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The Fed in on the ropes, but not down

Published June 15, 2016
  • Market action is generally subdued with a minor tilt towards the USD as might be expected given today’s 2pm ET Fed decision
  • A summary of Economic Projections will be released alongside its interest rate statement and Fed Chair Janet Yellen will hold a press conference 30 minutes afterwards at 230pm ET
  • While the Fed is expected to hold rates in their current 0.25-0.5% bound due to weaker jobs data last month and the uncertainty surrounding the UK referendum on EU membership, there is still reason for optimism
  • Those who are bullish on the US economy, and by proxy the USD, will note that the Fed may be down, but is not out…
  • …earnings, income and spending have all shown improvement recently and most inflation metrics picked up in April and May
  • As well, the US housing market is robust and energy prices have surged alongside a stabilization in global GDP…
  • …which in our view leaves the Fed in an interesting state of cautious optimism: Yes, they will hold rates but it’s not all that bad – they are on the ropes, but not down, so expect a degree of zeal to emanate from Fed Chair Yellen this afternoon
  • The Canadian dollar is trading lower this morning as USDCAD breaches the 1.2900 level of a fresh eight day high
  • Oil prices continue to pull back and are likely  contributing to the weakness in the Loonie, as WTI moves below the $48 handle for a loss of 1.3% on the day thus far
  • Canada reported that Manufacturing Sales for April increased at a 1% clip, outpacing the 0.6% forecast – but the market has ignored it thus far and is solely focused on the looming Fed decision and falling oil prices

USDCAD Technical Glance
USDCAD is posting its fifth day of gains and is now within striking distance of the key 21 day moving average (DMA) at 1.2957.  A close above that level would certainly entice USD bulls to add fresh long positions.  Failure at that level would likely indicated exhaustion for this USD recovery and thus be a harbinger of a lower USDCAD before the week is out.

Chart: USDCAD close to testing key 21 DMA