This week our currency strategists focused on the Australia’s CPI Report and BOJ Monetary Policy Statement for potential high-quality setups.
Out of the eight scenario/price outlook discussions this week, two discussions arguably saw both fundie & technical arguments triggered to become potential candidates for a trade & risk management overlay. Check out our review on those discussions to see what happened!
Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.
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AUD/CAD: 1-Hour Forex Chart by TradingView
On Tuesday, our strategists had their sights set on the Australia’s CPI Report (Q3 2024) and its potential impact on the Australian dollar. Based on our Event Guide, expectations were for headline CPI to come in at 2.4% y/y and 0.4% q/q, both below their respective previous reads.
With those expectations in mind, here’s what we were thinking:
The “Aussie Advance” Scenario:
If the CPI came in hotter than expected, we anticipated this could weigh against speculations of near-term interest rate cuts from the RBA, possibly giving the Aussie some wings against its counterparts. We focused on AUD/NZD for potential long strategies if broad risk sentiment leaned net bullish, especially given the recent RBNZ rate cut. If risk sentiment was broadly positive, AUD/CHF looked promising for longs given the SNB’s recent dovish stance and rate cut.
The “Aussie Avalanche” Scenario:
If Australia’s inflation data shows a significant slowdown in price growth, we thought this may draw in fundamental Aussie bears. In this case, we considered AUD/USD for potential short strategies in a broad risk-adverse environment, particularly given the pair’s recent downtrend and falling odds of aggressive Fed rate cuts ahead. In a risk-on environment, AUD/CAD short made sense given the Bank of Canada’s recent comments suggesting rate cuts would be to “stick the landing” rather than combat high inflation.
What Actually Happened
The Q3 2024 inflation data showed consumer price increases decelerated more than expected, with quarterly CPI dropping from 1.0% to 0.2% against market expectations of 0.3%. The annual rate fell from 2.7% to 2.1%, below the forecast of 2.3%.
Key points from the CPI report:
- The slowdown was driven by a 17.3% drop in electricity prices due to government subsidies
- Fuel prices fell 6.2% in the quarter
- Services inflation ticked higher from 4.5% to 4.6%, remaining a key RBA concern
- Food and non-alcoholic beverages (+0.6%), and Recreation and culture (+1.3%) saw notable increases
Market Reaction & Outcome
With both slower headline inflation and core measures coming in below expectations, this fundamentally triggered our AUD bearish scenarios. And with the risk environment leaning bullish from Tuesday to Wednesday, AUD/CAD was the pair to watch for potential quality technical short setups.
Looking at our AUD/CAD chart, we can see the pair dipped on the news, but bounce during the Wednesday session, likely helped by weak oil prices pressuring CAD and the broad risk-on environment lifting the Aussie. We discussed this potential scenario in our original discussion, and if it did bounce, we saw that the pair may hit the broken support area around 0.9160 before returning to the downside.
Looking at the AUD/CAD above once again, we can see the pair did test that area multiple times, with the best bearish reaction coming after the first touch, dropping all the way back to 0.9100 (intraweek lows) before drawing in CAD bears after weak Canada GDP data.
The Verdict
In our original discussion, we mentioned potential short setups on AUD/CAD if Australia’s inflation data disappointed, which it certainly did. The fundamental trigger was clear with the significant miss in both quarterly and annual CPI readings, while our technical analysis correctly identified the 0.9160 level as a key area to watch for bearish continuation.
If that strategy was followed, it’s “likely” that it supported a net positive outcome, but with the choppy price action following the event, strong trade management skills and execution practices would have been needed to ensure a net positive result on AUD/CAD this week.
NZD/JPY: 1-Hour Forex Chart by TradingView
On Wednesday, our strategists had their sights set on the Bank of Japan monetary policy statement and its potential impact on the Japanese yen. Based on our Event Guide, expectations were for the BOJ to maintain its short-term interest rate target at <0.25%, with markets looking for signals on future policy direction and updated economic forecasts.
With those expectations in mind, here’s what we were thinking:
The “Yen Bulls Rise” Scenario:
If the BOJ delivered a less dovish tone or showed increased concern about excessive FX volatility, we anticipated this could support the yen. We focused on NZD/JPY for potential short strategies if broad risk sentiment leaned adverse, especially given the RBNZ’s recent dovish shift with their 50bps rate cut. In a risk-on environment, CHF/JPY short was our pair of choice given the SNB’s plans to cut rates in coming quarters.
The “Yen Bears Charge” Scenario:
If the BOJ maintained its dovish stance without showing much concern about yen weakness, we thought this could weigh on the currency. In this case, we considered AUD/JPY for potential long strategies in a broad risk-on environment, particularly given Australia’s recent strong jobs data. If risk sentiment was leaning more adverse, CHF/JPY long made sense given the pair’s uptrend and recent SNB comments about remaining active in currency markets.
What Actually Happened
The BOJ held its short-term interest rate target steady at <0.25% in a unanimous decision, while making several notable adjustments to their outlook:
- Core inflation forecast for fiscal 2025 trimmed to 1.9% from 2.1%
- BOJ projects inflation to remain around 1.9% through fiscal 2026
- Economic growth forecasts maintained at 0.6% for current fiscal year
- Growth projections of 1.1% and 1.0% for fiscal 2025 and 2026 respectively
Most importantly, Governor Ueda struck a notably less cautious tone in the press conference, dropping the previous stance that the BOJ could “afford to spend time” assessing risks. He specifically noted that “wages and prices are moving in line with forecasts” and that downside risks to overseas economies were clearing.
Market Reaction
Japanese yen bulls crushed the bears, prompting JPY to rally against all of the major currencies. And with broad markets showing risk-off behavior, we thought NZD/JPY was the pair to watch.
NZD/JPY saw immediate selling pressure following both the policy announcement and subsequent press conference, as Ueda’s less cautious tone and the unanimous decision were interpreted as setting the stage for potential December action.
However, the bearish momentum was limited as Ueda later clarified there was no preset expectation for rate hikes, triggering some profit-taking during the London session. The pair found support near the S1 pivot (90.387) & 90.50 minor psychological level before stabilizing.
During the U.S. session, broad risk aversion was in play and usually helps reinforce the yen’s strength, but the yen pulled back ahead of Friday. This was possibly short position profit taking after a solid intraday run lower and ahead of a very busy Friday session for forex traders (monthly U.S. jobs report ahead).
The Verdict
Looking at our original discussion, the strategy was “likely” supportive of a net positive outcome as the less dovish BOJ stance combined with risk-off flows triggered a very bearish NZD/JPY reaction. But we only rated it as “likely” as active risk management was needed given the late Thursday reversal, meaning the trade plan used would have been a big factor in the potential outcome.
For those who executed short positions around pivot point and took profits at the S1 pivot support area / minor psychological level, they likely saw the best outcomes.