweighed support from supply disruptions in Middle East causing crude oil price to fall sharply in both global crude oil benchmarks. Further, investor’s caution ahead of Bank of Canada’s interest rate decision update scheduled to release later today weighed down CAD bulls resulting in USD gaining upper hand. Investors are also on lookout for US weekly crude oil stock pile data which could decide the momentum of the pair for the rest of the week.
European Markets Bleed despite Positive PMI’s, Traders Await US Data for Short Term Cues
May 3, 2019 by Karthik Subramanian Leave a Comment Filed Under: Market News - US Open Tagged: EUR-USD, European Markets, GBP-USD, PMI’s, Precious Metals, traders, Trading Perspective, USD
Dovish cues from US Wall Street and Asian markets amid holiday thin activity in Asian markets influenced bearish price action in European markets despite most major indices and equities opening positive today.
Summary: US market yesterday saw major benchmark indices and equities close in red. Dovish cues from Fed Chair Powell’s comments, lack of positive tone in Fed forward guidance amid holiday thin market weighed on investor risk appetite resulting in dovish price action in Wall Street. Japan and Chinese markets remain closed today. However, other major markets namely Singapore, Australia and India saw dovish price action in Asian market hours over dovish cues from US Wall Street and cautious investor stance amid holiday thin Asian markets. However, European markets opened on positive note ignoring cues from international market. Positive updates from Italy, French and Euro area economic calendar added further support to healthy risk appetite in European market. While US Dollar fell post Fed policy meeting update, it had managed to recover overnight loss in Asian market hours post which it is trading in consolidative mode in the global market. Forex market saw positive price action in both Asian and European markets.
Precious Metals: Precious metals are trading with bearish bias in global market today. While Fed forward guidance lacked positive tone, it suggested that there won’t be a rate cut in near future. This along with Dollar’s rebound in the broad market earlier today caused Gold to decline while silver traded range bound with slight bearish bias.
Crude Oil: Crude oil price fell sharply in the global market as US EIA weekly crude oil inventory data released yesterday showed a sharp build in inventory. This combined with news that Iranian crude oil worth over $1 billion is locked outside Chinese ports ahead of US termination of Iranian sanction waivers added to pressure on crude oil bulls causing price to decline over 1% in the global market.
EM FX Asia – China and Japan markets remained closed today limiting trading volume in Asian market hours. Korean Won, Taiwan Dollar and Indonesian Rupiah traded positive while Thai Baht, Malaysian Ringgit and Philippines Peso traded with dovish bias in the global market.
On The Lookout: Macro data calendar schedule for US remains relatively silent today. European market saw release of PMI updates which mostly had positive outcome. While European equities traded positive earlier in the day, most major benchmark indices turned dovish ahead of US Wall Street opening. US market will see release of Preliminary Q1 Nonfarm productivity data and Unit labour costs data and Factory orders data for March which is likely to keep price action volatile to some extent in Wall Street today. Headlines suggests positive progress on Brexit front, while Sino-U.S. trade talks is yet to see any new unique headlines hit market post US representatives visit to China earlier this week. Cues from geo-political events will continue to remain as the main driving force behind the price action in major global markets the week ahead.
Trading Perspective: Wall Street is likely to see relatively positive price action today with major indices aiming to recover losses incurred during previous trading session. Healthy risk appetite is likely to support market bulls resulting in positive price action in Forex markets as well.
EUR/USD: The pair continues to trade above 1.12 handle having rebound from overnight lows influenced by Fed forward guidance update. Positive macro data updates from Euro area also added strength to EURO’s momentum. Investors now await US macro data updates for fresh trading cues.
GBP/USD: The pair traded positive earlier in the day as overnight headlines hinted at cross party talks between May and Corbyn are likely to end with a mutually agreeable Brexit deal. However, BOE’s reduction in 2019 inflation forecast caused British Pound to surrender early gains and trade in red. Traders now await US macro data updates for short term trading cues and profit opportunities.
USD/CAD: The pair traded range bound in the global market well near previous session highs as decline in crude oil price and strength for US Greenback stemming from Fed forward guidance supports USD bulls. While the Fed update lacked positive tone, the update suggested it is unlikely for the fed’s to cut rate in immediate future supporting positive price action in USD as traders await macro data updates for trading cues.
