June 22, 2022

  • Powell begins two-day testimony to Congress
  • Canada May Inflation scorching hot 7.7% y/y
  • US dollar rebounds on safe haven demand

FX change at a glance

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.2978-82, overnight range 1.2919-1.2995. close 1.2918

Inflation is scorching hot in Canada. Statistics Canada reported consumer prices rose 7.7% y/y, the largest yearly increase since January 1983. Even worse, analysts expected monthly core CPI to dip to 0.3% from 0.7% in April. Instead, it jumped to 0.8% m/m, which is the fastest pace on record.

Statistics Canada noted that “Price pressures continued to be broad-based, pinching the pocketbooks of Canadians and in some cases affecting their ability to meet day-to-day expenses.”

USDCAD barely budged on the news. Perhaps there will be a delayed reaction as today’s inflation data may be hot enough to spur the Bank of Canada to raise interest rates by 1.0% at the July 13 meeting.

It is not a wild guess. The Bank of Canada estimate for the neutral rate is 2.0-3.0%. The Bank of Canada benchmark rate is 1.5%, so a 1.0% rate hike merely removes the accommodation from monetary policy.

Such a move would spur a USDCAD sell-off, but that won’t be today. Instead, all eyes are focused on Fed chair Powell’s testimony to congress that starts today.

USDCAD rallied from 1.2918 to 1.2995 on the heels of renewed Covid concerns from China which helped send oil prices tumbling.

WTI dropped from $109.65/barrel at yesterday’s close to $104.21/b in Europe, a 5.0% decline, after traders feared rising global recession risks would reduce demand. The anticipated supply shortages from the Russian oil embargo are more a European thing then a global problem as China and India have increased Russian oil purchases by 55% in May. The Indian government ordered oil companies to load up on discounted Russian crude. WTI technicals warn that a break below $101.60 may extend losses to $85.60/b.

Bank of Canada Senior Deputy Governor Carolyn Rogers will participate in a Globe and Mail chat discussing “Growth and Risk – The future of the Canadian economy.”  There is no media availability and no audience Q and A. Either whatever she says is a big secret or it is just a regurgitation of earlier remarks.

USDCAD technical outlook

Yesterday’s intraday USDCAD bearish outlook didn’t last. USDCAD support in the 1.2905 area held and the subsequent rally above 1.2950 shifted the focus to 1.3000.  The currency pair is locked in a 1.2900-1.3050 range. The long term uptrend line is in the 1.2500 area, while gains are capped by resistance in the 1.3050-80 zone.

For today, USDCAD support is at 1.2905and 1.2860. Resistance is at 1.2990 and 1.3020. Today’s Range 1.2890-1.2960.

Chart: USDCAD 4 hour

Source: Saxo Bank

G-10 FX recap and outlook

Early NY traders are pushing back against the negative risk sentiment seen in Asia and Europe. SP500 futures are down 1.6% but have clawed back some of their overnight losses.

Today’s theme is global recession. Markets fear rising interest rates in the major G-10 nations (except Japan) will drive the world economy into a recession. Those fears helped lower commodity prices and sparked a demand for safe-haven US dollars.

A recession is a significant fear of central bankers, which explains why policymakers in Europe, the UK, Canada, and the Fed, are spending a lot of time downplaying the risks. US Treasury Secretary Janet Yellen is doing her part. She said that the traditional measure of two quarters of negative growth equalling a recession has typically worked, but recessions are alike. That’s a tacit way of saying, “this time is different.”

Fed Chair Jerome Powell’s take on recession risks will be a key focus at today’s Congressional testimony.

He is expected to reiterate that inflation is his biggest fear, and he will raise rates aggressively to beat it into submission while assuring Congress that inflation will return to target in 2024.

EURUSD is chopping about in a 1.0470-1.0538 range. Selling pressure due to renewed Covid measures in China has faded and traders are focused on the upcoming Powell testimony. However, the single currency is rangebound in a 1.0400-1.0600 band. Prices are supported by the recent round of hawkish comments from ECB policymakers, but gains are capped by a weak Eurozone growth outlook, exacerbated by the Russian/Ukraine war.

GBPUSD traded in a 1.2162-1.2279 range and is close to the top in NY supported by UK inflation data. May CPI rose 9.1% y/y, as expected but higher than April’s 9.0% increase. Producer Price Index measures were all higher than expected. Widespread Labour unrest may limit gains due to strikes having a negative impact on the economy.

USDJPY slid to 135.82 from 136.70 but remains elevated because of the ultra-dovish BoJ monetary policy stance.

AUDUSD dropped from 0.6971 to 0.6883 due to risk aversion from renewed Covid concerns in China and lower commodity prices. NZDUSD fell to 0.6246 from 0.6312

The US economic calendar is light, leaving Fed Chair Powell’s testimony to provide market direction.

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

Source: Saxo Bank

China Snapshot

Today’s Bank of China Fix 6.7109 Previous 6.6851

Shanghai Shenzhen CSI 300 fell 1.27% to 4.270.62, Previous close 4,325.57

Renewed Covid woes weigh on stocks. Macau closed public services until Friday. The city of Zhuhai closed some entertainment venues.

Chart: USDCNY 1 month

Source: Yahoo Finance