Everyone's blaming it on trade tensions. Could it be something more?

SUMMARY

ANALYSIS

USDCAD

Dollar/CAD had a volatile day yesterday; initially falling lower on Powell’s dovish remarks before Congress, then spiking higher following the Bank of Canada’s more dovish than expected hold to interest rates, and then falling lower again as crude oil prices surged higher.  Everyone’s blaming it on trade tensions, and by everyone we mean global central bankers.  Jerome Powell’s testimony and the FOMC Minutes released yesterday basically re-affirmed the Fed’s party line that increased trade tensions, slowing global growth and low inflation are the drivers that are going to force them to begin a new rate cutting cycle later this month.  “Cross-currents” have re-emerged, but the Fed won’t go into detail.  “Uncertainties” and “other developments” that have come in “since our June meeting” continue to weigh on the US economic outlook, but the Fed won’t tell us what they are.  Even the Bank of Canada referred to global trade tensions, in a more concerned manner, in its announcement yesterday.  Stephen Poloz, like Jerome Powell, cited a decent domestic economic outlook, but it seems he too is now caving and falling into line with the global bond market’s desire for more accommodative monetary policy.  So what are the central bankers not telling us?  Could off-shore USD funding markets (money markets) be experiencing some sort of stress in terms of liquidity?  The continued inversion of the LIBOR and Eurodollar futures curves would suggest so.  What could be causing this stress?  Could it be the slow motion train-wreck which is Deutsche Bank?  Could it be the real possibility of a “no-deal” Brexit?  Could the rush into global bonds be less about falling inflation expectations and more about a demand for high quality collateral in the anticipation of a negative shock?  Whatever it is, interest rate markets continue to reflect an anxiety that goes way beyond the threat of a few tariffs being levied here and there in our opinion.  Central bankers appear more and more powerless to control the bond markets, and more and more inept when it comes to forecasting and learning from past policy failures, but yet they have to exude confidence when speaking before us…and so what we’ve been seeing lately in our opinion is a delicate PR dance.  How do we sound positive and at the same time explain what the bond markets are saying without causing a panic?  The “Fed rate cut trade” was back on yesterday, for all tense and purposes, and we’ve since seen some big moves higher in US bonds, gold and Eurodollar prices, and broad USD selling, but all these markets are retracing a bit as we enter NY trade because of a slightly hotter than expected US core CPI measure for June, which was just reported at 8:30amET (+2.1% YoY vs +2.0% exp).  The broader USD, which initially saw selling after Powell remarks, is now trying to claw back some of its overnight losses.  We think USDCAD, in particular though, will remain under pressure so long as the market stays below the 1.3070 level.  A move above could invite some short covering however, so we’d be aware of that.  Jerome Powell is expected to deliver similar testimony before the US Senate Banking Committee this morning at 10amET.  We’ll also have a ton of other Fed-speak to comb through, with Williams speaking at 11:15amET, Bostic at 12:15pmET, Barkin at 12:30pmET, Quarles at 3:30pmET and Kashkari at 5pmET. 

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EURUSD

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AUG GOLD DAILY

GBPUSD

Sterling has galloped over 100pts higher since Powell re-affirmed the bond market’s desire for rate cuts yesterday morning.  Traders are now grappling with chart resistance in the 1.2550-85 as NY trade gets underway today, but it appears the swift selloff in EURGBP off the phycological 0.9000 level and rising 10yr gilt yields (now back above 0.80%) appear to helping to keep the market bid.

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EURGBP DAILY

AUDUSD

A dovish Powell indeed came to the rescue for the Australian dollar yesterday.  The Fed chairman’s prepared remarks saw AUDUSD surge back above the 0.6930-40 support level.  Trend-line resistance at 0.6970 then gave way in overnight trade broad, follow-though, USD selling swept over markets.  We’ve seen a downside test of 0.6970 following the US June CPI figures, but buyers were quick to defend the level.  We think this bodes well for AUDUSD technically heading into the end the week, provided Powell doesn’t shock the markets today (US Senate testimony is expected to be the same as what was delivered to the US House Financial Services Committee).

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USDJPY

Dollar/yen was never able to challenge the 109.05 level yesterday as Powell’s remarks quickly knocked US bond yields and the broader USD lower.  So too went USDJPY, and the market broke two key support levels heading into the NY close (108.70 and 108.40).  This helped precipitate follow through selling, in our opinion, when Asia woke up and decided to sell USD broadly as well.  Buyers stepped in however at horizontal chart support in the 107.80 as European trade got underway today, and we’ve since seen them push the market higher still after the stronger than expected US CPI report for June.  We think USDJPY trades with a range-bound to bid tone today as almost 2blnUSD in options expire here between 108.30 and 108.50.  US yields also appear to be feeling some upside pressure from the rally in German bund yields to 1 week highs.

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DEC 3-MONTH EURODOLLARS DAILY

Charts: TWS Workspace

About the Author

Erik Bregar - Director, Head of FX Strategy

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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