March 17, 2022

  • Equities rally despite hawkish Fed outlook
  • Bank of England hikes rates 0.25% -no surprise there
  • US dollar retreats despite higher Treasury yields

FX at a Glance 24 hours

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.2654-58, overnight range-1.2654-1.2697, close 1.2676

USDCAD has traded as frothily as a poorly-pour Guinness in a second-rate pub. Prices churned in a 1.2707- 1.2775 range in the aftermath of the FOMC statement, before closing at 1.2676.  USDCAD traded sideways in Asia then fell further in Europe to open in NY at its session low.

USDCAD is merely collateral damage in the ever-shifting global risk sentiment environment. Traders snubbed news that Canadian inflation soared 5.7% y/y in February, well above forecasts with even higher levels expected in the coming months.  Core inflation is rising as well and at 3.9% is nearly double the bank of Canada target.

No matter.  It is the US inflation and interest rate driving USDCAD direction, with a nod to the Ukraine invasion, and only economists and analysts care about Canadian economic reports

WTI oil prices have retraced its Russia/Ukraine invasion gains but remain within striking distance of $100.00/b.  Prices are supported by expectations that the loss of Russian crude will keep prices elevated as global economic growth resumes.

USDCAD technical outlook

The USDCAD intraday technicals turned bearish with the break below 1.2750 yesterday. A decisive move below the 1.2640-50 area will extend losses to 1.2550, the uptrend line from June 2021. A move above 1.2690 suggests furth gains to 1.2760.  The 1.2620-1.2890 range that has contained price action since January remains intact.  A failure to take out the bottoms, suggests a retest of the top.

For today, USDCAD support is at 1.2640 and 1.2610.  Resistance is at 1.2690 and 1.2750. Today’s Range 1.2650-1.2750

Chart USDCAD daily

Source: Saxo Bank

G-10 FX recap and outlook

The FOMC hit the panic button.  Fed Chair Powell and colleagues have gone from blissfully unconcerned about rising inflation just six months ago to paranoid.  They hiked rates 0.25% yesterday, predicted another six increases to follow before year-end, and four more hikes in 2023.  They also announced they would be reducing the size of their balance sheet (quantitative tightening).

Mr Powell tempered the hawkish tone by saying the US economy is strong and could easily withstand higher interest rates.

Equity markets agreed with him.  Hong Kong’s Hang Seng Index soared 7.04%, although it had far more to do with China’s planned stimulus and property developer support than the Fed.

Japan’s Nikkei 225 climbed 3.46%, while Australia’s ASX 200 closed 1.05% higher.  European stocks opened in positive territory, but those gains have evaporated in early NY trading.  S&P 500 futures were steady overnight but suggesting a lower open on Wall Street.

WTI oil prices gained 4.16%, while gold rose 1.71%.  The US 10-year Treasury yield faded from yesterday’s 2.224% peak to 2.124% in NY.

The market reaction to the hawkish Fed is a bit of a head-scratcher.  It is hard to believe that equity markets will sustain gains in the face of aggressively rising interest rates and while Russia runs over sovereign nations. Perhaps St Patrick’s Day has something to do with the strange reaction.

US economic reports were better than expected including weekly jobless claims (2114,000 vs forecast 224,000), and Philadelphia Fed Manufacturing Index (27.4 vs forecast 15).  They did not have any impact on FX.

FX risk sentiment was modestly positive due to comments (mostly from Ukraine) of progress in peace negotiations with Russia.  That sentiment is souring due to Russia’s lack of conciliatory comments and aggressive posturing by NATO officials.  Secretary-General Jens Stoltenberg said NATO has a responsibility to prevent the Ukraine conflict escalating further.

EURUSD traders were unfazed by the hawkish Fed.  Prices rallied from 1.0950 around FOMC announcement time to 1.1065 in Europe before they slid to 1.1040 in early NY.  One of the reasons for the rally is because traders determined the Fed’s actions were not as bad as feared and took profit on short positions.  However, the concerns about the ongoing Russia/Ukraine conflict limited gains.  Germany’s IFW institute cut its 2022 GDP growth forecast to 2.1% from 4.0% earlier.  Eurozone HICP inflation rose 5.9% y/y.  The EURUSD technicals are bullish above 1.0950.

GBPUSD broke the overnight high and rallied to 1.3210 before plunging to 1.3098.  The Bank of England announced a 0.25% rate hike in move designed to help prevent inflation expectations from becoming “embedded.” Deputy governor Jon Cunliffe wanted to leave rates unchanged. The BoE dialed back rhetoric about more rate hikes by writing further hikes “might” be warranted compared to “likely” in the previous statement.

USDJPY traded in a 118.50 to 119.08 range with prices retreating from the peak as the US 10-year Treasury yield slipped from 2.20% to 2.12 f4% before inching higher in NY. Tomorrow’s BoJ monetary policy meeting will be a non-event as monetary policy is expected to be left unchanged.

AUDUSD rallied from an FOMC low of 0.7214 to 0.7372 in early NY trading, powered by a mix of positive risk sentiment, rising commodity prices, and a stellar employment report.

Australia gained 77,400 jobs, well above the forecast for a gain of 28,300.  The unemployment rate dropped to 4.0% from 4.2%.

NZDUSD shrugged off a weaker than expected Q4 GDP report (actual 3.1% vs forecast 3.3% y/y) and rallied from an FOMC low of 0.6772 to 0.6853 in NY.

Chart of the Day: GBPUSD BoE announcement

Source:  Yahoo Finance

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

Chart: Saxo Bank

China Snapshot

Today’s Bank of China Fix 6.3406, previous 6.3800

Shanghai Shenzhen CSI 300 rose 1.96% to 4,237.70

Chart: China 1 month

Source: Saxo Bank