Photo: Microsoft Stock Photo

April 19, 2023

  • UK inflation rises and Eurozone inflation declines.
  • Traders re-evaluating early rate cut calls for US.
  • US dollar opens with gains compared to Tuesday-commodity currencies underperform.

FX at a glance

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.3429-33, overnight range 1.3387-1.3440, close 1.3388

One in five Canadian workers are planning to go on strike.  They are all government employees, represented by PSAC, and they are very unhappy. 

They are unhappy being paid high wages and they are even unhappier with being forced to accept a gold-plated, defined benefit retirement package. They are also annoyed because none of the union members lost a job or a penny of income during the pandemic. They feel disrespected because they get to retire about 2.4 years earlier than worker-bees in the private sector. All the unhappiness will go away if the government would just give them a 13,5% wage hike, over three years.

The Parliamentary Budget Office reported that the average cost for a full-time federal employee was $125,300 in 2021. 

Gee, if only everyone could be so unhappy. The economy would boom, and Canada would be the envy of the world.

And just to ensure that Canadians are inconvenienced even more, Bank of Canada Governor Tiff Macklem reminded markets that, although he expects inflation to continue to fall, the risks to his view are tilted to the upside.

WTI dropped from $81.16/b to $79.99/b due to broad US dollar strength on the prospect of higher US interest rates, for longer. A steeper drop below $78.70 would spark a ga-filling plunge to $75.70/b, the peak level just before Opec announced its surprise production cut on March 31.

Chart: WTI oil daily

Source: Saxo Bank

USDCAD Technical Outlook

The intraday technical flipped to bullish overnight with the break above the downtrend line from March 24 (1.3405). A decisive breach above 1.3450, suggests a short-term bottom is in place at 1.3305 and opens the door to a test of resistance at 1.3550.  A drop below 1.3380 shifts the focus to 1.3305.

For today, USDCAD support is at 1.3390 and 1.3340.  Resistance is at 1.3450 and 1.3490.

Today’s range 1.3405-1.3490

Chart: USDCAD 4 hour

Source: Saxo Bank

G-10 FX recap and outlook

Traders are erring on the side of caution today, after a round of hawkish Fed-speak, mixed US data, and a barrage of US quarterly earnings reports. They no longer expect the Fed to cut interest rates in July but assign a 64% chance for a November cut.

Yesterday, St Louis Fed President James Bullard said the recent data and sticky inflation supports another rate hike, while dismissing talk of a recession, due to the strength of the labour market.

There is a dearth of US economic data on tap leaving quarterly earnings reports to drive risk sentiment and the US dollar’s direction.

EURUSD traded defensively, falling from 1.0983 to 1.0927 in early NY trading. EURUSD outperformed GBPUSD as Eurozone inflation, at 6.9% y/y is far lower than that of that of the UK.

GBPUSD rallied to 1.2471 from 1.2403 then gave back all the gains by the time NY opened.  The catalyst for the rally was UK inflation rising 10.1% y/y in March, rather than the 9.8% expected. Core-CPI also beat expectations and rose 6.2% y/y (forecast 6.0%). Higher food prices were largely to blame for the increase. The odds of the Bank of England hiking rates by 25 bps on May 11 rose to 97.0%.

USDJPY added to this week’s gains, rising from 133.96 to 134.7 in an almost-straight line move overnight. The gains are due to firmer US Treasury yields (10-year Treasury yield 3.62% compared to 3.507% on Monday) and supported by an uptick in Industrial production and Capacity Utilization data.

AUDUSD traded in a 0.6186-0.6216 range with prices weighed down by softer commodity prices. Traders ignored Westpac Leading Index details (Mar 0.0 m/m vs Feb 0.1% and traded cautiously alongside broad US dollar lethargy.

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

Source: Saxo Bank

China Snapshot

Bank of China Fix:  6.8731, Previous: 6.8814

Shanghai Shenzhen CSI 300 fell 0.90% to 4124.56.

Treasury Secretary Janet Yellen will discuss US economic priorities for China on Thursday.

Chart: USDCNY 1 month

Source: Bloomberg