May 20, 2022

  • China cuts 5 year LPR, boosting risk sentiment
  • Canada closed Monday for Victoria Day
  • US dollar poised to end week with sharp losses

FX weekly change at a glance:

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.2779-83, overnight range 1.278-1.2833 previous close 1.2823

USDCAD dropped in a renewed positive risk environment stemming from China’s stimulus actions. The PBoC 15 bp rate cut gave commodity prices a boost and sparked global equity market rally.

WTI oil prices remain firm at $112.44/barrel after trading in a $110.157/b-$112.58/b range overnight thanks to China’s stimulus actions.

The release of hotter than expected Canada inflation data, rising oil prices and improved risk sentiment are weighing on the currency. In addition, the CPI data means the BoC could act more aggressively in raising rates.

Canada is closed Monday

USDCAD technical outlook  

The intraday USDCAD technicals are bearish below 1.2830, looking for a move below 1.2770 to extend losses to 1.2740, then 1.2710. A breach of the bottom level targets 1.2655, the 61.8% Fibonacci retracement level of the April-May range. A move above 1.2820 would negate the downtrend.

For today, USDCAD support is at 1.2770 and 1.2730.  Resistance is at 1.2830 and 1.2880.  Today’s Range 1.2750-1.2830.

Chart: USDCAD 4 daily

Source: Saxo Bank

G-10 FX recap and outlook

Hallelujah! The Peoples Bank of China (PBoC) trimmed its 5-year Loan Prime Rate (LPR) by 15 bps to 4.45% from 4.60%, and the world’s financial market ills were cured. At least, that is what overnight price action would suggest.

The Shanghai Shenzhen CSI 300 and Hong Kong’s Hang Seng Indexes surged 1.95% and 2.96%. The news lifted Australia’s ASX 200 to a 1.15% gain. European traders embraced the news enthusiastically, with the German DAX index jumping 2.0% and the UK FTSE 100 rising 1.81%. US stock futures climbed, led by the S&P 500 futures jumping1.16%. Gold and WTI oil prices are marginally firmer.

Traders ignored the US 10-year Treasury yield bounce, which rose to 2.866% from 2.78% yesterday. Perhaps they believe that the May 9 peak of 3.20% is also the peak for this rate hike cycle.

The world is a nastier place, and positive risk sentiment may be misplaced.

North Korea is flinging missiles willy-nilly, and the white said it would “respond to provocations” if it occurs during Biden’s Korean visit.

China continues to be annoyed with American support for Taiwan. A Chinese diplomat undiplomatically said, “If the US side insists on playing the Taiwan card and goes further and further down the wrong road, it will certainly lead to a dangerous situation.”

China snubbed US sanctions on buying Russian oil and is busy topping up its Strategic Petroleum Reserves. The White House said China is not violating the sanctions, and that may be because the more oil China takes from Russia, the less they buy from Iran.

Russian President Putin has his knickers in a knot over the Sweden and Finland applications to join NATO. He also can’t be too happy with US plans to arm Ukraine with ship-killing munitions to end the blockade in Odessa.

Traders also ignored another round of hawkish Fedspeak. Yesterday, Kansas City Fed President Ester George said the Fed wouldn’t be dissuaded from raising interest rates because of equity market volatility. She said “I think what we’re looking for is the transmission of our policy through market’s understanding, and that tightening should be expected. So, it’s not aimed at the equity markets in particular, but I think it is one of the avenues through which tighter financial conditions will emerge.”

EURUSD rallied from 1.0556 to 1.0599 and it is trading close to the top in early NY. Prices are underpinned by broad US dollar weakness from the improved risk sentiment tone, and due to more hawkish comments from ECB officials. Policymakers Ignazio Visco, Madis Muller and Martin Kazaks suggested a July rate hike is called for due to inflation. EURUSD gains are just a correction while prices are below 1.0700.

GBPUSD consolidated yesterdays gains in a 1.2439-1.2495 range. Traders ignored the weak GfK Consumer Confidence data (actual -40 vs April -38), while taking solace from better than expected UK Retail Sales data. Bank of England Chief Economist Huw Pill said UK rates have further to rise due to soaring inflation. GBPUSD resistance at 1.2520 guards the longer term downtrend line at 1.2700.

USDJPY consolidated earlier losses in a 127.54-128.29 range as rising US Treasury yields competed with safe-haven demand for yen. Japan April CPI was 2.5% y/y compared to 1.2% previously.

AUDUSD traded in a 0.7004-0.7072 range with gains fueled by the improved risk tone after the PBoC     5-yr LPR cut. The Chinese stimulus gave commodity prices a lift. This weekend, Australia goes to the polls with bookies predicting Labour’s Anthony Albanese will be the next Prime Minister in a coalition government.

There are no US economic reports today.

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

Chart: Saxo Bank

China Snapshot –

Today’s Bank of China Fix 6.7487   Previous 6.7524

Shanghai Shenzhen CSI 300 rose 1.95% to 4,077.60

China surprises and cuts 5 year Loan Prime Rate by 0.15 bps to 4.45% from 4.60%, leaves 1 year LPR unchanged at 3.70%.

Chart: USDCNY 1 month

Source: Yahoo Finance