ECB gives market super dovish taper. $EUR lower. $USD broadly higher. US GDP on deck.

Summary

• ECB gives the market an even more dovish taper than was expected.  EURUSD falls as the head & shoulders topping pattern plays out; EURJPY fails at key resistance, and a broad USD rally ensues.

• USDCAD gunning for the 1.29s.  Poloz out with some dovish talk yesterday.  EURCAD breakout derailed for the time being.

• GBPUSD back at range lows.  Bank of England meets next Thursday.

• USDJPY and US yields steady below recent highs.  Japanese CPI comes in weaker than expected.  Option barriers still capping.

• US GDP at 8:30amET.  Markets expected +2.6%.

• CME open interest changes 10/26: AUD -2066, GBP -1678, CAD -5729, EUR -50, JPY +2159.

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By The Numbers: Daily FX Snapshot

USD/CAD - Canadian Dollar

Dollar/CAD was content to follow the broader USD higher yesterday in the absence of CAD specific news.  We got the small pull back and then the resumption of the rally, which we were expecting.  Looks like we finally got some big position liquidation (see open interest changes).   Market is now dealing with some resistance in the high 1.28s, but traders are still buying dips.  Odds are the market will continue to hug the upward sloping trend line we have drawn on our chart (highlighted in blue today), with a broadly weaker USD theme still in place as we enter NY trading.  The 50% retrace of the May to Sep down move comes in at the 1.2930s.  Hearing some talk on Reuters about traders putting on butterfly option spreads (which is a range-bound play on markets).  Did anyone notice Stephen Poloz yesterday say “the US is now out in front of us” when talking about monetary policy divergence between Canada and the US over the last 2years?  If that doesn’t cement the idea of a dovish Bank of Canada and no rate hikes for the near-term, I don’t know what does.  EURCAD will likely provide a negative drag again today as the EURUSD fall took a serious whack out of the EURCAD chart breakout.  The bullish pattern is still technically in play so long as the cross holds the high 1.48s and unfortunately EUR moves will likely be the driver for this cross going into next week.  GBPCAD is steady, consolidating recent gains to the 1.70 handle, although we must note GBPUSD as it may break down again (see below).

EUR/USD - European Central Bank Euro

The ECB reduced its bond buying program to $30bln EUR per month yesterday (pretty much what the market was expecting) but they gave no indication of when the quantitative easing program would end (this was more dovish than expected).  Then Mario Draghi spoke and out came the super dove: still doesn’t see encouraging signs for wages and inflation, insisted that substantial degree of monetary stimulus still needed, rates to remain at present levels for an extended time, and again no clues as to when the ECB will stop trying to prop things up.  All this was super bearish EUR because it was way more dovish than expected.  There was no knee-jerk higher in EURUSD as the ECB was clear in its tone for a change.  EURUSD descended lower, albeit in a controlled manner, and the much touted H&S topping pattern finally started to play out.  Market is now testing a critical support area, 1.1610-30.  Some traders are talking about the projected move for a complete H&S pattern coming in at the 1.12s, but hearing talk overnight as well that there are option expiries and barrier options at 1.1600 into month end (which may slow down the selling near-term).  Technically speaking, the market is a “sell on rallies” now so long as it remains below the 1.1670s (previous Oct low and top of the downward sloping trend-line shown on our chart).  EURGBP looks like it won’t be able to help, with the cross testing 0.8850 to the downside again.  EURJPY, as we alluded to yesterday, completely failed at the 134.50 level (2yr high).  Selling picked up steam as the high 133s gave way in EURJPY, which now further hurts prospects for EURUSD.   No clues from USDCNH throughout all this as the pair was content to follow the broader USD move.  US 10s over German bunds now firmly above +2.00 (another EUR negative).  The net long EUR position must be feeling some pain this morning.  With CME open interest practically unchanged yesterday, it’s hard to tell how positions shifted (likely some longs bailed and some new shorts piled in by about the same amount).

GBP/USD - British Pound

Sterling traders are feeling demoralized this morning as Wednesday’s GDP rally was completely unwound yesterday in the wake of EURUSD selling.  Technically, we’re still in the range we mentioned last Friday, but we’re now testing the lower bounds of it.  Market currently sitting at the 61.8% Fibo of the Aug low to Sep high.  Next support  1.3040-50 (Oct low and lower bound of downward channel we have drawn).  Next support after that is 1.2980-1.3000.  A reminder than the Bank of England meets next Thursday.  EURGBP flows are a supportive factor right now while GBPJPY flows are not. 

Market Analysis Charts

USD/CAD Chart

EUR/USD Chart

GBP/USD Chart

Charts: TWS Workspace

About the Author

Erik Bregar - Trader

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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