April 6, 2019 by Karthik Subramanian Leave a Comment Filed Under: Market News - US Open Tagged: crude futures, EURUSD, NFP, Precious Metals, stocks, T.Yields, trading, US Indices, USD, USD/CAD
Summary: Global market is seeing another day of mixed activity in Asian and European markets today. However, the bias is favoring bulls as opposed to bias in favour of bears yesterday. While optimism surrounding Sino-U.S. trade talks had initially faded over lack of details on what was discussed in trade talks between delegates of both nations, Trump’s comments hinting that presidential summit to sign a trade deal will be held within four week boosted risk appetite in the market. Asian market saw all major markets aside from Hong Kong maintain positive price action across entire trading session. Positive cues from Asian markets helped investor sentiment improve in European markets influencing most major benchmark indices and stocks to open and trade in Green. However, lingering effects from Italy’s reduced growth forecast and Brexit woes continue to pressure market bulls keeping sharp upside move in check ahead of today’s US NFP data update. Strong USD in the global market influenced mixed action in Forex market.
Precious Metals: Post sharp declines during previous session which took to the price to multi month lows, both Gold and Silver saw sharp recovery rally earlier today. However strong USD capped gains preventing move above critical resistance levels, while increased risk appetite on Trump’s further affected price action of safe haven assets in the market causing precious metals to decline from intra-day highs and trade rangebound in European market hours.
Crude Oil: Crude oil price today rose to new 2019 highs with Brent crude futures seeing price per barrel scale $70 handle testing new 2019 highs. However, concerns of global economic slowdown owing to lack of progress in Brexit and Sino-U.S. trade talks caused the price to decline in Asian markets resulting in subdued price action with bearish bias in European market hours.
USD/JPY: The pair saw price action reach 3-week highs as optimism surrounding positive outcome in Sino-U.S. trade talks supported positive action of US Dollar. Further, expectations for trade deal to be signed by both nations in near future boosted risk appetite in the broad market giving strong fundamental support to USD bulls and weakening demand for Japanese Yen which is considered as safe haven asset in the broad market.
On The Lookout: As trading session comes to close for the week geo-political events remain the main focus of investors across the globe. Optimism surrounding Sino-U.S. trade talk is recovering once again post comments from US President Donald Trump who commented that trade deal will be signed between two nations within four weeks time. While there haven’t been any clear details on what topics are being discussed between delegated on two nations, news hinting at timeline for trade deal is a welcome update. Meanwhile on European side, Brexit deadline is fast approaching with UK political climate still remaining in dire straits and lawmakers indecisive nature hampering progress in Brexit. While amendment has been passed to approve another request for deadline extension, PM May is yet to contact EU for Brexit extension request. In immediate future as trading session comes to close for the day investors focus is on US and Canadian macro data updates for short term directional bias and profit opportunities.
Trading Perspective: Risk on investor sentiment is likely to influence positive price action in US market hours. A positive outcome in US NFP data will strengthen US Dollar capping gains in Forex market.
US Indices: US benchmark index futures in the international market were trading positive ahead of Wall Street opening. The positive price action was influenced by optimism surrounding Sino-U.S. trade talks which greatly boosted investor risk appetite in the global market. Investors now await US NFP data and unemployment rate update for short term directional cues ahead of US market opening.
EUR/USD: The EURUSD pair continues to trade below mid 1.12 handle and remains trapped in a range bound price action in lower half of 1.12 price range despite better than expected macro data outcome from Germany as EURO is pressured by Brexit woes. But bulls remain supported by Sino-U.S. trade deal optimism. A dovish NFP will help the pair move the upper half of 1.12 handle while hawkish NFP will lead the range bound action continuing in favour of USD for rest of the day’s trading session.
USD/CAD: The pair saw steady upward price action across today’s Asian and European market hours. Softer Crude oil price and upbeat US T.Yields are some of the major factors that support US Dollar on its positive price action. However, optimism surrounding Sino-U.S. trade talks continue to underpin market bulls supporting CAD to some extent capping USD’s gains. Traders now await Canadian Employment change data, US NFP data and Unemployment rate update from Canada and US calendar for short term directional cues ad profit opportunities.