CAD traders caught off guard by Poloz speech. AUD holding gains. EUR quiet. USDJPY longs licking wounds

Summary

• CME OPEN INTEREST CHANGES 12/14: AUD +14250, GBP +10321, CAD +3057, EUR +42008, JPY +11446

• ECONOMIC DATA UPDATE: US Retail Sales come in at +0.8% MoM in November, beating expectations.  The Japanese Tankan Large Manufacturing Index survey comes in at 25, slightly beating expectations as well.  On deck for today: Canadian Existing Homes sales and US Industrial Production for Nov (expectations for +0.3% MoM)

• CENTRAL BANK UPDATE: After the ECB kept monetary policy unchanged yesterday morning, Mario Draghi offered an upbeat growth outlook near-term for Eurozone GDP and inflation, but he didn’t sound very positive about the longer term (2019 and beyond).  There wasn’t much to take away from his comments, but there certainly wasn’t a hawkish tone.  The more market moving central bank speak yesterday came from the BOC’s Stephen Poloz, who threw off traders with rather hawkish commentary on Canada’s monetary policy outlook.  After last week’s dovish rate hold from the Bank of Canada where Stephen Poloz said the central bank would “continue to be cautious” on rate moves, Poloz changed his tune slightly.  In a speech at the Canadian Club in Toronto yesterday, Poloz said “The economy has made tremendous progress over the past year, and it is close to reaching its full potential. We are very encouraged by this, and we are growing increasingly confident that the economy will need less monetary stimulus over time”.  Poloz also defined the word “cautious” by saying “Cautious is not a code word. It’s just like anybody driving in a snow storm. You need to drive a little slower and you watch all the signs along the way to make sure you stay on the road.  To be honest, his speech could have been interpreted dovishly or hawkishly depending on who you spoke to, but it seems traders focused on his more upbeat tone and the “less monetary stimulus” headline that hit the newswires.

• USDCAD: Dollar/CAD traders largely ignored the beat from US Retail sales and they also weathered the EURCAD selling storm post ECB press conference, but they were caught completely off guard by Stephen Poloz’s speech later in the session.  USDCAD plunged 125 pts rather quickly, smashing through support levels, but then had a spectacular recovering toward the NY close.  That recovery brought the market back up above key support in the 1.2760-1.2770 area, which is where we now sit.  If we look at the charts, yesterday’s move hurts the positive technical outlook we’ve been presenting as of late, and puts the market back in a range.  The EURCAD chart recorded a bearish outside reversal yesterday, which is another negative development.  The GBPCAD chart is not looking so hot either, as the cross has now firmly broken below 1.7125.  The US/CA 2yr yield spread has backed up further to +26bp.  All in all, it’s been a quick turn of events for USDCAD traders in the last 24hrs.  The key today will be how the market responds to the support level we mentioned.

• AUDUSD:The Aussie is consolidating recent gains fairly well, probing a little bit higher during early European trading today, now off the highs, but still within yesterday’s tight NY range.  While the AU/US 2yr yield spread has backed up a bit today, copper continues to rally, easily breaking through resistance at 3.05 yesterday.  Support lies at 0.7640 again today.  Resistance 0.7690-0.7000.  If AUDUSD can close around current levels for the week, this will be a positive technical development on the weekly charts.

• EURUSD: So the Euro came off a bit after the ECB’s hold on monetary policy yesterday.  Mario Draghi press conference was a bit of a mixed bag, but the better than expected headline from US Retail Sales (reported at the same time) was clearly USD bullish, and so we felt that had a bigger influence on market activity yesterday.  Yesterday’s EURUSD move wasn’t great technically speaking, putting us back below the key level we mentioned yesterday (1.1810-1.1820).  The market has found support at the 1.1760-70s however.  There’s more support at 1.1740-50.  Market chatter is that we have $2bln+ EUR option expiry today at 1.1800, and so this will likely provide a near-term bid and contain action.  The US/GE 10yr yield spread has ticked up a bit today (now +206bp).  EURGBP is also rallying quite strongly as we write, which is also supporting EURUSD.

• GBPUSD: After a rather dull trading session yesterday post BOE, sterling has come alive this morning and traders are selling again.  There hasn’t been much out of the EU summit other than the EU leaders formally agreeing to approve the 2^nd phase of Brexit negotiations.  While it’s not surprising the EU would say this, perhaps traders were expecting a little bit more than a simple re-hash of last week’s headline.  It’s all about monitoring the wires for GBP traders today.  Today’s break below support at 1.3410-20 (a level we mentioned yesterday) is technically negative.  That level now acts as resistance that must be regained before positive GBPUSD momentum can return.

• USDJPY: There’s been no love for USDJPY ever since the FOMC meeting on Wednesday, and that’s largely because US yields have backed up significantly since the announcement and press conference.  Our sense is that US bond traders don’t have faith in the Fed’s 2018 dot plot for rate hikes, given the Fed’s admission to being perplexed about lower than expected inflation.  There have also been some negative headlines in the last 24-48hrs concerning US tax reform.  All this is dampening the mood in USDJPY and the fact the market has taken out some key support levels in the process is not helping.  Support today 112.00-112.20.  Resistance 112.60-112.70.  

Market Analysis Charts

USD/CAD Chart

AUD/USD Chart

EUR/USD Chart

GBP/USD Chart

USD/JPY 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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