October 17, 2022

  • UK Chancellor trashes Kwasi’s mini-budget, GBP rallies
  • European stocks trading higher, S&P futures rally
  • US dollar opens mixed, GBPUSD outperforms

FX at a glance: 

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.3813-17, overnight range 1.3784-1.3877, close 1.3882

USDCAD may see some homegrown volatility this week with the release of the BoC Business Outlook Survey (BOS) today, and inflation on Wednesday.

Analysts expect the BOS to show that wage and price plans have peaked, and that longer-run price expectations fell. If so, they expect the BoC may be a tad less hawkish at the October 26 meeting.

Don’t bet on it.

BoC Governor Tiff Macklem isn’t. Last week he said “The economy is clearly overheated. You can see this is very evident in labor markets where we’ve got very high vacancies. Businesses are certainly telling us that they’re having trouble finding enough workers to meet the demands of all the clients.”

He went on to say “We have yet to see a clear turning point in underlying inflation. Inflation continues to broaden across goods and services.”

The Governor is very concerned about inflation expectations noting “we certainly are seeing more dispersion among survey respondents with more people thinking that inflation could stay higher for longer”

He will get more clarity on inflation Wednesday.  CPI is expected to dip to 6.8% y/y from 7.0% in August, while Core-CPI ticks down to 5.6% from 5.8%.

Many analysts suggest that the BoC will not hike rates as high as the Fed because inflation is lower in Canada.  That view has underpinned USDCAD but price action continues to be dictated by S&P 500 moves.

WTI oil prices peaked in Europe at $86.88/b, dropped to $85.22/b just before NY opened and are trading at $86.21.  The top side is capped after China’s Xi Jinping suggested there would be no change in the zero-covid policy which suggests Chinese economic growth will continue to be slow which will lower global demand.  The downside is underpinned by the planned production cuts that start November 1.

USDCAD Technical outlook

The intraday technicals are bearish below 1.3850, looking for a break below 1.3760 to extend losses to 1.3690, the uptrend line from October 5.  A decisive break below 1.3690 targets 1.3650 then 1.3440.  A move above 1.3850 extends gains to 1.3910 then 1.3960.

For today, USDCAD support is at 1.3750 and 1.3710.  Resistance is at 1.3860 and 1.3890. Today’s range: 1.3750-1.3840

Chart: USDCAD 4 hour

Source: Saxo Bank

G-10 FX recap and outlook

The British pound is centre stage today.  GBPUSD rallied from 1.1181 in early Asia to 1.1330 in NY after new Chancellor of the Exchequer Jeremy Hunt basically scrapped his predecessors “mini-budget.”  He delayed “indefinitely” a 1% cut to income tax, sharply scaled back the energy support plan (from 2 years to six months) and said the government was reversing “almost all” the tax measures from the mini budget.

Elsewhere, the US dollar remained supported by comments on Saturday from St Louis Fed President James Bullard.  He suggested there may be two more 75 bp rate hikes this year.

Asia stock markets closed lower except for those in China.  Japan’s Nikkei 225 index fell 1.16% while Australia’s ASX 200 dipped 1.04%.  European traders are modestly optimistic with the UK FTSE 100, German Dax, and French CAC ahead by around 0.40%.  S&P 500 futures are 1.11% higher, thanks to the dip in the US 10-year Treasury yield from 4.015% to 3.951%, and better than expected BoA earnings.

EURUSD traded in a 0.9717-0.9770 range with prices tracking broad US dollar sentiment.  Hawkish comments from ECB officials failed to give the single currency any upward traction. Governing council Member Martins Kazaks supports a 75 bp hike at the October 27 meeting and another 50 or 75 bps in December. His colleague Bostjan Vasle agreed saying “Given both headline and core inflation dynamics, I think we will continue with interest rates increases at our next two meetings,” he said. “I think that our most recent pace for hikes is also appropriate at our next two meetings.

USDJPY traded in a 148.43-148.89 range with the topside capped by threats of intervention by Finance Minister Shunichi Suzuki.  He said we “can’t allow speculative, excessive FX moves” and that officials were watching forex with a high sense of urgency.

AUDUSD traded in a 0.6204-0.6263 band with price action tracking broad US dollar sentiment.

NZDUSD traded in a 0.5553-0.5613 range with prices getting some support from expectations of higher interest rates with the RBNZ’s OCR rate reaching 5.0% by mid-2023.

The US data calendar is empty.

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

Source: Saxo Bank

China Snapshot

Today’s Bank of China Fix: 7.1095, previous 7.1088

Shanghai Shenzhen CSI 300 rose 0.10% to 3846.41

Chart: USDCNY 1 month

Source: Saxo Bank