USD Archives - Out of WACC

Canada Crisis: Second Rate-Cut Of The Year

On July 15 (Wednesday), Canada’s central bank AKA Bank of Canada (BoC) cut overnight rate by 25 basis points (bps) from 0.75% to 50%. This is the second rate-cut this year. First rate-cut took place in January. Not only rate-cut, but lower growth forecasts.

BoC expects Gross Domestic Product growth to be 1.1% year-over-year (Y/Y) this year, down from its 1.9% forecast in April. Policy makers said that Gross domestic product probably “contracted modestly” in the first half. However, they did not call it recession. ‘‘The lower outlook for Canadian growth has increased the downside risks to inflation,’’ policy makers said.

Bank also reduced the net exports contribution to GDP by 0.8% to 0.6% from 1.4%. A stronger U.S. economy and a weaker Canadian dollar should contribute to higher export growth.

Bank of Canada's July Forecasts. Source. — Bank of Canada’s July Forecasts (Page 14). Source.

There has been a big shift in the inflation tone over the past few months:

April: “Risks to the outlook for inflation are now roughly balanced”

May: “the Bank’s assessment of risks to the inflation profile has not materially changed”

This time (July): “The lower outlook for Canadian growth has increased the downside risks to inflation”

“The Bank anticipates that the economy will return to full capacity and inflation to 2 per cent on a sustained basis in the first half of 2017.” In the April’s forecasts, the bank expected the economy to return to full capacity at the end of 2016. I can tell that the Bank is running scared.

Damages from low oil prices has been extensive. Canada is the world’s fifth-largest oil producer and lower oil prices will definitely not help the economy. The damages from lower oil prices shrank the economy in the first half of the year.

Recently after Iran deal has been reached, oil prices fell sharply. It’s currently trading around $48. If the the deal is finalized, it won’t be very good for Canada economy since Iran might want to double its oil production, leading to much lower oil prices.

The bank also said “Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.” If conditions get worse, they will cut rates again.

Oil is not the only problem for Canada. Other concerns are potential bubbles in housing and consumer debt.

According to BoC’s Monetary Policy Report (June), “the vulnerability associated with household indebtedness remains important and is expected to edge higher in the near term in response to the ongoing negative impact on incomes from the sharp decline in oil prices and a projected increase in the level of household debt.” (Page 30).

Over the past few years, housing prices in Canada have skyrocketed. Lower borrowing costs will just add fuel to the fire (DEBT + HIGH PRICES IN HOUSING MARKET WITH LOW INTEREST RATES = NOT A GOOD COMBINATION) . There just might be a bubble in the housing market. But, BoC does not think so.

The next BoC meeting is on September 9th, about a week before the U.S. Federal Reserve meeting, the day that many believe lift-off from the zero interest rate policy will take place. CPI and non-farm payrolls data for July and August will decide whatever the Fed will hike or not.

Rate-cuts and plunging commodity prices, especially crude oil, has caused sell-off in Loonie. Ever since the first rate-cut of the year (January), Loonie (CAD) has weakened significantly. With strengthening dollar (USD), USD/CAD has skyrocketed. When looked at monthly chart, USD/CAD has developed ‘Cup and Handle’ formation. While this is a sign to short USD/CAD, I would be very careful because fundamentals for CAD are too weak. If I were to short it, I would put my stop above the resistance line (Bold Red line).

Update on Microsoft, RBNZ, and upcoming events to watch out.

Update on MSFT: I’m still watching MSFT (Microsoft stock ticker) for good entry. I will go long on it in the future at a good entry price. Microsoft stock and other blue chip stock fell after Intel slashed revenue outlook due to weak PC demand. The decrease in the price of MSFT is still a good buying opportunity.

Microsoft (MSFT) - Hourly — Microsoft (MSFT) – Hourly

Last Wednesday, Reserve Bank of New Zealand left the Official Cash Rate unchanged at 3.5%. NZD (Kiwi) quickly reacted by rising as it disappointed traders who were looking for rate cut. In a statement by the Reserve Bank Governor Graeme Wheeler, cited that the New Zealand dollar “…remains unjustifiably high and unsustainable in terms of New Zealand’s long-term economic fundamentals.” I still believe that RBNZ will intervene and send NZD down, if not by rate-cut. I would be short on NZD/USD, at this time.

Upcoming: Bank of Japan (BoJ, Late Monday/early Tuesday – March 16/March 17 EST), Federal Reserve (Wednesday – March 18 – 2 P.M EST) and Swiss National Bank (SNB, Thursday – March 19 – 4:30 A.M EST).

BoJ will either hold or increase the stimulus package. If they do, JPY (Yen) will be bearish–sending USD/JPY further up–after rising to over 121.00 this week. If they don’t, we have to watch for their tone. It will be either bearish or bulling on the Yen, depending on what BoJ say, or react.

Federal Reserve will be watched very closely after a very positive non-farm payrolls last week. This week, U.S stocks were a roller coaster. There was a hard sell-off in equities and a bullish USD (U.S Dollar), due to an increasing chance of rate-hike. On Thursday (March 12, 2015), Retail Sales came out very negative. Retail Sales fell 0.6% (-0.6%), worse than expected of 0.3%, following -0.8%. Core Retail Sales (excluding automobiles which accounts for 20% of Retail Sales) fell 0.1% (-0.1%), worse than expected of 0.6%, following -1.1%. However, it was little better than previous report in February. I believe people who are saving money from low oil-prices are probably paying off their debts, before they spend on “wants”. The U.S market reacted positively because some people thought that negative Retail Sales would hold-off the Federal Reserve from raising the interest rates. On Wednesday, the Fed might also drop “patient”, signaling that rate-hike is very close.

