Forex Today: Central bankers are still hogging the limelight and driving currency moves

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.


Markets often act as if central banking is a science and central bankers have omnipotence. Both premises are false as the past decade or more has shown.

On the other side of the coin central bankers often act as though the market will understand exactly what they mean even as they talk in opaque language with "on the one hand here and on the one hand" style arguments all the way through their speeches and pronouncements.

In normal times this gap is often too big to cross. But at times when policy needs to be adjusted the chance for misunderstanding and argument about the import of nuances grows. 

It's where we are now as central banks seek to exit emergency monetary accommodation and normalise rates.

And so it is that central bankers were again to the fore in overnight forex trade. The ECB continues to walk back from hawkishness, thee battle rages at the ECB, the RBA disappointed by being neutral, the Riksbank took its first tentative steps, and BoC governor Poloz gave a clear signal - yes clear - that the BoC will be raising rates soon.   


With all of that said in the introduction I think it is important to think about what central banks are actually doing because that's important for forex in the medium term once market reactions to moves are out of the way. The first thing to remember is we humans, us traders, don't feel levels we feel changes. That's why you get a reaction to changed policy. The second thing to note is that the frame of reference at the present for central bank policy moves is not tightening. It is the withdrawal of emergency stimulus. It is as Mohamed El-Erian said on Twitter again this morning - NORMALISATION. 

Anyway, the Australian dollar is the big mover over the past 24 hours among the big currencies. After the RBA struck a neutral tone yesterday the AUDUSD fell out of bed trading down to an overnight low around 0.7590. That price action told us more about traders than it did about the RBA. Clearly they really did buy this theory that there was a coordinated policy to talk rates higher across the globe. So governor Lowe’s more cautious tone seems to have caught the longs by surprise.

I've written and published my daily AUDUSD column this morning already - you can read more here.

As I noted in the introduction while many central banks and market participants are trying to read the tea leaves and parse the nuances there is one real hawk in the dove house right now. 

That hawk is governor Stephen Poloz and his Bank of Canada.  

Poloz told German newspaper Handesblatt (exactly why do these central bank governors give scoops to foreign newspapers) that rates need to be set pre-emptively. "If we only watched inflation and reacted to inflation, we would never reach our inflation target, we'd always be two years behind in the reaction," he said. "So we have to look at the rest of our indicators in the models that predict inflation," he added to cheers of Janet Yellen and most of her colleagues at the Fed I'd bet. 

The Canadian dollar has been a big mover as  result.That strength has taken USDCAD down to 1.2937.

It’s a lesson in why I never pre-empt my system entry signals.

In this column yesterday I said I was about a day away from a long entry signal and that the set up was emerging. Dunk Dung! USDCAD is down and I am safely not long and wrong. At the risk of looking silly though the longer term charts suggest USDCAD could fall to 1.2650 if price can’t recover back above last night’s high of 1.3015/20 is bested by week’s end. Here’s the chart:

Elsewhere EURUSD is at 1.1352 about flat on yesterday morning's open. You could have expected a deeper pullback given Peter Praet’s comments on the need for accommodative policy settings in the EU.  

Praet, the ECB's chief economist, said that the EU recovery is essentially predicated on the current policy settings continuing. "The baseline scenario for future inflation remains crucially contingent on very easy financing conditions which, to a large extent, depend on the current accommodative monetary policy stance," he said.

Euro didn't do much overnight however. It did trade down to the 1.1340 level I identified yesterday morning as the ""easy target". The overnight low was 1.1335. !.1300 is the big level now and for this week. If it gives way I'd expect a deeper retracement.

Here's the chart:

USDJPY is at 113.08 this morning as the Yen catches a bit of a bid tone as forex traders wonder about what the reaction, perhaps retaliation, of the US and global community might be to the DPRK's latest missile test - and claim it was an ICBM. 

If you think about it though the DPRK chucking missiles in the vicinity of its neighbours - Japan and Korea - makes the yen a surprising safe haven play. Historically yes, certainly. Right now, in this situation, perhaps not so much. For me anyway. 

That said though the price action is the price action. 112.90/113 remains support with 112.50/60 needed to break to trun the focus away from a test toward 114.00/40.

Here's the chart:

GBPUSD is also lower after weaker than expected Construction PMI data last night. But the battle raging on the BoE's MPC is out in the open with Ian McCafferty, one of the BoE's MPC members who voted for a hike at the last meeting, telling the Daily Post in Wales that "I feel on the balance of monetary policy that there is a need for change." He added he thinks a rate rise "would be justified and would be the prudent thing to do at this stage."

So GBPUSD is down a little at 1.2932. !.2860 remains my preferred short term target.

Here's the 4-hour chart: 

And last, but not least, Sweden's Riksbank said last night there is little chance of another rate cut and more monetary stimulus. But it's not in a rush to hike either. EURSEK rallied hard and finished mid range on the day at 9.666. 

I'm off now till July 24. So good luck and good trading. 

Have a great day's trading.

Greg McKenna 

Chief Market Strategist

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