Dovish turn from Powell hurts USD broadly. US rates downtick, but US stocks celebrate

Summary

• USDCAD: Dollar/CAD attempted a run for the 1.34s early yesterday after trendline resistance in the 1.3320-40s gave way, but Jerome Powell’s speech before the Economic Club of New York threw cold water on the USD bulls.  The Fed chairman said there was no preset path to monetary policy, the impact of interest rates hikes on the economy was uncertain, but more importantly that the Fed is now “just below” the neutral range for Federal Funds rate.  This was interpreted by traders as unexpectedly dovish, considering Powell said rates were “a long way” from neutral only last month.  The news is also sparking speculation that the Fed will now hold off on further interest rate hikes after December.  The USD collapsed across the board around the noon hour, leaving USDCAD in shambles by 2pm around the key 1.3240s support level.  We saw a bounce off this level in late NY trade, and an attempt to regain the 1.3290s in overnight trade, but this move is failing now as crude oil bounces strongly back above the $50 mark.  Reports of Russia potentially participating with OPEC’s anticipated production cuts is helping with today’s oil bounce, but we may also be seeing some short covering ahead of next week’s big OPEC meeting on Dec 6th.  Today’s North American calendar features the FOMC Minutes from the last Fed meeting on Nov 8th, but we think this report may largely be brushed off as old news because of Powell’s comments yesterday.  We think the USDCAD technicals have once again become uncertain here but we believe the 1.3240-1.3290 zone becomes a pivot for prices going into week’s end.  Trade and hold above the 1.3290s, and we think positive momentum can return, but trade below the 1.3240s and we could start to unravel heading into December.  Twenty-year historical seasonality for USDCAD suggests the October/November rally will pause in December.

• EURUSD: Euro/dollar is entering NY trade this morning with a mixed tone, but it is still over 100pts higher from yesterday’s lows due to Powell’s comments.  Yesterday’s price action formed a bullish outside day on the charts; a pattern that continues to hold despite a mild pullback for EURUSD overnight.  Traders cite talk from the EU’s Oettinger, about the US tariffs indeed being applied before Christmas, as the reason for the mild EUR selling into 1.1350 support.  As one might expect though, the European Commission subsequently denied Oettinger’s opinion and EURUSD bounced higher.  The market has now regained the 1.1370s, which opens the door for an upward test of the 1.1400-1.1405 level.  We could be well on our way to the 1.15s should this chart resistance level break.  USDCNH remains stubbornly bid throughout all the USD selling, which is the one negative correlation we would point out for EURUSD here.  The BTP/Bund spread continues to range trade as Italian bond traders await the European Commission’s next move regarding the Italian budget.  Germany just reported Nov CPI slightly below expectations, +2.3% YoY vs +2.4%.

• GBPUSD: Sterling is the laggard this morning; giving back almost all of yesterday’s Powell-driven gains.  We can’t point to a specific headline to cause the swift move back below the 1.2820s, but we’re hearing the typical month-end buying flows in EURGBP are particularly heavy this month.  We’re also not so sure today’s announcement of Theresa May to participate in a live debate with opposition leader Jeremy Corbyn on Dec 9th is helpful for GBP sentiment here.  This will be just two days before the expected Dec 11th parliament vote on May’s EU-approved Brexit draft, and it could be a dramatic event.  Another reason to sell GBPUSD so it seems for now.  Near term chart support is 1.2710-40.  Resistance is 1.2790-1.2840.

• AUDUSD: The Aussie continues it’s march higher this morning after the market exploded higher through the 0.7250s post Powell.  We saw two pullbacks off chart resistance in the 0.7330s (yesterday afternoon and in early European trade today), but traders have pushed the market above this level now.  Some Fibo resistance comes in at 0.7340, but there’s not much else above there for another 100pts we’d say.  We think the short AUD fund position is at risk here.  Over 1blnAUD in options expire at the 0.7400 strike on Monday.  The December through April period is seasonally the best time of year for Australian dollar appreciation, if we look at 20-yr historical returns.  This AUD seasonality correlates well with that of copper and gold prices over the same period.  The G20 leaders summit commences tomorrow in Buenos Aires, Argentina.

• USDJPY: The Aussie continues it’s march higher this morning after the market exploded higher through the 0.7250s post Powell.  We saw two pullbacks off chart resistance in the 0.7330s (yesterday afternoon and in early European trade today), but traders have pushed the market above this level now.  Some Fibo resistance comes in at 0.7340, but there’s not much else above there for another 100pts we’d say.  We think the short AUD fund position is at risk here.  Over 1blnAUD in options expire at the 0.7400 strike on Monday.  The December through April period is seasonally the best time of year for Australian dollar appreciation, if we look at 20-yr historical returns.  This AUD seasonality correlates well with that of copper and gold prices over the same period.  The G20 leaders summit commences tomorrow in Buenos Aires, Argentina.

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Market Analysis Charts

USD/CAD Daily Chart

USD/CAD Hourly Chart

January Crude Oil Daily Chart

EUR/USD Daily Chart

EUR/USD Hourly Chart

USD/CNH Daily Chart

GBP/USD Daily Chart

GBP/USD Hourly Chart

EUR/GBP Daily Chart

AUD/USD Daily Chart

AUD/USD Hourly Chart

December Copper Daily Chart

USD/JPY Daily Chart

USD/JPY Hourly Chart

EUR/JPY Daily Chart

Charts: TWS Workspace

About the Author

Erik Bregar - Director, FX Trading

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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