Canadian dollar surged broadly last week as the highly anticipated OPEC meeting finally delivered an agreement on production cut. WTI crude oil surged 51.80 and took the Loonie, as well as stocks higher. The Canadian Dollar was also boosted by better than expectation employment data. Nonetheless, Canadian Dollar was overwhelmed by the strength of Sterling. The British Pound surged on talk that there are rooms for UK to have a softer Brexit. Meanwhile, Japanese Yen ended as the weakest major currency again on strong risk appetite. Dollar followed as the second weakest one. The mixed non-farm payroll report from US didn't change market's expectation on a December Fed hike. But the negative monthly wage growth raised doubt on whether Fed would hike again by June.
The immediate focus will turn to Italian referendum on Sunday. With the "no" camp leading in opinion polls, Italian shares and bonds have underperformed of late. The market's key concern is that a "no" vote leading to resignation of Prime Minister Matteo Renzi would trigger massive selloff in bank shares, forcing the debt-ridden Banca Monte dei Paschi di Siena to suspend plans for a critical 5B euro capital increase and then making other banks, such as UniCredit, to delay similar plains too. Such risks might be contagious, spreading to other peripheral countries and result in another European financial crisis. More in Quick Guide to Italian Referendum on Senate Reform.
ECB meeting will then take center stage next week. The current EUR 80b a month asset purchase program is scheduled to end next March. But the central bank is yet to provide any details on handling it. There has been various speculations on what ECB would be. But for the moment, tapering the bond purchase seems an unlikely option Instead, ECB could opt for extending the program by another six months. In any case, the Euro would likely be rather volatile in the coming week. Meanwhile, RBA and BoC will also meeting this week but bother are expected to keep policies unchanged.
The dollar index stayed in tight range last week as consolidations continued. One of the concerns for Dollar is the sharp pull back in NASDAQ last week, as weighed down by tech stocks. Another is the mild loss of momentum in treasury yields. Such consolidations could extend in near term, till Donal Trump delivers a clear picture on his immediate policies, possibly in January. But overall, outlook in dollar index stays bullish as long as 99.11 resistance turned support holds. The long term up trend is expected to extend to 61.8% projection of 78.90 to 100.39 from 91.91 at 105.19 next.
Regarding trading strategy, we're holding two short positions in AUD/USD, entered at 0.7550 and 0.7480. In spite of the sharp fall from 0.7496 to 0.7369, AUD/USD quickly recovered. The development raised some doubt on whether the consolidation pattern from 0.7310 would extend. Hence, we'll extend one short position at market this week first and keep the other with stop at 0.7550. Overall, we're still favoring the case that medium term consolidation pattern from 0.6826 low should have completed and the larger down trend is ready to resume. Hence, we're expecting a test on 0.7144 support in near term, as first target. And decisive break there will likely extend the larger down trend through 0.6826 low.