S&P 500 (SPX) - Hourly — S&P 500 (SPX) – Hourly

SNB might set a new floor to the exchange rate (EUR/CHF). I would not trade CHF (Swiss Franc) because of two reasons. One, it’s too violent and there is no clear direction yet. Second, SNB does not know what it’s doing after what they did in January. But, I would still watch out closely, as it might affect other pairs, such as EUR and USD.

Central Bank Meeting Minutes: BoE, FOMC and ECB (Update on Greece)

During the week of February 16, 2015, BoE (Bank of England), FOMC (Federal Open Market Committee) and ECB (European Central Bank) released its meeting minutes for the latest monetary decisions. Let’s go in depth of these meeting minutes and how we can apply them to our trading decisions.

Bank of England (BoE) – (February 18, 2015)

The Bank of England meeting minutes showed that the Monetary Policy Committee (MPC) voted unanimously (9 members) to keep the benchmark interest rate unchanged at a record-low of 0.5%. There were hints it could be lowered in the next few months (yes, decrease, not increase). Two committee members, Martin Weale and Ian McCafferty who voted in favor of rate hike previously, were in favor in holding rates this time. Regarding its inflation in which Consumer Prices Index (CPI) fell to 0.3% (lowest since decades ago) last month changed the views of MPC. Some worry that it might slip below zero in the next few months. It has caused some to suggest rate cut over the next few months. The rate cut hinted in the minutes is totally different than what the Bank of England governor, Mark Carney said last week.

Mark Carney spoke to the press at Inflation Report press conference. He signaled that BoE remains on course to raise interest rates in the U.K. next year, despite decline in inflation. He also mentioned that BoE might cut the interest rate if inflation transforms into deflation (below 0). I believe if the inflation falls below 0, the BoE will cut the interest rate by 0.25, but only for short period of time. However, he pointed out that BoE still expects its next move will be raising rates, not cut them.

There are confusions going on with BoE on interest rate. I look at this way; inflation goes below 0, rate cut will come, inflation starts to increase, rate increase will come, and watch out for future statements by BoE for more clues. I would not trade Pound (GBP) based on these interest rate talks, for now. There is no clear road for interest rate for now. But, I would trade based on other news/events and charts’ technical.

Federal Reserve – (February 18, 2015)

The Federal Reserve meeting minutes showed that the Federal Open Market Committee (FOMC) expressed concerns over raising interest rates too soon, which could could halt or slow the U.S economic “recovery”. They are also worried over the impact of dropping “patient” from central bank’s rate guidance. They thought that removing “patient” from the FOMC statements in the future would put too much weight on its meaning. As a result, it would cause financial markets to overreact (Unlike Swiss National Bank, Federal Reserve cares about financial markets movements). If “patient” is dropped, I would think that interest rate hike is coming in the next two meetings. They also worried about falling inflation expectations in the U.S. If the inflation drops, I believe it’s going to halt (not cut) FOMC from raising the interest rate, but not decrease the rates.

In the minutes, it’s mentioned that there are worries about international events such as Greece (Greece got 4 month bailout) and Ukraine (There’s no “truce”). But, it’s not going to keep them from raising the interest rate, backed by strong jobs reports. However, the federal reserve signaled its willingness to keep interest rates low for longer because of strong U.S dollar and “flat” housing market. Raising interest rates will only send U.S higher, making it much stronger than ever.

On February 24 and 25, Fed Chair Janet Yellen will be speaking in congressional testimony and we should look for further clues to the timing of the interest rate hike.

Any clues of earlier rate hike will send U.S. dollar to rise in which I would go short USD/JPY, USD/CAD, and/or long GBP/USD. Remember, don’t hold your trade positions for more time if you trigger market order just based on what Yellen said, unless there are other news and technical to support your trade.

European Central Bank (ECB) – (February 19, 2015)

The European Central Bank first ever meeting minutes showed fears of continued deflation the euro zone, which led to launch of Quantitative Easing (QE) program which starts in March. The main goal of QE is to drag the euro zone out of deflation and near to 2% inflation target. This first minutes doesn’t reveal much of anything. Since there weren’t any new details or “surprising” details, the markets, especially Euro did not move much.

Europe has agreed to extend its financial lifeline to Greece only for 4 months. The deal was stuck last Friday (February 20, 2015). This is another bailout for Greece. How long does Euro has to keep bailing out Greece from the mess Greece made? The deal is not final if Greece does not come up with its plan by Monday (February 23, 2015). Then, it will be voted by institutions involved in the bailout by April. If the institutions do not back the plan, the “deal” becomes “no deal”.

I would still keep an eye on Greece. If you trade Euro, be careful with news coming out of Greece. It will be violent and may cause you to have losing positions or touch stop loss (or make money). When picking Euro to trade, I would pick pairs other than EUR/USD.

If you have any questions, feel free to leave comments or contact. Thank you.