A Dovish Tapering, Or A Clear Roadmap?
Pi De Jonge | Oct 26, 2017 11:28
Today, the highly-anticipated ECB meeting will take centre stage, with the Bank being expected to unveil a plan for the future of its QE asset purchases.
Market participants are likely to focus on whether the ECB will proceed with a so-called “dovish tapering”, whereby it begins to reduce its monthly asset purchases without providing a clear roadmap for when the process may end, or whether it will provide such a timeline. Recent media reports quoting “officials familiar with the debate” suggest that the Governing Council is divided on how to proceed. In our view, the Bank is more likely to err on the side of caution, given the still-uncertain prospects for the bloc’s economy. We doubt that officials will pre-commit to a roadmap for reducing purchases to zero, as that could risk a rapid tightening in financial conditions, something the Bank surely wants to avoid.
Overall, we find it difficult to envision a scenario where the ECB surprises investors with its aggressiveness. The usual method of operation for Draghi & Co is cautiousness, and we don’t think that is likely to change now. Even though the eurozone is showing some signs of economic momentum, that has not translated into a material pick up in inflationary or wage growth pressures yet. A potentially “dovish tapering” announcement is likely to cause the euro to correct lower, we think.
EUR/USD edged north on Wednesday, breaking above the downside resistance line taken from the peak of the 8th of September. Nevertheless, the recovery was stopped by the 1.1830 (R1) key resistance obstacle. In our view, the pair is likely to continue oscillating near that level, waiting for the ECB decision. If the ECB refrains from providing a clear roadmap for when it expects to end its QE purchases, EUR/USD bears may take charge near the 1.1830 (R1) zone and perhaps push the rate down for a test at the 1.1780 (S1) level. A clear dip below that hurdle could pave the way for our next support of 1.1730 (S2). On the other hand, a clear timeline may encourage buyers to overcome 1.1830 (R1), something that may set the stage for the next resistance of 1.1880 (R2).
h3 EUR/USDSupport: 1.1780 (S1), 1.1730 (S2), 1.1690 (S3)
Resistance: 1.1830 (R1), 1.1880 (R2), 1.1940 (R3)
Loonie collapses as the BoC shifts to a cautious tone
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The BoC kept its policy unchanged yesterday and appeared quite cautious on policy. Policymakers noted several uncertainties surrounding the economic outlook, such as the NAFTA renegotiations. In addition, the Bank mentioned the strength of the Canadian dollar twice, noting that it is likely to delay inflation from meeting the 2% target and that it will probably weigh on export growth. Most notably, the BoC concluded the statement by indicating that although less stimulus will likely be required over time, the Governing Council will be cautious in making future adjustments to the policy rate. As a result, CAD plunged on the news, while the probability of a December rate hike declined notably. We think the currency could remain under selling pressure over the next days, especially considering the absence of major events on the Canadian economic calendar until next Friday.
USD/CAD surged yesterday following the BoC rate decision to breach the resistance (now turned into support) of 1.2770 (S1). Following the break above the key hurdle of 1.2600 (S3) on the 20th of October, the short-term outlook has turned positive in our view. Yesterday’s rally confirmed that and thus, we expect the bulls to shoot again soon and perhaps aim for the 1.2850 (R1) resistance. A clear break above that level could see scope for extensions towards our next hurdle of 1.2940 (R2). Having said that though, given that the rally appears overextended, we would stay careful of a possible corrective setback before the next positive leg.
Switching to the daily chart, we see that the break above the medium-term downtrend line taken from the peak of the 5th of May, and the move above the 1.2600 (S3) zone, may have been early signals of a trend reversal. This enhances our view that the pair may be poised to continue trading north in the foreseeable future.
As for the rest of today’s events
Besides the ECB, both the Riksbank and the Norges Bank will announce their rate decisions. Kicking off with the Riksbank, it appeared quite dovish when it last met, keeping its interest rate easing bias intact. We believe that officials are unlikely to change their tone substantially now, given that most of the economic data we received since they last met were not particularly upbeat. Thus, the reaction in SEK may be somewhat negative.
Turning to the Norges Bank, in contrast to its Swedish counterpart, its tone was relatively optimistic at its latest meeting. We don’t expect any drastic change in this Bank’s language either, given that Norway’s CPI rates ticked up in September. An upbeat tone regarding Norway’s economy could work in favour of NOK.
h3 USD/CADSupport: 1.2770 (S1), 1.2660 (S2), 1.2600 (S3)
Resistance: 1.2850 (R1), 1.2940 (R2), 1.3000 (R3)
Original post: Econ Alerts and FXGiants
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