Originally published by AxiTrader
Welcome to the Forex Today column.
In it, I'll be trying to add a bit more colour and a lot more charts than I do in my broader overnight Market Wrap I do first thing every morning to set myself and my trading up for each day and each week.
RECAP
There is a limit to the tolerance that central bankers, desperately seeking inflation, can have for the appreciation of their own currencies and associated fall in the US dollar. Australia's Reserve Bank has been at the vanguard of global resistance and has none too subtly warned against the negative impact of a higher Aussie on the economy.
Recently we've seen in the minutes of the last ECB meeting that Europe's central bank is worried about further appreciation of the euro while actions in China to free up yuan selling was clear signal that Beijing had had enough of the US dollar's fall.
That growing cohort of disquiet gained a new member last night with BoC deputy governor Timothy Lan highlighting the Bank of Canada too is worried about the impact of the stronger Canadian dollar to the economy.
In his own way Mark Carney also intervened to unwind recent pound strength - against the US dollar and the euro - by making a point of both the gradual nature and relatively low endpoint of the mooted tightening cycle which is expected to begin soon.
It doesn't mean the US dollar's fall has ended - the Fed and US data flow have a say in that. But this is powerful opposition to more US dollar losses and thus more evidence that the turn and recovery in the US dollar is at hand.
HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS
The Canadian dollar and pound were the big movers overnight on the back of central bank comments which seemed to mitigate some of the excitement forex traders had for these pairs. That’s seen the pound lose 0.7% to around 1.35 now while USD/CAD is up 0.8% at 1.2289. It’s ready for a run unless the Fed releases its inner dove this week.
In the case of the Canadian dollar it was comments from BoC deputy governor Timothy Lane. He said, “we will be paying close attention to how the economy responds to both higher interest rates and the stronger Canadian dollar”. One thing he did note, and something which is truly important for markets at a macro perspective, is that Canadian business is doing well because of the “global economic expansion that is becoming more synchronous”.
Yes it is. It may not be of specific interest to individual currencies pairs - save maybe for the Australian dollar and other pairs seen leveraged to growth - but this is a powerful driver of stocks, bonds and central bank policies. So it ends up back in the Forex space regardless.
Anyway back to the Canadian dollar and it's on the back foot as USD/CAD climbed 0.7% to 1.2278 this morning. As I highlighted yesterday the chances were USD/CAD headed higher and my target remains 1.2400/20. A break of this level would signal a much stronger rally toward the 1.27 region.
The pound was also a big mover on the back of central bank speak with Mark Carney highlighting the gradual pace and low terminal rate of any cycle. That’s seen the pound lose 0.6% to around 1.3514.
If GBP/USD takes out last night's low at 1.3464 a run toward the 38.2% retracement of the latest run at 1.3294 opens up.
Elsewhere the euro is hanging tough at 1.1957 up 0.11% after data showed EU inflation is starting to trend a little higher once more - but still low - and another ECB official was hawkish on policy. As a result, the euro's move was against a generally stronger US dollar.
If the euro can take out 1.1985/1.2000 things could get interesting.
The yen’s weakness continued and USD/JPY sits at 111.41 this morning up around half a per cent. Dollar yen is very sensitive to interest rate differential and with the reduction in tension over the Korean peninsula – at least in markets – it has a double whammy of drivers higher. My target is the 200-day moving average at 112.25.
I've done my usual AUD/USD piece which you can read here. The synopsis is that the RBA minutes are important and traders are selling rallies. .7850 is my target.
The kiwi was bid yesterday but it's rallied again failed at the overhead resistance I've highlighted. The election this weekend is looking closer than many thought and the policy platform of the Labour party seems to have a few traders cautious. That sets up a potential break out of this wedge the NZD/USD is currently in - whoever wins.
But we have to get past the Fed first.
Have a great day's trading.