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2018-07-12 08:15

Swift reversal lower in crude oil rescues USDCAD after hawkish rate hike from BoC. Broad USD rally ensues with USDJPY breakout/USDCNH strength leading. USD backing off this morning after in-line US CPI.

Source: EBC Trading Desk

Summary

  • USDCAD: The Bank of Canada raised overnight interest rates by 25bp to 1.5% yesterday; a policy move that was largely expected by market participants.  The tone of the press release was upbeat, but what was more notable in our opinion was the downplaying of risks from trade tensions, and with that USDCAD plunged lower in what could be argued was a more hawkish (less dovish) that expected announcement.  The move lower extended to the 1.3060 support level we talked about yesterday and then bounced going into the release of the weekly DOE oil inventory report.  While the report showed a much larger than expected draw in crude oil inventories, leveraged funds bailed leading to a cascade lower in oil prices that saw USDCAD swiftly reverse back above the 1.3130s and up towards the 1.32s.  Stephen Poloz’s press conference at 11:15am didn’t help in our opinion, as we felt his tone was more neutral and there was no indication of forward guidance.  August crude oil closed considerably lower yesterday (-5%), which meant USDCAD closed at its highs.  Trend-line resistance in the 1.3180 was surpassed, and it is this level that the market is retesting so far today after peaking at 1.3219 in Asian trade overnight.  The overall risk tone to markets is good this morning as Trump speaks at the NATO summit, so we’re see equities up and USDCNH down.  The broader USD is trading mixed though, with emerging market FX currencies trading higher but EURUSD, GBPUSD and AUDUSD trading flat to weaker.  Today’s North American calendar features US CPI for June (just released in-line with expectations +2.9% YoY, +2.3% YoY on core), a speech from Fed speaker Harker (12:15pm) and a US 30yr bond auction (1pmET).  Yesterday’s auction of US 10yr paper went very well we’re told.  With the 1.3180s just giving way and what appears to be a rather run-of-the-mill CPI report (nothing to really get worried about on the inflation front), we think USDCAD trades with a weaker to range-bound tone today, potentially retesting support in the 1.3130s.

  • EURUSD: Euro/dollar continues to drift lower today after a miserable NY close yesterday.  The quick spike higher we saw in early NY trade yesterday, following headlines about ECB rate hike timing, quickly fizzled at trend-line resistance in the 1.1750s.  Then the selling picked up steam as technical levels gave way.  Crude oil smashed down through the 73 level, USDJPY broke to new swing highs, USDCNH broke back above 6.70, and before we knew it we had a broad USD rally (USDCAD reversing higher too at this point as well).  EURUSD took out support again in the 1.1720s, then 1.1690, and closed well below those levels.  An attempt was made in overnight trade to regain 1.1690, but that has failed and so traders have pushed the market down to the next support level (1.1650s) ahead of the US CPI report.  We think EURUSD trades with a range-bound to higher tone today, with the 1.1660s supporting and yesterday’s support levels capping (1.1690-1.1720).

  • GBPUSD: Sterling had a similar trading pattern to EURUSD yesterday, bouncing a touch higher around the NY open but ultimately trading lower with the broad USD buying wave that accompanied the sell-off in crude oil.  GBPUSD closed well below trend-line support in the 1.3220s, which has led to some further selling overnight, but buyers appear to making a stand now ahead of the Theresa May’s Brexit white-paper, which was just released.  More here: https://www.theguardian.com/politics/2018/jul/12/brexit-white-paper-seeks-free-movement-for-skilled-workers-and-students.  The reaction in GBPUSD so far has been muted, perhaps because there’s not a whole lot more in it that Theresa May hasn’t already articulated in some shape or form.  The key now in our opinion is how EU negotiators react.  GBPUSD has punched above the 1.3220s post US CPI (which bodes well for a retracement back to the 1.3270s), but the momentum hasn’t been strong so far.

  • AUDUSD: The Aussie also followed EURUSD yesterday, bouncing a tad off support in the 0.7380s early on, but later breaking back down through that level when EURUSD lost the 1.17 handle.  The swift reversal lower in crude oil, gold and CAD didn’t help either.  Selling stalled in the 0.7360s during Asian trade however as the “risk” tone up-ticked (S&P+Nikkei futures up, USDCNH down), and we’re now seeing buyers step up during early NY trade.  The 0.7380s have been regained post US CPI but resistance abounds (0.7405, 0.7425-35).  Copper has bounced 1% higher today following yesterday’s plunge lower.

  • USDJPY: Dollar/yen continues its explosive rally higher today, baffling some traders as to the reasons why.  We would argue most of this move continues to be driven by bullish technicals, which we started pointing out last week.  The Nikkei’s strong rally overnight and the broader improvement in risk appetite, despite yesterday’s blip, continues to support as well.  We’re seeing some broad USD selling post US CPI and with that USDJPY has backed off a tad.  Expect support on dips to 112.00-112.10.  The next meaningful resistance on the daily chart is 113.50, and so we think this rally still has some room to go.

Tune in @EBCTradeDesk for more real-time market coverage.

 

Market Analysis Charts

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Charts: TWS Workspace


About the Author

Erik Bregar

Erik Bregar - Director, FX Trading

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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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