USD retreats as US 10s look over 2.73 and then reverse lower. Trump State of Union in focus. Key close for EURUSD ahead.

Summary

• USDCAD: The breakout higher in US yields is the dominant theme in FX markets for the second day in a row now.  US 10s made another attempt to break higher overnight in Asia as the Nikkei and the S&Ps fell apart, trading above 2.73 briefly, and the broader USD followed suit.  Then US yields reversed lower as European traders stepped in, leading to selling in the broader USD once again.  USDCAD followed this broader theme, trading higher through Asia and early European trading.  It then failed at the chart resistance we pointed out yesterday (1.2370-1.2380), and has had a miserable retreat lower as the broader USD sees selling once again.  Trend-line support today checks in at 1.2315, and the market bounced off of it successfully in the last couple hours.  This downward sloping support level continues to support the market for a 5^th day in a row, and we feel it will be relevant again today as it marks the last line of defense in USDCAD (from a technical analysis perspective) before much lower prices in our opinion.  The market needs to trade above 1.2370-1.2380 to arrest the range-bound to lower trend that we’re in.  On the fundamental front, the 6^th round of NAFTA talks concluded yesterday with not much fanfare.  While Robert Lighthizer (US trade representative) slammed Canada on the WTO complaint, he sounded positive saying “some real headway was made here”.  Even Canada’s foreign affairs minister Freeland had an upbeat tone, saying “without being overly optimistic, I am heartened by the progress”.  All of this is net-net USDCAD negative (as there was a lot of fear regarding NAFTA going into these talks...which hasn’t panned out).  Next up for USDCAD traders is US Consumer Confidence at 10amET, Trump’s State of the Union tonight (9pmET) and the FOMC meeting tomorrow at 2pmET.  We feel USDCAD continues to trade in a range-bound to lower pattern with 1.2315 supporting and 1.2380 resisting.  EURCAD and GBPCAD flows have been supportive in the last few hours.

• AUDUSD: The Aussie looked like it was going to crack overnight when broad USD buying came in during Asia.  The market lost trend-line support (0.8080s), and sold off towards the support level we mentioned yesterday (0.8030-0.8050), but then it rebounded sharply higher as US yields and the broader USD backed off.  This technical recovery puts us right back above the 0.8080s as if nothing happened, but it’s technically positive once again and keeps AUDUSD in good shape for the NY session.  The market has been dying for some Australia-specific news of late, and we finally get some tonight at 7:30pm (Q4 CPI).  Then of course, all eyes will be glued on Trump’s speech.  The Aussie’s price pattern today correlated well with copper prices as well.  Copper took a nose dive as the Nikkei and S&Ps dipped, and it has recovered most of its losses as we write (supporting AUD once again).

• EURUSD: The Euro was looking shaky going into mid-day yesterday, as support broke at 1.2370, but the next level we mentioned (1.2340s) held the market together and we saw a decent NY close all things considered.  The brief overnight excitement over US yields breaking higher again saw EURUSD test the 1.2340s again but the market held this support level...yet again.  Combine this with a bullish outside reversal on the 3am hourly chart, US yields subsequently backing off their highs, and a decent Q4 Eurozone GDP number (reported at 5am) and we have a rally underway, which is all of a sudden testing key resistance in the 1.2430s.  The 1.2430s represents trend-line resistance, which capped trade yesterday.  If the market were to close firmly above it today, it would make the daily candle a bullish engulfing candle (which is bullish), and it would put a target on the huge option expiry touted for tomorrow’s NY cut.  (Reuters is still reporting 3.5bln EUR at 1.2500 set to expire at 10am tomorrow).  USDCNH price action is supporting EURUSD today as well, as the market failed miserably in the mid to high 6.34s after two attempts higher in the last 24hrs.  It has given up now, trading back into the 6.32s and back within a down-ward sloping price channel.  The flows from the EUR crosses continue to be a mixed influence over the last few days.  EURGBP flows were supportive of late after the break higher above 0.8780, but the cross is running into trend-line resistance now in the 0.8820, pressuring EUR.  EURJPY flows, on the other hand, were a negative influence of late, but today’s sharp hammer reversal higher above 135 is helping EUR.  We feel the EURUSD’s NY close today will be key to setting the trend for tonight and tomorrow for the broader USD, and at this point it feels like the market has the momentum it needs for a bullish close.

• GBPUSD: Sterling didn’t have a great day yesterday, closing well below the 1.41 support level, and while that opened the door for further selling overnight, buyers stepped in quickly at Fibo support in the low 1.40s when the broader USD turned lower.  Some blamed the overnight move lower on some negative headlines surrounding Theresa May (Whitehall report leaked showing negative Brexit implications and her rejection of the EU’s proposed deal on the Brexit transition period), but none of this matters now as GBPUSD is over 130 pts off its lows, and back above the important 1.41 trend-line level.  Like EURUSD, there’s potential here for a very positive NY close as well.   EURGBP flows have helped GBPUSD in the last few hours as 0.8820 got rejected.  A sharp snap back in GBPJPY, after a plunge lower overnight, is also helping GBP right now.  Governor Carney speaks before the Lords’s Economic Affairs Committee at 10:30amET.

• USDJPY: Dollar/yen traders ought to be down-right miserable.  The brief excitement over US 10s hitting 2.73 overnight helped the broader USD, but not USDJPY.  Then we saw US yields back off a bit, the USD go offered again, and USDJPY seemed to react more to that.  The market is now back below the 108.90-109.00 area, after closing back above it yesterday (which is negative technically).  We’re seeing some broad JPY selling against EUR and GBP over the last few hours, but not even that is helping USDJPY.  We can’t say we’re all that surprised by this price action.  This overextended USD long (JPY short) position continues to drag on this market, with traders now likely using any rallies to cut losses.  The global equity sell off seems to be picking up a little steam here as we finish writing, and this doesn’t bode well for USDJPY either (JPY’s risk-off, safe haven status might kick in).  Next line of defense on the charts is 108.20.

Market Analysis Charts

USD/CAD Chart

AUD/USD Chart

EUR/USD Chart

GBP/USD Chart

USD/JPY Chart

USD/CNH Chart

EUR/GBP Chart

EUR/JPY Chart

March Copper

March Nikkei

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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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