FxWirePro: No Change in Fed’s approach and no change shorts in Loonie – Uphold CAD RV trades

The US Federal Reserve kept the Fed funds rate on hold (at 2.50%), as widely anticipated, it continue to adapt to a more dovish stance than expected, moving to a neutral stance in regards to interest rate adjustments, highlighting a need to pause against a backdrop of weaker inflation and slowdown in global growth. It also said it is prepared to adjust balance-sheet normalization. 

Instead, the Fed suggests that it will apply a flexible approach for normalizing its balance sheet, while Fed chair Jerome Powell explicitly did not comment during the press conference on whether the next rate step would be up or down. According to Powell that will depend solely on the data. 

In the future, the FX market is therefore likely to react much more volatile to data surprises, as market participants will always analyze these as to which direction the Fed’s monetary policy will take. Regarding further rate hikes, the focus will rest on inflation according to Powell. Even in a continued positive economic environment, the Fed could refrain from further interest rate hikes as long as there are no clear signs of a rise in inflation. As long as the latter remains stable the Fed assumes that for now, its key rate is already neutral.

Maintain CAD shorts vs. CHF and USD:
Little occurred this week to alter our medium-term bearish CAD views. If anything, the current state of the US government shutdown and gridlock reinforces our conviction that the prospects for passing USMCA/NAFTA 2.0 through Congress remain challenging, which should put significant pressure on CAD later this year; we are well- positioned for such difficulty through our calendar call spread. 

Our CADCHF cash leg, undertaken to hedge against a potential extension of dollar weakness from late- December and early-January, remains partially exposed to risk ahead of US-China trade headlines but still reflects our medium-term late-stage cyclical outlook for FX markets.

US yields fell, seeing the curve steepen, with the broad USD coming under heavy selling pressure. With commodity prices extending this year’s rally and equities holding onto their recovery, commodity and higher-yielding currencies are outperforming.

In the Fed’s communication, it does no longer mention further gradual rate hikes or that risks to the economic outlook were roughly balanced. Courtesy: Lloyds & JPM

Trade tips: Activated long in a -3m/+7m OT USDCAD calendar call spread (k=1.40) in Mid-January. Paid 16.6%, marked at 17.7%.

Sold CADCHF on January 15th 0.7438. Stop at 0.7590. Marked at -0.96%.

Currency Strength Index: FxWirePro's hourly USD spot index is flashing -64 (which is bearish) while articulating (at 11:30 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex