FX markets quiet ahead of FOMC meeting on Wednesday

Summary

• USDCAD: Dollar/CAD is meandering in the high 1.33s this morning after prices failed to hold gains above the 1.3380s on Friday, however there is a slight bid tone to the market as crude oil gives up its overnight gains.  This week promises to be full of headlines as we’ll have the much anticipated Fed decision on Wednesday, where traders are expecting another 25bp rate hike.  With this move largely telegraphed by chairman Powell for months now, the focus will likely be on the Fed’s economic and inflation outlook going into 2019.  One could argue some of today’s broad USD weakness, albeit mild, is some long USD position squaring ahead of a Fed speech that may have to sound more cautious.  We’ll know more on Wednesday at 2pmET, but until then we’ll get US November Housing Starts (tomorrow) and Canadian November CPI (early Wednesday).  The US Philly Fed survey for December comes out on Thursday.  Finally, the Friday before Christmas will bring US and Canadian GDP figures, US Durable Goods, US Core PCE, and Canadian Retail Sales data.  The speculative fund community marginally added to both long and short positions in USDCAD during the week ending Dec 11th, but it wasn’t anything to write home about.  The net USDCAD long position still remains intact as traders began the rollover of December contracts to March 2019.  If we look at the chart technicals this morning, we feel Friday’s pivot zone is still in play, albeit from a slightly higher level as the trendlines slope upwards…call it 1.3370-90.  Movement above should entice buyers while price action below may invite selling.

• EURUSD: Euro/dollar is walking back most of Friday’s bearish price action this morning, but there’s not a whole lot we can pin this to fundamentally.  The final Fed meeting of the year now looms large for markets and as we said above, one could make the argument that traders are positioning for a dovish hike.  The headlines out of Italy today have been positive, as the coalition leaders Di Maio and Salvini have agreed to the 2.04% deficit target that PM Conte proposed before the EU last week.  Italian bonds are trading steady in the +260bp range.  The Chinese yuan has been quiet to start the week, so we cannot garner any clues from there.  The EUR demand this morning has been broad based we might add (against most other currencies).  The speculative funds at CME trimmed shorts and added to longs, ever so slightly, during the week ending Dec 11th; but their net short position (11 weeks old now) still appeared well entrenched heading into the December/March rollover.  We think they remain in charge so long as the market stays below the 1.1380s.

• GBPUSD: Sterling is bouncing a little higher this morning too, and we would note Friday’s close back above the 1.2570 trend-line level as a positive precursor to today’s price action.  The UK headlines over the weekend seemed to center around reports of a second referendum on Brexit, but Theresa May’s government is pushing back against such rumors.  Expect some headlines from May today as she’ll once again appear before Parliament.  This week’s UK calendar will also give traders something to chew on, as we’ll get UK CPI data on Wednesday, UK Retail Sales and the Bank of England meeting on Thursday, followed by UK Q3 GDP figures on Friday.  The funds remain net short GBP (long USD), but as we mentioned last week, they are far less short than they were the last time we were trading at these levels in September.  New short positions were added during the move down through the 1.26s, but so too were new long positions.  We think GBPUSD tries to take advantage of any broad USD selling into the Fed meeting this week, and while we agree the Brexit saga is not over, we’re starting to wonder how much more bad news can this market price in.  We think Friday’s close was constructive for price and we’d be on guard for an upside break of the 1.2650-80 resistance zone.

• AUDUSD: The Australian dollar has been extremely quiet to start the week; trading between two trend-lines in the high 0.71s.  Friday’s close back above the 0.7170 level was constructive for price and while we think this halts the downward momentum a little bit, we think the “sell on rally” vibe will still remain so long as equity market risk sentiment remains sour.   The S&Ps are currently trading down 12pts and looked poised to attack last week’s lows.  Copper prices are slipping lower 1% this morning.  AUDUSD is not benefiting from the USD sales that are helping EUR and GBP.  This week’s Australian calendar features the November employment report on Wednesday night.  The speculative funds trimmed their net short AUD (long USD) to 45k contracts during the week ending Dec 11th, or back down to July’s levels.

• USDJPY: Dollar/yen is not having a fun start to the week as Friday’s sell-off in US equities continues to spill over into this week’s price action.  With the S&P futures now staring at last week’s lows again, we’re seeing USDJPY break chart support in the 113.40s and 113.20s in short order.  The Bank of Japan will be meeting late Wednesday/early Thursday to announce their latest update on monetary policy (no changes are expected).  The next chart support zone is 112.90-113.05.  The USDJPY longs at CME thought twice about positioning heading into the December/March rollover, and liquidated almost 20k contracts on the rally back up to the 113.50s. 

Tune in @EBCTradeDesk for more real-time market coverage.

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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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