April 25, 2022

  • China’s CSI 300 index drops nearly 5.0% on Beijing Covid fears
  • Marcon wins French election, EURUSD traders do not care
  • Safe-haven flows boost US dollar

FX change at a glance: 24 hours

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.2744-48, overnight range 1.2709-1.2767, previous close 1.2710

USDCAD soared as a wave of “risk-off” sentiment washed over markets crushing equity and oil prices in the process.

FX traders have fixated on the Fed’s hawkish pivot, especially after Chair Powell went from ignoring rising prices to pretending, he has been on top of the situation all along. The CME Fedwatch tool has an 83% probability that US rates will be 2.75-3.0% by Dec 14, which is 2.5% above current levels.

BoC Governor Tiff Macklem said interest rates were going higher. The BoC is likely to match or even exceed US rate increases, which should undermine USDCAD gains. But not today. Traders are focused on Wall Street and oil prices.

WTI oil dropped from $101.75/barrel to $96.89/b on China Covid fears and the higher US rate outlook. However, losses should be limited due to supply disruptions from Russia sanctions, issues in Libya.

Governor Tiff Macklem addresses the House Finance Committee, and he is expected to repeat that Canadian rates are going higher.

USDCAD technical outlook  

The intraday and medium term technicals are bullish, supported by the break above the 100 day MA at 1.2673.  Further gains above 1.2790 target 1.2950.  However, Bollinger band and RSI studies suggest the rally is running out of steam. Failure to extend gains decisively above 1.2790 risks a quick retrace to 1.2670 and then 1.2624, the 200 day moving average (MA).

For today, USDCAD support is at 1.2710 and 1.2670.  Resistance is at 1.2790 and 1.2850.  Today’s Range 1.2690-1.2790

Chart: USDCAD daily

Source: Saxo Bank

G-10 FX recap and outlook

Someone opened the 2022 version of Pandora’s box and unleashed a myriad of woes.  Chief among them is “Vlad the Mad Putin,” who dispensed with the pretext of “peace talks” saying they were at a “dead-end, “and according to the FT, is going for a massive land grab.  Saddam Hussein did the same thing in 1990, but world leaders got together and chased him from Kuwait back to Bagdad.  Saddam didn’t have nukes, though.

Twenty-six Covid cases were reported in Beijing, China and authorities began a massive testing program.  Markets fear that Beijing (population 2.5 million) may suffer the same fate as Shanghai and be locked down.

Chinese stock markets cratered, with the Shanghai Shenzhen CSI 300 plunging nearly 5.0% and USDCNY soaring to 6.5730.  The currency is catching up to recent US dollar demand against the majors and a sharply narrowing of Chinese bond/US Treasury yield spreads.

EURUSD popped at the Asia open, then plunged from 1.0847 to 1.0708 in early European trading.  News that French President Emmanuel Macron won the presidential election and the German IFO Survey stabilized, were not factors.

 IFO wrote, “The ifo Business Climate Index rose to 91.8 points in April, after 90.8 points in March.  This was due primarily to less pessimism in companies’ expectations.  Their assessments of the current situation are minimally better.  After the initial shock of the Russian attack, the German economy has shown its resilience.”  The EURUSD technicals are bearish with the break below 1.0800 setting the stage for a drop to 1.0550.

GBPUSD is suffering from the wave of broad US dollar demand and lingering negative sentiment from Friday’s weaker than expected economic data.  Retail Sales fell 1.4% m/m in March while Services PMI dropped from 62.6 to 58.3 in April.  Friday’s break below support at 1.3000 was nasty and opens the door to further losses to 1.2500.

USDJPY dipped thanks to the US 10-year Treasury yield retreating to 2.84% after flirting with 3.00% last week.  The currency was undermined by last weeks talk that the US and Japanese might intervene to buy yen.

Australia and New Zealand were closed for ANZAC Day but that didn’t stop AUDUSD from dropping to 0.7146 from 0.7264 or NZDUSD sliding to 0.6584 from 0.6638.  Broad-based US dollar demand, risk aversion, and lower commodity prices weighed on the currencies.

The are no top tier US economic reports today, leaving FX market direction determined by Wall Street.

Chart: Yield spread- US and China bonds


FX open, high, low, previous close as of 6:00 am ET

Chart: Saxo Bank

China Snapshot

Today’s Bank of China Fix 6.4909 (Previous Fix 6.4596)

Shanghai Shenzhen CSI 300 fell 3.94% to 3,814.91

A spike in Covid cases in Beijing started a mass-Covid testing program for millions of residents, sparking fears of heavy-handed, Shanghai-style, lockdown measures.

Traders spooked after Chinese authorities allowed CNY to fall sharply, as the currency places “catch-up” with broad G-10 US dollar strength and eroded the spread between US Treasuries and Chinese benchmarks.

Chart: China 1 month

Source: Yahoo Finance