Clock Ticking Down to Fed Time

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April 28, 2021

Treasury yields rise into FOMC meeting

Canada Retail Sales expected to climb 4.0% in March

US dollar opens with modest bid

USDCAD open 1.2404-08, Overnight Range 1.2384-1.2416, close 1.2402

FX at a Glance

Source: IFXA/RP

FX Recap and Outlook

The US dollar inched higher overnight. Traders pared positions ahead of this afternoons FOMC meeting and President Biden’s 9:00 pm address to Congress.

The major Asian equity indexes closed with modest gains. European bourses are buoyant, but Wall Street futures are flat. 10-year Treasury yields surged to 1.643% from 1.581% yesterday, while oil and gold prices are a tad firmer.

President Biden will unveil a $1.8 trillion spending plan that reportedly includes money for child care, education and paid leave. The programs will be funded by raising taxes on incomes over $400.000 and more aggressive tax enforcement.

FX markets ignored reports that US Navy ships in the Persian Gulf fired warning shots at Iranian navy vessels. Heroically, the American’s avoided hitting anything. How would the US react if Iranian Navy vessels cruised the Gulf of Mexico?

Russia continues to taunt Ukraine and NATO. The Russian Navy had a series of combat exercises in the Black Sea on Tuesday.

The FOMC meeting is expected to be a “non-event.” Analysts believe the Fed will be content to await more data before discussing QE tapering. However, that was also the conventional wisdom ahead of the BoC meeting last week. That’s when policymakers decided that a surging COVID-19 crisis in many provinces was the ideal backdrop to announce interest rates would increase sooner than expected.

EURUSD dropped to support at 1.2060 after closing in NY at 1.2092 due to higher 10 Treasury yields and caution ahead of the FOMC meeting. The German Confidence Survey was weaker than forecast at -8.1 compared to the forecast of -3.5. The EURUSD uptrend channel from the end of March continues to guide prices higher.

GBPUSD slid on the back of broad-US dollar demand sparked by higher Treasury yields, but the losses halted at the 1.3860 uptrend line support area. If the FOMC lives up to advance billing and leaves monetary policy unchanged, GBPUSD may challenge resistance in the 1.4010 area.

USDJPY climbed from 108.69 to 109.0y, underpinned by higher Treasury yields. The Japanese government is considering more aid for retailers impacted by forced closures due to COVID-19. March Retail Sales rose 1.2% m/m compared to the forecast of 0.6%.

AUDUSD was the weakest major G-10 currency overnight, although the loss was only 0.27%.

Australia Q1 CPI was lower than forecast, rising 1.1% y/y instead of 1.4% y/y. That news and broad USD dollar demand weighed on the currency. NZDUSD opened in NY unchanged.

WTI oil prices climbed to $63.33 in early NY trading, supported by Goldman Sachs analysts forecasting higher crude prices and higher demand.

USDCAD traded quietly but maintained its bearish bias, supported by higher oil prices. Prices dropped below the overnight low of 1.2404 to touch 1.2384 in NY trading. The slightly hawkish Bank of Canada outlook was reiterated by Governor Tiff Macklem in his address to the House of Commons Finance Committee yesterday.

He repeated earlier remarks saying, “we are hopeful that there will be less labour market scarring and lost capacity than we earlier feared, and we have revised up our estimate of the economy’s potential output.” He also hedged his view saying, “I want to emphasize that considerable uncertainty surrounds our estimate of potential output.”

Canada Retail Sales are expected to have risen 4.0% m/m in February. The FX reaction may be muted as the data is stale, and the latest COVID-19 restrictions suggest March data will be weaker.

USDCAD Technicals

The intraday USDCAD technicals are bearish . Prices continue to consolidate losses following the drop below 1.2460 and while below this level, another test of 11.2380 is likely. A break above 1.2460 would extend gains to 1.2510. For today, USDCAD support is at 1.2380 and 1.2340. Resistance is at 1.2420 and 1.2460. Today’s Range 1.2360-1.2440

Chart: USDCAD 4 hour