Broad USD strength reverses after PBOC hikes reserve requirement for Yuan forward trading. EURUSD sees volatility amid Italian budget nervousness. US NFP payrolls on deck.
Summary
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USDCAD: Dollar/CAD continues to drift in the familiar 40pt downward channel that has contained price since Tuesday’s negative outside day. USDCNH and EURUSD have led the overnight action, with the former bursting higher after a higher USDCNY fix from the PBOC and the latter collapsing on budget fears in Italy. This helped USDCAD inch higher to test the top end of the channel, but all this is reversing now as the PBOC just announced an increase in the reserve requirement for FX forwards trading to 20%. USDCNH is crashing lower and the broader USD is following. Next up is the US non-farm payrolls report (NFPs) at 8:30amET. Traders are expecting +190k jobs for July and wages to grow +2.7% YoY and +0.3% MoM. We think a weak number will likely see this broad USD selling wave intensify, which means USDCAD breaks support in the 1.2990s and guns for the 1.2940-50s. We think a better than expected number will help the market rebound into the 1.3050s. September crude oil has a bullish setup this morning following yesterday’s massive outside day pattern and overnight news about Sinopec suspending American crude imports: http://www.euronews.com/2018/08/03/chinas-unipec-suspends-us-oil-imports-amid-growing-trade-row-sources. Next week gets off to a slow start with the Civic Day holiday on Monday, then we’ll get Canadian Building Permits for June (Wednesday), Canadian Housing Starts and US PPI for July (Thursday), and the July reads on Canadian Employment and US CPI (Friday). The 20yr August seasonals patterns for CAD and crude oil futures are mixed, with the former suggesting mild CAD weakness (USDCAD strength this month) and the latter suggesting continued gains in the energy complex.
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EURUSD: Euro/dollar was well offered for most of yesterday and oversees trading today, but we’re trading in the positive now following the move from the PBOC to make Yuan forward trading a little more capital intensive. EURUSD slumped earlier as traders now fret about the Italian budget. More here: https://uk.reuters.com/article/uk-italy-budget/italy-ministers-to-meet-on-budget-as-markets-fret-idUKKBN1KO0U3. Italian 10s blew though 3%, BTPs over Bunds surged to +260bp, and Italian 2s surged past 1.20%, but all these moves are reversing now too. Expect EURUSD to continue higher into chart resistance at 1.1640-50 should the NFPs disappoint. Expect a retest of support in the 1.1560s (which held prices early), and possibly lower (1.1530s) should we get a blowout number. Next week is light on the Euro data front, with just the June figures for German Factory Orders (Monday) and German Industrial Production and Trade (Tuesday). The 18yr seasonal pattern for EUR futures suggest mild weakness for the month of August.
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GBPUSD: Sterling followed EURUSD lower earlier today, with the weak NY close yesterday below support in the 1.3030s helping the cause. Like EURUSD, it also bottomed around the 4am hour as Italian assets regained their composure and, like almost everything else at this hour, it too is benefiting from the PBOC’s move and the drop in USDCNH. We think a weak NFP report sees GBPUSD regain the 1.3030s (arresting the downtrend temporarily), while a strong report will see us resume lower. The next major chart support after the London lows (1.2970) is 1.2920-50. EURGBP is stuck at the support at 0.8900 today, not offering much clues. Next week is big for UK data (all of it coming on Friday): Q2 GDP, June Manufacturing/Industrial Production figures, and the June Trade Balance. The 20yr seasonal pattern for GBP futures suggest continued weakness this August.
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AUDUSD: The Aussie had a miserable NY close yesterday, falling back below the 0.7370s which we said would help the technical picture yesterday. An attempt to regain that level failed in early European trade and then the EURUSD rout + the USDCNH surge took AUDUSD briefly below yesterday’s lows. Downward sloping trend-line support in the 0.7350s and a calming in Italian assets after the 4am hour saw us bottom out, and a surge in copper prices following the PBOC move just now has seen us rocket higher towards the 74 handle. Next up are the US NFPs. Support is 0.7370s, then 0.7340-50. Resistance is 0.7420. Next week features the RBA interest rate decision (Tuesday early morning ET), Australian Westpac Consumer Confidence data (Tuesday night ET), and the quarterly released RBA Monetary Policy Statement (Thursday night ET). The 20yr seasonal pattern for AUD and copper futures suggest continued weakness this month.
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USDJPY: Dollar/yen trades directionless today ahead of the US payrolls data, after yesterday’s rebound back above the 111.40s arrested the downward momentum from early Wednesday. A large option expiry looms today at the 112 strike ($1.7bln). The JPY crosses have been quiet today, but EURJPY is not looking to hot technically now sub 129.50. Support today is 111.30-40. Resistance is 111.95-112.15. We’ll get an updated read on the net long USD (short JPY) position at CME later today (as of 7/31); a position that has taken some heat of late given the USDJPY decline. Next week features Japanese June Machinery Orders (Wednesday night ET) and Japanese Q2 GDP (Thursday night ET). The 20yr seasonals for JPY suggest gains this month.
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About the Author
Exchange Bank of Canada (EBC) is a Schedule 1 bank based in Toronto, Canada. EBC specializes in foreign exchange services and international payments providing a wide range of services to financial institutions and corporations, including banknote foreign currency exchange, travelers' cheques, foreign currency cheque clearing, foreign currency bank drafts, Global EFT and international wire transfers through the use of EBC's innovative EBCFX web-based FX software www.ebcfx.com.