July 21, 2022

  • Surprise! ECB hikes 50bps
  • Italian Prime Minister Draghi resigns posing new risks for EU
  • US dollar rebounds from yesterday’s open

FX at a glance:  

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.2914-18, overnight range 1.2862-1.2925, close 1.2881

USDCAD opened defensively yesterday then quickly turned offensive, rising from1.2857 to 1.2905, before closing at 1.2881. 

News of another hot inflation report (actual 8.1% y/y vs 7.7% in May) was greeted with a yawn.  The Bank of Canada had already reacted to the data when they hiked rates by 1.00% last week.  The currency pair traded sideways and continued to do so overnight.

Falling WTI oil prices contributed to USDCAD gains.  WTI gave back all of its gains for the week when prices fell from $103.75/b yesterday to $94.63 in NY today.  The drop in prices is driven by the slight easing of energy concerns in Europe, reduced demand due to a weaker “summer driving” season, and from concerns around slowing demand from China.

USDCAD will continue to drift with the tide of broad US dollar sentiment.

USDCAD technical outlook

The USDCAD technicals neutral inside a 1.2820-1.3060 range with prices trading just below the mid-point of that band. The intraday outlook is negative while prices are below 1.2940, looking for a break of 1.2860 to test 1.2820.  A move above 1.2940 puts 1.3060 in play.

For today, USDCAD support is at 1.2860 and 1.2820.  Resistance is at 1.2940 and 1.2990.  Today’s Range 1.2860-1.2940

Chart: USDCAD 4 hours

Source: Saxo Bank

G-10 FX recap and outlook

We are deep into the dog days of summer (July 3-August 11). Fed policymakers have stopped barking until next Wednesday’s FOMC meeting, Russia is taunting the EU with gas shipments, and Italian politics returned to chaos.

Gold bulls felt rather smug when prices soared above $2,000/ounce following the Russian invasion of Ukraine. Bombs and bullets are good for gold. Self-righteous, born-again, inflation-fighting central bankers, not so much. Fears of sharply higher US interest rates drove XAUSUD below support at $1780.00 in early July, and prices are just above support that stretches back to April 2020. A move below this level opens the door to the pandemic low of $1465.00.

The ECB raised interest rates for the first time in 11 years today. The 0.50%. hike was hike was more than most expected and EURUSD rallied from 1.0190 to 1.0260 on the news.. The statement justified the move saying “The Governing Council judged that it is appropriate to take a larger first step on its policy rate normalisation path due to updated assessment of inflation risks and the reinforced support provided by the TPI for the effective transmission of monetary policy. 

The press conference to explain the decision doesn’t begin until 7:00 am PDT.

There is a lot of other background noise, including Russia, restarting gas pumps into the Nord Stream 1 pipeline, although the flow is only 40% of capacity.

Italian politics are in chaos, a common bi-annual state. That led to rising Italian bond yields and weaker European stock markets

GBPUSD dropped from 1.2002 to 1.1922 in Europe and is in the middle of that band in early NY trading. Traders are awaiting the ECB meeting results while keeping an eye on the UK political leadership race. Traders are also biding their time until the August 10 BoE monetary policy meeting.

USDJPY rallied from 138.00 to 138.88 after the BoJ left interest rates and monetary policy unchanged, as expected. The BoJ repeated that it will continue to cap the 10-year JGB yield at 0.25% and paid lip service to the currency level.

AUDUSD traded defensively overnight due to broad US dollar strength with prices falling from 0.6915 to 0.6861. NZDUSD traded similarly in a 0.6187-0.6240 band.

Today’s US data includes weekly jobless claims (forecast 24,000) and Philadelphia Fed Manufacturing Survey (forecast 0, previous -3.3)

Chart of the Day Gold (XAUUSD) daily

Source: Saxo Bank

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

Source: Saxo Bank

China Snapshot

Today’s Bank of China Fix 6.7620, previous 6.7465

Shanghai Shenzhen CSI 300 fell 1.11% to 4,236.06

China is a tad unhappy with Democrat House Speaker Nancy Pelosi’s plans to visit Taiwan.  The Chinese Foreign Minister said, “China urged the U.S. to not arrange the visit and stop official exchanges, stop creating tensions across the Taiwan Straits, and take concrete actions to fulfill the U.S. commitment of ‘not supporting Taiwan secessionism.  If the U.S. insists on going its own way, China will take firm and forceful measures to firmly safeguard national sovereignty and territorial integrity. The U.S. must bear all the consequence of the visit.”

Chart: USDCNY 1 month

Source: Bloomberg