This week our currency strategists focused on the Bank of Canada interest rate statement and the Euro Area PMI survey updates 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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On Tuesday, our strategists had their sights set on the BOC monetary policy statement and its potential impact on the Canadian dollar. Based on our Event Guide, expectations were for a 50 basis point rate cut to 3.75%, with markets looking for signals on future easing.

With those expectations in mind, here’s what we were thinking:

The “Loonie Lift” Scenario:

If the BOC delivered a smaller 25 bps cut or signaled a pause in its easing cycle, we anticipated this could support CAD. We focused on CAD/CHF for potential long strategies if risk sentiment was positive, especially given the pair’s position near rising trend line support. In a risk-averse environment, EUR/CAD short was our pair of choice given the ECB’s recent dovish signals about potential December rate cuts.

The “CAD Crash” Scenario:

If the BOC cut rates by 50 bps and maintained a dovish stance suggesting further aggressive easing, we thought this could weigh heavily on CAD. We eyed CAD/JPY for potential short strategies in a risk-off environment, particularly given rising tensions in the Middle East and Japanese officials’ recent warnings about potential currency intervention. If risk sentiment leaned positive, AUD/CAD long made sense given Australia’s recent strong employment data supporting the possibility of the RBA leaning less dovish ahead.

What Actually Happened

The BOC delivered the expected 50 basis point rate cut, lowering its overnight rate to 3.75%. This marked their fourth consecutive rate cut since June.

Key points from the BOC statement:

• Inflation hit the 2% target with core inflation falling below 2.5%
• Labor market remained a concern with population growth outpacing modest hiring
• Growth expected to slow in H2 2024 but strengthen gradually as rates declined
• BOC expects to “reduce policy rate further” if economy evolves as forecast
• Emphasized decisions will be taken “one meeting at a time”

In his press conference, Governor Macklem notably shifted tone, emphasizing that “we are back to low inflation” and that risks around their inflation forecast are “reasonably balanced.” His key message: “Now our focus is to maintain low, stable inflation. We need to stick the landing.”

Market Reaction

This outcome fundamentally triggered us to look towards CAD/JPY for opportunities, especially given the arguably broad market weakness in the front half of the week.

CAD/JPY saw immediate selling pressure when the BOC announced its jumbo rate cut, dropping steadily after running up the event. The BOC cut and profit taking were likely in play, pushing CAD/JPY lowering in the following two sessions from roughly 110.50 to 109.50 before the market stabilized.

By Friday’s close, CAD/JPY was hovering around 109.60, having found support at the rising 100 SMA and 109.50 minor psychological area.

The Verdict

So, how’d we do? Our fundamental analysis correctly anticipated a bearish move in CAD/JPY on the bearish BOC decision, but our technical argument was no where in sight as the market rallied higher even before the BOC event.

Still, if a bearish position was taken after the BOC event and as the bears rejected the bulls at the 110.50 minor psychological level, a move could have been caught who adapted to what the market was giving them.

With that perspective, we think that this discussion was “likely” supportive of a net positive outcome as CAD did fall after the bearish BOC event, but again, probably only by those who adapted the original strategy to the new market picture.

On Wednesday, our strategists had their sights set on the upcoming Euro Area PMI updates for October 2024 and their potential impact on the euro. Based on our Event Guide, expectations were for slight improvements in the manufacturing and services sectors, with Euro Area Manufacturing PMI forecast at 45.1 (vs. 45.0 previous) and Services PMI at 51.5 (vs. 51.4 previous).

With those expectations in mind, here’s what we were thinking:

The “Euro Rally” Scenario:

If the PMI data came in stronger than expected, particularly in Germany’s numbers, we anticipated this could ease concerns about the region’s economic outlook. We focused on EUR/JPY for potential long strategies in a risk-on environment as JPY tends to underperform in that scenario. In a risk-off environment, EUR/CAD long was our pair of choice given the dovish expectations for the upcoming Bank of Canada meeting and/or any weakness in oil demand.

The “Euro Retreat” Scenario:

If the PMI readings disappointed, mainly showing deteriorating business conditions in the region’s largest economies, we thought this could weigh on the euro. In this case, we considered EUR/AUD for potential short strategies if broad risk sentiment was net positive, particularly given the recent strong Australian jobs data and improving Chinese economic indicators. In a risk-off environment, EUR/CHF short made sense given the Swiss franc’s safe-haven appeal and recent dovish ECB commentary.

What Actually Happened

The Euro Area PMIs painted a mixed picture on Thursday. The French data disappointed with Manufacturing PMI falling to 44.5 (vs. 44.9 forecast) and Services PMI dropping to 48.3 (vs. 49.8 expected). However, German numbers surprised to the upside with Manufacturing PMI jumping to 42.6 (vs. 40.7 forecast) and Services PMI rising to 51.4 (from 50.6).

These mixed results brought the overall Euro Area Manufacturing PMI up to 49.9 (vs. 45.1 forecast) and Services PMI slightly down to 51.2 (vs. 51.5 forecast). We’d say that this was slightly net bearish, especially with the underlying data showing businesses continuing to scale down output amid weakening demand, with new orders falling for the fifth consecutive month.

Market Reaction

Broad risk sentiment was starting to look up on Thursday as bond yields retreated and some progress was announced towards a Israel-Hamas ceasefire. This prompted a closer look at EUR/AUD and when looking at the chart, we can see that the pair showed immediate volatility following the French PMI release, with an initial drop from around 1.6220 (pivot point).  The pair also sustained trade below the ‘falling highs’ trendline, making an argument for shorting the pair.

However, the euro was already in rebound mode thanks to some disagreement brewing between ECB members on the next interest rate move, and with stronger German data to help, the euro continued to trek higher.

The Verdict

So, how’d we do? In our original discussion, we mentioned potential EUR/AUD short setups if Euro Area PMIs disappointed and risk sentiment stayed positive. In our opinion, this was the outcome but the market moved higher, which we think was some pullback of aggressive rate cut betting prompted by ECB members speak at the IMF’s annual meeting.

Overall, it’s pretty clear that this discussion did not support a positive outcome, even with fundamental support and a solid technical setup. Once again, that’s how it goes sometimes: even when we identify the correct catalysts, the price action doesn’t align with our expectations. That’s why proper trading and risk management remains crucial for long-term trading success.