Canada Inflation Rebounds

Source: Statistics Canada

FX markets nervous following Tuesday’s price action

Bank of Canada rate decision and quarterly MPR ahead

US dollar opens mixed but keeps most of yesterday’s gains

USDCAD open 1.2592-96, Overnight Range 1.2585-1.2622, close 1.2613

FX at a Glance

Source: IFXA/RP

FX Recap and Outlook

Canada inflation jumped in March which Statistics Canada downplayed by pointing out that” A significant proportion of this increase was attributable to a steep decline in prices in March 2020.”

CPI rose 2.2% y/y in March, but was a tick below the forecast for a 2.3% increase. USDCAD jumped to 1.2622 from 1.2605 following the news.

Financial markets were relatively complacent yesterday. FX volatility was low, and equity prices were consolidating gains near-record levels, preparing for another move higher. Then someone got spooked about COVID-19, and in the words of Ronnie James Dio, “when you listen to fools, the mob rules.”

Coronavirus concerns set off a wave of risk aversion sentiment yesterday, and FX markets haven’t recovered. India reported close to 2,000 deaths on Monday, a number that health experts and government officials believe to be vastly understated. Japan is reportedly ready to declare another state of emergency in Tokyo and Osaka due to a fourth-wave coronavirus outbreak.

The news knocked 10-year Treasury yields down from 1.607% to 1.559% and sent Wall Street stocks lower. Today, Asia equity markets closed with losses, led by a 2.03% drop in Japan’s Nikkei 225.

European equity traders appear less concerned about COVID-19 concerns in Asia because areas in the Netherlands, France, and Germany are planning to ease pandemic restrictions in the coming days and weeks.

EURUSD is in full retreat after touching 1.2079 yesterday. Prices dropped to 1.1999 in NY on lingering risk aversion sentiment . Some analysts believe EURUSD got ahead of itself yesterday as the Fed appears to have won the battle against bond bears. The US economic recovery is leaving the Eurozone in its dust, suggesting that EURUSD is vulnerable to further losses. The intraday technicals are bearish below 1.2030, looking for a break of 1.2000 to extend losses to 1.1940.

GBPUSD peaked at 1.4007 yesterday and is trading at 1.3908 in NY. Profit taking and negative risk sentiment are weighing on prices. UK inflation rose 0.7% y/y in March, easily beating the previous results. ING economists pointed out that this was the last inflation reading that compared rates to pre-pandemic readings. They expect CPI levels to double in April. GBPUSD risks further losses to 1.3830 below 1.3900 today.

USDJPY was battered by yesterdays shift into “risk-off” trades. The drop in US Treasury yields knocked USDJPY from 108.51 to 107.89 overnight. The sell-off was exacerbated by safe-haven demand for yen due to the Indian and Japanese coronavirus outbreaks.

AUDUSD fell to 0.7701 from 0.7815 yesterday due to the negative risk sentiment. Australia Retail Sales were better than expected (actual 1.4% m/m vs February -0.8%), but were not a factor. NZDUSD ignored the Q1 CPI report (actual 1.5% q/q vs forecast 1.4%), and tracked AUDUSD moves.

Yesterday, USDCAD rallied from 1.2481 to 1.2622 with gains exacerbated by stop-loss buying on the break of 1.2560. as prices action closely tracked AUDUSD and EURUSD. It hasn’t changed today. USDCAD is trading at 1.2626 in NY due to a falling oil prices and concerns ahead of the Bank of Canada interest rate statement and quarterly Monetary Policy Report (MPR) due today.

The BoC is expected to announce it is tapering its QE purchases. Traders will be looking for any hints that the BoC may bring forward the timing of its next rate increase.

The US data calendar is empty.

USDCAD Technicals.

The intraday USDCAD technicals turned bullish with the break above 1.2560, which will revert to support. The year-long downtrend line in the 1.2630-50 area is being tested. If broken, it shifts the focus to 1.2890 and suggests a short term bottom is in place at 1.2480. A break above 1.2660 targets 1.2890 A move below 1.2550 targets 1.2480. For today, USDCAD support is at 1.2550 and 1.2510. Resistance is at 1.2630 and 1.2660. Today’s Range 1.2550-1.2650

Chart: USDCAD daily