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2018-01-18 08:15

Bank of Canada's dovish 25bp hike later deemed more neutral. Mid-day USD meltdown saved by Apple headlines. Option expiries containing action in early NY trading.

Source: EBC Trading Desk

Summary

  • USDCAD: The Bank of Canada raised overnight interest rates yesterday by 25bp to 1.25% (as expected), and while the tone of the 10am press release come off as a little dovish (“uncertainty about the future of NAFTA is weighing on the outlook” and “some continued monetary policy accommodation will likely be needed”), Stephen Poloz’s press conference was more neutral in tone (with the most important headline in our opinion being “we don’t know whether end of NAFTA would mean end of tighter rates”).  With that, the initial spike lower/reversal higher in USDCAD to 1.2500 was faded by mid-day.  Then we saw some heavy USD sales come in across the board as GBPUSD tripped stops above 1.3850 and US yields resumed their march higher.  This pressured USDCAD down into the 1.2370s (well below trend-line support in the 1.2420s), and the prospects were looking bleak at that point for the rest of day.  Then around 2pm we got a somewhat upbeat Beige Book report and more importantly, some surprise headlines out of Apple (AAPL) about repatriation of $250bln USD back to the US over the next five years.  This development literally saved the USD across the board, allowing USDCAD to recover completely back above the important 1.2420 support level.  USDCAD now sits comfortably between 1.2430 and 1.2470 with traders unwilling to move the market much in either direction after yesterday’s wild ride.  We’ve seen some broad based USD selling again overnight, as the EURUSD, GBPUSD and AUDUSD charts try to repair themselves, but this is not impacting USDCAD much as EURCAD and GBPCAD rally above near term resistance.  Combine this neutralizing effect with reports of a 780mln USD option expiry at 1.2460 today, and we feel USDCAD will be a bit directionless today, but we would note yesterday’s technical recovery on the charts as a positive backdrop.  With yesterday’s pre-announcement price action tripping stops above 1.2500 in USDCAD, we feel key near term resistance is now 1.2540.  Support today remains in the 1.2420s.  Should it break again, it puts the mid 1.23s back in focus.

  • AUDUSD: The Aussie was a star again yesterday, continuing its bounce off trend-line support in the 0.7950s.  The market broke the 80 handle to the upside during the broad USD selling mid-day yesterday, but came in decisively after the Apple headlines.  The stronger than expected Dec Australian employment report, released last night at 7:30, failed to bring back buyers (which is a bit concerning), but some broad based USD selling, since Europe stepped in, is helping AUDUSD stay above that key 0.7950 support level again today.  Copper is quiet.  The upbeat Chinese GDP and Industrial Production numbers (reported overnight at 2am) is also helping AUD as China is a major export market for Australia.  We feel AUDUSD continues to look strong technically, so long as 0.7950 holds.  With no major Australian data on tap until Jan 31, AUDUSD will likely continue to trade off the broader USD theme.

  • EURUSD: The Euro had a roller-coaster ride yesterday as well, making attempts to repair its daily bearish reversal pattern mid-day, only to have it fail completely by day’s end after the Apple headlines and the subsequent broad-based USD rally.  Yesterday’s daily candle goes down on the books as a bearish outside candle, which is not great technically, and it means trend-line resistance in the 1.2230s becomes more of a focal point today (this level supported price action yesterday, but is now capping it).  Failure to regain the 1.2230s in any meaningful way today would invite a resumption of EURUSD selling in our opinion.  Reuters is reporting 2bln EUR in option expiries today between 1.2180-1.2220 which could add weight into 10am.  EURGBP fell apart yesterday as GBPUSD surged, and that’s adding a little weight to EURUSD here.  EURJPY and USDCNH are positive influences today however, with the former getting support from broad based JPY selling and the latter from the more upbeat Chinese data reported overnight.

  • GBPUSD: Sterling was all the rage yesterday, continuing its bounce off support in the 1.3750s and surging through chart resistance at 1.3825 mid-day.  It’s hard to point to anything fundamental behind this move, but it’s not surprising given the bullish technicals that reasserted themselves following Friday’s upside breakout.  As mentioned on Monday, there’s not much technical resistance on the charts until 1.4050 (and even that is light at best because of the extremely wide daily range created after the Brexit referendum result in June 2016).  We’re hearing talk from option traders about demand for upside strikes (which is not surprising), and yesterday’s move has all the hallmarks of a good old fashioned stop hunt (which can have a cascading effect on prices).  Everything fell apart after the Beige Book and the Apple headlines however, and the close was not encouraging for GBPUSD bulls (back below trend-line resistance in the 1.3850s).  Traders are trying to repair things now as the USD gets sold more broadly again, and so GBPUSD is back above this level as we write.

  • USDJPY: Dollar/yen did well yesterday, supported initially but improving technicals, a big recovery in US stocks, and a slow but steady resumption of the rally in US yields.  The Apple headlines and the subsequent broad-based USD rally was icing on the cake going into the NY close, improving the technical picture further for USDJPY.  Support now checks in at 111.00-111.05.  Resistance is now 111.40-111.55.  The lack of a resolution on the US government shutdown continues to underpin US yields, as is reports of China and Japan buying less US treasuries this past November.  The widely reported option expiries at 110.80 and 111.00 will likely influence the trade towards 10am (with $3bln USD notional rolling off).  We feel USDJPY range trades a bit now ahead of the BOJ meeting next week (Jan 23).

     

Market Analysis Charts

USD/CAD Chart

AUD/USD Chart

EUR/USD Chart

GBP/USD Chart

USD/JPY Chart

USD/CNH Chart

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.

Interested in creating a custom foreign exchange trading plan? Contact Us or call EBC's trading desk directly at 1-888-728-4918.


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Posted By Rachel Butler at 08:15 AM