Forex Markets Staying in Consolidation Mode, Aussie Got No Lift from Strong Job Data

Trading in the forex markets remain rather dull today. Dollar’s recovery overnight again lack conviction. Nonetheless, USD/JPY does seem to have bottomed out, but that’s mainly thanks to Yen’s weakness. Canadian Dollar is bounded in range after the highly anticipated BoC rate hike. Traders are holding their bet on the Loonie after cautious tone of BoC. Sterling spiked higher through 1.3835 key resistance but there was no follow through buying. It’ll take a little more time to see if that’s bull trap. Australian Dollar doesn’t get any lift by strong job data and is staying in consolidation.

Canadian Dollar range bound after BoC rate hike

BOC raised the policy rate by 25 bps to 1.25% yesterday, as "recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity". The move had been widely anticipated. As such, we observed the instant "sell the news" move in USDCAD after the announcement. Canadian dollar’s retreat was pared later in the day, though, as the market has priced in another rate hike by May. Policymakers remained cautious over future rate hikes and cited the uncertainty in the NAFTA renegotiations as a risk. Yet, the market appeared to have shrugged off these comments.

The central bank also released its latest Monetary Policy Report (MPR), providing updated economic projections. The staff projected GDP growth to average at 3% in 2017, followed by 2.2% in 2018 (up from 2.1% in October’s estimate). Growth should ease further to 1.6% in 2019 (up from October’s 1.5% forecast). A major risk facing Canadian economy is the uncertainty around NAFTA negotiations which is "clouding the economic outlook". As such, the latest economic projections have incorporated "additional negative judgment on business investment and trade" of NAFTA uncertainty.

More in BOC Raises Policy Rate, Market Prices In Another Hike Before May

Fed Beige Book: Modest to moderate gains in activity

The latest Beige Book prepared by the Atlanta Fed continued to depict an upbeat economic environment. All Districts surveyed reported "modest to moderate gains" in economic activity while Dallas reported a "robust" increase. The outlook for this year remains optimistic. On the employment situation, most Districts noted a tight labour market. Some suggested that the situation is constraining growth. Despite this, wages in most Districts only grew at a "modest" pace.

Focus shifting to BoJ meeting next week

With BoC decisions now passed, focuses are gradually shifting to BoJ meeting next week. According to a Reuters poll, the majority of economists surveyed expected BoJ to stand pat on interest rate throughout 2018. But it should also be noted that there is no overwhelming consensus on what would happen in the second half. It’s noted that the outlook in the latter part of 2018 will very much depend on the future of Governor Haruhiko Kuroda. That is, whether Prime Minister Shinzo Abe would offer him another term.

Yet, for the near term, there is little chance for a change in BoJ’s policies. According to Bloomberg’s report, the summary of opinions of December meeting noted discussion on the possibility of raising rates. But that’s just a small shift in sentiments, and it’s not even a majority of view. The document noted that "when it is expected that economic activity and prices will continue to improve going forward, the situation may occur where the Bank will need to consider whether adjustments in the level of interest rates will be necessary," as one member said.

Australia job growth extends record streak

Australian job growth remained strong with 34.7k expansion in December. That’s more than double of market expectation of 15.2k. That’s the 15th straight month of expansion, the longest streak since 1993. And the more encouraging part is that full time jobs rose by 322k since December 2016, making up the majority of the 393k growth. Unemployment rate rose to 5.5% but that’s due to a jump in participation rate at 65.7%. For the moment, markets are only pricing in 50/50 chance of an RBA rate hike by August. Also from Australia, consumer inflation expectation rose 3.7% in January.

Elsewhere

A batch of key Chinese data will be the focus today, including GDP. US will release housing starts, Philly Fed survey and jobless claims.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.7932; (P) 0.7977; (R1) 0.8014; More…

AUD/USD lost some upside momentum after hitting 0.8022 and intraday bias is turned neutral for consolidations first. Further rally is expected as long as 0.7874 support holds. Above 0.8022 will extend the rise from 0.7500 to 0.8124 high. there will resume whole medium term rebound from 0.6826 and target key fibonacci level at 0.8451. On the downside, break of 0.7874 will indicate short term topping and turn bias to the downside for 55 day EMA (now at 0.7764).

In the bigger picture, current development suggests that medium term rebound from 0.6826 is still in progress and could be resuming. Such rise could target 38.2% retracement of 1.1079 (2011 high) to 0.6826 (2016 low) at 0.8451. As such rise is seen as a corrective move, we’d expect strong resistance from 0.8451 to limit upside.

Economic Indicators Update