- Markets pricing 95% chance for 75 bp Fed rate hike
- Global equity rout continues overnight, China is an anomaly
- US dollar opens higher, safe-haven currencies outperform
FX change at a glance
Source: IFXA Ltd/RP
USDCAD Snapshot: open 1.2922-26, overnight range 1.2868-1.2940, close 1.2899,
USDCAD rallied with the more aggressive US interest rate outlook. The fall-out from Friday’s hotter-than expected US inflation report sparked an avalanche of bond selling which wiped out everything in its path. The 10-year Treasury yield surged, stocks cratered, and oil prices slid.
Traders are ignoring the rise in Canadian Government bond yields and interest rate differentials that favour Canada. The BoC is likely to hike Canadian rates by 0.75% on July 13.
Oil prices are firm. WTI ranged in a $120.42-$122.33/b band overnight and is trading at $121.85 in NY. Prices are supported by anticipation of rising demand and lower supply due to Russian sanctions.
Canada Manufacturing Sales rose 1.7% m/m in April, a tick better than expected but below the 3.5% rise in March.
USDCAD technical outlook
The intraday USDCAD technicals turned bullish with the break above 1.2620 and the minor uptrend is intact while prices are above 1.2870. A break above 1.2960 suggests a retest of 1.3030 while a move below 1.2860 targets 1.2770, then 1.2660. Longer term, the uptrend from May 2021 on the weekly chart is intact with a move above 1.3000 suggests a rally to 1.3600.
For today, USDCAD support is at 1.2880 and 1.2840. Resistance is at 1.2950 and 1.2990. Today’s Range 1.2890-1.2990.
Chart: USDCAD 4 Hour
Source: Saxo Bank
G-10 FX recap and outlook
Fed Chair Jerome Powell is dancing to the market’s tune, and he has two left feet. Just three week’s ago, he said 50 bp hikes were likely in June and July but warned a 0.75 bp rate hike was possible if inflation failed to show signs of easing in coming months.
By saying “coming months” implies the decision as to whether inflation was easing would need two or more CPI reports. Boy, he is about to look foolish.
A host of top-tier investment bank economists have predicted a 0.75% rate hike at Wednesday’s meeting.
The CME’s FedWatch tool probability of a 75 bp hike is 94.5%.
Bond Traders are convinced that there may be more than one 0.75% rate hike. The US 10-year Treasury yield soared from 3.16% yesterday to 3.392% before easing to 3.33% in NY today.
Asia equity indexes plunged in the wake of the Wall Street debacle. Australia’s ASX closed down 3.55% while Japan’s Nikkei 225 lost 1.33%. China’s Shenzhen CSI 300 squeezed out a 0.79% gain. European bourses started positive, but all are deep in negative territory. S&P 500 and DJIA futures are posting gains. WTI oil prices is trading at the overnight session peak while gold continued to drift lower reaching to $1821.20 in NY.
US Producer Prices rose 10.8% y/y in May compared to 10.9% in April.
EURUSD rallied from 1.0398 in Asia to 1.0484 in Europe and are trading at 1.0458. The German ZEW Survey was modestly positive. The Survey noted “Financial market experts are less pessimistic about the economy. However, the economy is still exposed to numerous risks, such as the effects of the sanctions against Russia, the unclear pandemic situation in China and the gradual change of course in monetary policy.” The divergent ECB and Fed monetary policy outlook and bearish intraday EURUSD technicals suggest gains are capped in the 1.0500 area.
GBPUSD trades at the bottom of its overnight 1.2066- 1.2207 range. The UK employment data was weak as average UK wages fell at the fastest pace in two decades. The UK government injected fresh Brexit uncertainty when they passed the Northern Ireland Protocol bill which changes the deal with the EU.
USDJPY is above the middle of the overnight 133.88-134.81 range with gains from rising Treasury yields Support from dovish BoJ monetary policy and rising Treasury yields is offset by safe-haven demand for yen.
AUDUSD is trading in a 0.6884-0.6969 range due to broad US dollar demand and lower commodity prices. Both NAB Business Confidence and Conditions surveys were lower than in April but the data was largely ignored.
FX open, high, low, previous close as of 6:00 am ET
Source: Saxo Bank
Today’s Bank of China Fix 6.7482, Previous 6.7182
Shanghai Shenzhen CSI 300 rose 0.79% to 4,222.31, Previous close 4,189.35
Chart: USDCNY 1 month
Source: Yahoo Finance