July 20, 2022

  • Global equity indexes grinding higher
  • Canadian inflation cooler than forecast, still hot
  • US dollar extends losses; CAD outperforms

FX at a glance:  

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.2856-60, overnight range 1.2858-1.2881, close 1.2871

USDCAD underperformed against its G-10 major currency pairs due to a mix of broad USD dollar weakness, firmer oil prices, and stop-loss selling on the break below 1.2890. 

Canadian inflation was cooler than expected but still hot.  June CPI rose 8.1% y/y, rather than the 8.4% forecast, but it was still higher than the May 7.7% result. StatsCanada noted that the increase was the largest yearly change since January 1983.

The inflation results will not change the BoC’s outlook as a high number was anticipated and the reason the BoC raised rates by 1.0% last week.

WTI oil prices are in a downtrend below $104.50/barrel which has capped this weeks rally.  Traders ignored the 1.86 million barrel increase in US crude inventory last week and focused on the risk of further supply shocks due to the Russian invasion of Ukraine and Opec’s inability to boost production.

USDCAD direction will continue to take its lead from S&P 500 price action.

USDCAD technical outlook

The intraday USDCAD technicals are bearish below 1.2950 with the break below 1.2930 then 1.2880 setting up a new trading band between 1.2820 and 1.2930.  A move through the bottom targets support at 1.2680 while a topside breach points to 1.3050.

For today, USDCAD support is at 1.2840 and 1.2820.  Resistance is at 1.2910 and 1.2940.  Today’s Range 1.2840-1.2940

Chart: USDCAD daily

Source: Saxo Bank

G-10 FX recap and outlook

Risk sentiment has turned positive. Traders are eagerly buying into commentary that the worst is over for stocks. The bottom is in. An article in Barron’s yesterday encouraged the sentiment. It said equity bulls argue lower oil prices in the past month suggest inflation has peaked. If so, the Fed can dial back its rate hike aggressiveness. They also point out that bond yields are below their highs. Traders are ignoring the bear view that earnings will drop, driving equities lower.

The “bottom is in “view may be a symptom of heat-stroke, or Putin propaganda before he escalates his war.

Or is it just noise in a summer market when Fed policymakers cannot comment?

Asia traders were optimistic and bought stocks across the board. Japan’s Nikkei 225 jumped 2.7% ahead of another dovish BoJ meeting tomorrow. Australia’s ASX climbed 1.34%, helped by higher commodity prices.

European traders were more reticent, partly due to ongoing energy concerns. The German Dax is 0.22% higher, while the UK FTSE 100 gained 0.16%. Wall Street futures are reversed earlier gains and are modestly negative.

The US 10-year Treasury yield is trading at the bottom of its 2.979-3.034% range.

EURUSD jumped from 1.0121 to 1.0267 after Reuters reported the ECB would consider a 0.50bp rate hike on Thursday. Prices consolidated those gains in a 1.0220-1.0272 range overnight, then dropped to 1.0185 in NY.

Traders are nervous about the Nord Stream1 pipeline reopening after warnings from Putin that gas supplies are not guaranteed.

The ECB deposit rate is -0.50%, the refinancing rate is 0%, and the marginal lending facility rate is 0.25%. EURUSD traders are all excited because the ECB could raise rates by 50 bps, even though it would not do anything to lower inflation, which is at 8.6% y/y in June. EURUSD technicals are bearish below 1.0280.

GBPUSD rallied from 1.1927 to 1.2043 yesterday due to both US dollar weakness and comments from BoE Governor Andrew Bailey opining about a 50 bp rate hike. That speculation was reinforced after UK inflation soared 9.4% y/y, a 40-year peak. Prices consolidated in a 1.1990-1.2036 range overnight, then dropped to 1.1967 in NY.  The intraday GBPUSD technicals are modestly bullish above 1.1960.

USDJPY traded consolidated yesterday’s gain in a 137.91-138.37 range.  The BoJ is expected to keep its ultra-easy monetary policy unchanged on Thursday.

AUDUSD traded with a modestly bullish bias in a 0.6894-0.6929 range supported by hawkish comments from RBA Governor Philip Lowe, suggesting interest rates need to rise 1.15% to reach the RBA neutral rate of around 2.5%.

There is no top tier US economic reports today.

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

Source: Saxo Bank

China Snapshot

Today’s Bank of China Fix 6.7465, previous 6.7451

Shanghai Shenzhen CSI 300 rose 0.34% to 4,283.80

PboC leaves rates unchanged 1-year Loan Prime Rate 3,70%, 5 year LPR 4.45%

Macau will reopen some casinos on July 23

The US destroyer Benfold’s cruised the Taiwan Strait. China said frequent provocations by the US demonstrate that the US is a destroyer of peace and stability in the Taiwan Strait

Chart: USDCNY 1 month

Source: Bloomberg