This week our currency strategists focused on the Reserve Bank of Australia and Bank of Canada Monetary Policy Statements 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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GBP/AUD: Monday – December 9, 2024
GBP/AUD: 1-Hour Forex Chart by TradingView
On Monday, our strategists had their sights set on the RBA monetary policy statement and its potential impact on the Australian dollar. Based on our Event Guide, expectations were for the RBA to keep its interest rates steady at 4.35%, with markets focusing on any shifts in forward guidance given recent mixed economic data. With those expectations in mind, here’s what we were thinking:
The “Aussie Rally” Scenario:
If the RBA maintained its hawkish stance or showed increased concern about sticky inflation, we anticipated this could boost AUD.
We focused on EUR/AUD for potential short strategies if risk sentiment was positive, especially given the European Central Bank’s expected rate cut later in the week.
In a broad risk-off environment, AUD/CAD long made sense given the expectations of the Bank of Canada cutting interest rates as well.
The “Aussie Fall” Scenario:
If the RBA signaled a shift towards rate cuts or expressed heightened growth concerns, we thought this could weigh on AUD.
We considered GBP/AUD for potential long strategies in a risk-on environment, particularly given the pair’s position near support, improving data in Europe, and Sterling’s resilient reaction to recent dovish BOE member talk.
If risk sentiment stayed negative, AUD/USD shorts looked promising given reduced expectations of aggressive Fed rate cuts and bearish technical patterns on price.
What Actually Happened:
The RBA kept rates steady at 4.35% as expected but delivered notably more dovish forward guidance:
- Removed previous guidance that “it is not ruling anything in or out”
- Core inflation moderated to 3.5%, though still above target range
- Economic growth significantly slowed, with business conditions at post-2020 lows
- Board acknowledged supply-demand imbalances in the economy are narrowing
- Fourth-quarter inflation data due in January highlighted as crucial for February meeting
Market Reaction:
This outcome fundamentally triggered our AUD bearish scenarios, and with risk sentiment mixed but arguably slightly risk-on early in the week, GBP/AUD became our focus.
Looking at the GBP/AUD chart, the pair saw an immediate jump following the dovish RBA statement, climbing from around 1.9900 to test the R1 pivot point near 2.0093. The advance gained momentum during European trading as traders digested the implications of RBA’s policy shift.
2.0100 eventually proved to be the top for the pair as improving risk sentiment and better-than-expected likely had traders favoring the Aussie over pound as the week went on.
Finally on Friday, weaker-than-expected/previous U.K. GDP data had traders souring further on GBP/AUD, likely with the help of broad market risk-on sentiment signaled by higher oil, equities, Bitcoin and bond yields on the session.
The Verdict:
So, how’d we do? Our fundamental analysis anticipated AUD weakness on a dovish RBA shift, which played out as expected. We called the Pivot Point area as one to watch for potential buyers, which did play out ahead of the event. And this event took the market to even to our most optimistic target at the R1 Pivot resistance area around 2.0100.
Following that though, the pair pullback hard as the broad market environment and domestic data updates didn’t favor GBP/AUD longs, so the trade plan and execution would have been a big factor in outcome, especially with the market ending back near the Pivot Point.
Because of how the events played out and how trade management would have been a bigger factor with this idea, we’d rate this discussion as “neutral-to-likely” supportive of a positive outcome. Simply following the original plan would have net positive, but determining real time on how to manage after the target was hit would have been very important too.
CAD/JPY: Tuesday – December 10, 2024
CAD/JPY 1-Hour Forex Chart by TradingView
On Tuesday, our strategists had their sights set on the Bank of Canada monetary policy statement and its potential impact on the Canadian dollar. Based on our Event Guide, expectations were for the BOC to cut its interest rates by 50bps to 3.25%, with markets looking for signals on future policy direction.
With those expectations in mind, here’s what we were thinking:
The “Loonie Lift” Scenario:
If the BOC signaled a slower pace of future rate cuts or expressed less dovish concerns about growth, we anticipated this could support CAD. We focused on CAD/JPY for potential long strategies if risk sentiment was net positive, especially given growing uncertainty about BOJ hiking interest rates in December.
In a risk-off environment, NZD/CAD short made sense given RBNZ’s recent dovish shift with rate cuts.
The “Loonie Letdown” Scenario:
If the BOC maintained an aggressively dovish stance or signaled more rate cuts ahead, we thought this could weigh on CAD. We considered EUR/CAD for potential long strategies in a risk-on environment, particularly given the pair’s position near the key 1.5000 level.
If risk sentiment stayed negative, CAD/CHF short made sense given SNB’s less aggressive easing stance.
What Actually Happened:
The BOC delivered the expected 50bps rate cut to 3.25% but surprised markets with a notably less dovish forward guidance. Key points from the statement:
- The policy rate has been reduced by 175 basis points since June
- Inflation remains around the 2% target and is expected to stay close to target
- Bank anticipates a “more gradual approach” to future rate decisions
- New uncertainties include reduced immigration targets and potential U.S. tariffs
During the press conference, BOC Governor Macklem emphasized that while monetary policy has successfully brought inflation back to target, recent indicators point to softer growth than projected. However, he noted improvements in consumer spending and housing activity in response to lower rates.
Market Reaction:
This outcome fundamentally triggered our CAD bullish scenarios, and with risk sentiment leaning positive on hopes of improving demand and data in China, and oil having a strong up session, CAD/JPY was our pair to watch.
Looking at the CAD/JPY chart, the pair chopped around the R1 Pivot resistance area / 107.00 major psychological level before getting a bullish boost ahead of the BOC event thanks to most likely on a Reuters report that sources say the BOJ will likely hold in the upcoming meeting.
This popped CAD/JPY up to the 107.50 area, where the pair basically found support from after the BOC event. It was from here that the pair rallied further, nearly testing our first targeted upside barrier around the R2 Pivot resistance area / 108.00 major psychological level.
It never really quite got up there though, basically chopping between 107.50 – 108.00 for the rest of the week.
The Verdict:
So, how’d we do? Our original discussion was “likely” supportive of a net positive outcome. The fundamental trigger was clear with the BOC’s shift to a less aggressive easing stance, while our technical analysis accurately identified key resistance levels that helped guide trade management.
If traders entered long positions right on the news, it would have been likely to see a positive outcome given that the market closed the week above the pre-event bar. Better opportunities too long did come later as the pair pulled back and consistently found support at the 107.50 area. So the trade management plan and execution would have been crucial to the outcome given this post event behavior.
Overall, while we didn’t get a big rally a surprising outcome given the Central Bank developments and strong oil rally this week, ending with a positive outcome was very doable to focused and patient traders.