Forex Investment and Currency Trading

CAD continues to struggle today, with USD/CAD pushing higher after yesterday’s relatively hawkish FOMC statement. While the first part of the move can be attributed to a stronger USD, the last leg seems to be CAD-specific, as CAD softened against the crosses over the last couple of hours. EUR/CAD is trading at close to 1.62 at time of writing, nearing the two-plus month high of just under 1.6250 that we saw on Tuesday.

It is a quiet day on the data front as well and with liquidity continuing to dry up as the summer months are getting some legs, we will continue to see sharp and sometimes errant moves as this week progresses. Today is also Oil Settlement, thus we should see some LHS interest from producers. With little resistance until the 1.1800/10 area, USD/CAD could still see another leg higher today.

Yesterday was all about the much-awaited Fed decision, and the outcome was a little more interesting than we were expecting. While the bulk of the FOMC statement was largely unchanged from April, there was one very important omission - the FOMC removed the “deflation risk” sentence: “the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” This was obviously interpreted as hawkish (or at least hawkish by omission). The debate going into the FOMC meeting was what exactly the Fed would do (if anything) about rising bond yields and growing expectations that it could hike rates as soon as year-end. Instead of quelling those problems by increasing Treasury purchases or firming up the pledge to keep rates low for a long time, the Fed did the opposite, as bond yields rose across the curve after the statement was released. The USD has been climbing ever since, with particularly big gains against Sterling (GBP/USD back under 1.63) and the yen (USD/JPY up to mid-96 area). Markets are focusing on the fact that the Fed no longer seems to be considering further QE (if deflation is no longer a risk, there’s no reason for QE), which is certainly dollar-positive.

The euro held up well overnight well in the face of a climbing USD; after initially dropping from about 1.40 to 1.39 immediately following the FOMC announcement, it has held reasonably steady over the last half-day, bobbing around the 1.3950 level. Yesterday the overnight rate was trading at 0.75% and today’s it’s at only 0.28%, and there’s talk that this could begin to have an effect on the currency. However, there seems to be a lot of buying interest in EUR at the current levels, and the two effects appear to be cancelling each other out.

It appears as if there has been further intervention from the SNB today in EUR/CHF, with chatter that the SNB’s “line in the sand” is now something like 1.5250, as opposed to 1.5000. Markets will be keeping a close eye on both EUR/CHF and USD/CHF for the next several hours.