March 27, 2023

  • Markets pricing 70% chance Fed pauses rate hikes in May.
  • German Ifo Index rises to 93.3 from 91.1 in February.
  • US dollar drifts lower overnight, opens mixed from Friday.

FX at a glance

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.3729-33, overnight range 1.3702-43, close 1.3744

USDCAD retreated on the back of improved risk sentiment and broad-based US dollar weakness is a fairly subdued overnight session.

USDCAD is also on the defensive because markets are pricing that the Fed will pause rate hikes in May which served to reduce the CAD/US 2-year bond spread from -162.4 on March 2 to -111.2 this morning.

USDCAD will continue to track external influences, but gains will be hampered if WTI oil prices can take out resistance at $71.60/barrel and rally to $74.50.

USDCAD may get a bit of guidance from a speech by Deputy Governor Toni Gravelle on Wednesday.

USDCAD Technical Outlook

The intraday USDCAD technicals are bullish while prices are above 1.3640, supported by Friday’s move above the two-week downtrend line at 1.3710, and target resistance at 1.3850.

The uptrend line from February is intact above 1.3640, which if broken suggests a retest of support at 1.3440.

For today, USDCAD support is at 1.3690 and 1.3640.  Resistance is at 1.3740 and 1.3790.

Today’s range 1.3660-1.3740

Chart: USDCAD 4 hour

Source: Saxo Bank

G-10 FX recap and outlook

Kermit said it wasn’t easy being green and investors are not finding it easy to believe the Fed’s interest rate outlook.  The FOMC hiked rates by 25 bps last week and indicated more rate hikes were in the pipeline. 

Traders disagree.

The CME FedWatch tool indicates 69% odds that the Fed hits the brakes on rate hikes in May, and a 67.3% chance rate will be cut at the June 26 meeting.  The 2 year Treasury yield is close to 1% below that of the 3 month yield is further indication that the market view will prevail.

Minneapolis Fed President and noted hawk, Neal Kashkari admitted the banking stresses were a concern and would be a factor in the “hike-pause” debate going forward.

Banking system woes have come off the boil in but are still simmering. There are no shortages of articles showing steep declines in small bank deposits in favour of large “too -big-to-fail” banks and short-term government securities.  Deutsche bank shares are recovering after being pummeled on Friday as investors realize it is not a basket-case like Credit Suisse.

First Citizens Bank is reportedly buying around $72 billion of Silicon Valley Assets for $16.5 billion while First Republic shares have risen 33% in pre-market trading today.

Asian equity indexes closed on a mixed note.  Japan’s Nikkei 225 and Australia’s ASX 200 index finished with modest gains while the Hong Kong Hang Seng index slumped 1.75%. 

European bourses are enjoying a “relief rally.”  The German Dax index gained 1.33%, leading the charge higher. S&P 500 futures are up 0.68 while gold dropped 1.37%. (as of 5:45 am PDT)

EURUSD plunged Friday, falling from 1.0838 to 1.0723, then consolidated the losses in a 1.0746-1.0781 range overnight.  Prices derived a bit of support from the German ifo data. Business Climate, Current Assessment, and Expectations were all higher than in February which the Institute says, “shows the German economy is stabilizing.”  The EURUSD technicals are bearish below 1.0790, looking for a test of support at 1.0690.

GBPUSD is clawing back Friday’s risk-aversion losses, rising from 1.2220 to 1.2272. Sterling is underpinned by the improvement is global risk sentiment and the lingering impact of last week’s UK growth upgrade from the Bank of England.  However, the technical picture remains negative while GBPUSD is below 1.2460 and targets support in the 1.1860 zone.

USDJPY rallied from 130.46 to 131.74 in early NY.  Prices are supported by the unwinding of safe-haven trades and the rise in the US 10-year yield from3.37% to 3.462%.

AUDUSD drifted in a 0.6637-0.6665 range with weaker commodity prices taking a toll.

The US data calendar is empty.

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

Source: Saxo Bank

China Snapshot

Bank of China Fix:  6.8714, Previous: 6.8374

Shanghai Shenzhen CSI 300 fell 0.46% to 4012.48.

Chart: USDCNY 1 month

Source: Bloomberg