Powell shakes out doves by downplaying removal of "accommodative" language from Fed statement

Summary

• USDCAD: Dollar/CAD is trading significantly higher today when compared to yesterday’s opening levels.  Reports that the US is expected to publish the text of its agreement with Mexico “excluding Canada” this week saw the market shoot through trend-line resistance in the 1.2980 pre Fed.  Then we got the much anticipated 25bp rate hike as expected and a drop of the word “accommodative” in the Fed’s statement.  This led to broad USD selling initially, but this move completely reversed when Jerome Powell said dropping the language doesn’t signal a change in the Fed’s rate path.  The Fed’s dot plot still shows 1 more hike for 2018, three more for 2019 and one for 2020.  We think the Fed communication frustrated and perhaps hurt/shook out a number of market participants, which helps to explain why the funds liquidated positions for the most part yesterday (open interest declines in the major currency futures, with the exception of JPY).  USDCAD closed NY trade just shy of the next chart resistance level in the 1.3030s, aided on by broad USD reversal buying.  Some negative headlines, about Trump not liking the Canadian trade negotiators/threatening auto tariffs again, saw the market spike through the 1.3030s in early Asian trade and we’ve been building upon this positive momentum ever since.  Broad, EUR inspired, USD buying is also helping at this hour as traders fret about some last minute Italian budget turmoil (more below).  We think USDCAD has the technical strength now to continue higher for at least 100pts.  November crude oil struggled yesterday; trading down to support at 71.50 despite a smaller than expected build in EIA inventories.  Buyers stepped in though in late NY/early Asia to put the market back into a bit of a range here.  A break of 71.50 support would be USDCAD positive we feel.  The Fed’s Powell will be speaking to Rhode Island business leaders at 4:30pmET this afternoon.  The BoC’s Stephen Poloz will be speaking at the APEC annual meeting in Moncton at approx. 5:45pmET.  

• EURUSD: Euro/dollar is on the backfoot this morning after some Fed volatility and last minute Italian budget worries combine to damage the charts in just 12hrs.  The knee jerk reaction the Fed’s statement saw EURUSD bust through and regain chart support in the 1.1760s, but then Jerome Powell threw cold water on that bullish development by dialing back the significance of dropping the word “accommodative” in his press conference.  This saw the market fall quickly back below the 1.1760s, creating a lackluster NY closing pattern.  Italian budget worries then resurfaced all of sudden at the start of European trading today, with reports that the budget announcement would be delayed because League leader Salvini decided to support Di Maio in a last minute push for spending that would create a 2.4% budget deficit next year, as opposed to the below 2% figures that finance minister Tria has been selling all week.  Italian stocks sold off, Italian 2yr bonds traded lower, the BTP/Bund spread blew out 10bp, and EURUSD fell swiftly to the next support level at the 1.1700 level.  According to the latest headlines, a cabinet meeting will occur later today at 4pmET, and while one would think this would calm markets a little bit, the damage has been done and Reuters has since cited sources that Tria has threatened to resign.  All this leaves EURUSD on the defensive ahead of a potentially headline-heavy NY session ahead.  US Durable Goods was just reported +4.5% for August vs +2.0% expected.  The ECB’s Mario Draghi will be speaking at the ESRB conference at 9:30amET.  The ECB’s Lane will deliver the keynote at 1:30amET.  The ECB’s Praet will speak at 5pmET at King’s College, and of course we’ll have headlines out of Italy.  Over 1blnEUR in options expire at the 1.1700 strike this morning (10amET) and another 1.4blnEUR roll off tomorrow at 1.1750.  We think any break below 1.1690 will see traders target the next support level in the 1.1620s.  A move back above the 1.1760s is need to restore positive momentum.  USDCNH saw some selling in late Asia overnight as the PBOC drained liquidity to the tune of 60bln today, but the market regained the 6.87s in short order, keeping the upward bias in tact (EURUSD negative).

• GBPUSD: Sterling has a similar chart pattern to EURUSD over the last 12hrs; rallying above 1.3190 resistance post Fed statement, and crashing back below it post Fed press conference, but the NY close yesterday was decidedly more negative.  The market closed below the key upward sloping trend-line in the 1.3170s.  An attempt was made in Asian trade overnight to regain the level, but selling came in when this failed.  Looking over at the EURUSD chart at the European open provided another excuse to sell, and so traders quickly pushed GBPUSD down to the next support level in the 1.3110s.  We’ve seen a bounce here now into the NY open, but the Durable Goods beat is tempering enthusiasm a bit.  All eyes will be on BoE Governor Carney at 10amET, when he speaks at the same event as Draghi.  We think yesterday’s negative technical development post Fed could spell trouble for GBPUSD here, but a close below 1.3100 would be needed to confirm.  We think some month end EURGBP might stem the selling a little bit.

• AUDUSD: The Aussie looks like it tripped out short stops above the 73 handle during the broad USD selloff that followed the release of the Fed statement yesterday.  The move back below 0.7300 and the 0.7280s after the press conference however, like EURUSD and GBPUSD, was a technically negative development and led to a lackluster NY closing pattern.  The RBNZ rate hold created a bit of gyration for NZD and AUD, but we would argue it was a non-event.  AUD traders have been content to follow EURUSD since, moving the market to its lows on the week.  This morning’s break of chart support in the 0.7230s and now the 0.7220s post Durable Goods is not helping the sentiment either.   December copper has broken back below support in the 2.81 area.

• USDJPY: Dollar/yen took a stab at breaking above the 113.10s yesterday’s post Fed, but this failed when the USD reversed broadly after the press conference.  Overnight trading has been volatile, with the market chopping between support at 112.50s and resistance in the 112.80s.  We’ve now firmly broken back above the 112.80s after the beat on US Durable Goods, which puts the buyers back in charge.  Tonight’s Japanese calendar is eventful, featuring Tokyo CPI for September, the Japanese employment report for August, Industrial Production figures for July, and Retail Trade data for August.  All this occurs between 7:30 and 8pm ET.  We think US stocks/yields need to catch up here to USDJPY (as the NY closes yesterday were quite negative), otherwise USDJPY might face a negative headwind.

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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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