January 10, 2023

  • Cautious optimism undermines greenback, underpins stocks
  • Markets on hold awaiting Fed Chair Powell’s remarks from Sweden
  • US dollar on defensive, consolidating losses

FX at a glance

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.3387-91, overnight range 1.3378-1.3426, close 1.3390

USDCAD continues to consolidate Friday’s losses thanks to a cautiously optimistic Fed interest rate outlook. Prices broke to the top in early NY trading, coinciding with a slide in S&P 500 futures and an increase in the US 10-year Treasury yield to 3.602% from 3.547% at yesterdays close.

Traders are considering that the Fed is not seriously planning on raising rates as high or as long as indicated in the December 15 dot-plot projections. They believe that the drop in average hourly earnings and the weak ISM services PMI data means the Fed will only hike rates by 25 bps in Feb. That view may change Thursday with the release of the December inflation data.

The subsequent rise in commodity prices and US dollar sell-off against the major G-10 currencies, fueled USDCAD selling.

Markets are hoping for more clarity on the Fed’s outlook when Fed Chair Jerome Powell speaks today at 8:00 am ET (from Sweden). BoC Governor Macklem is also attending but his remarks are not being published.

USDCAD technical outlook.

The technicals are bearish below 1.3410 looking for a break below 1.3370 to extend losses to 1.3330, then 1.3230.  A break above 1.3410 targets 1.3480.

Longer term, the break below the 100 day moving average (1.3474) on Friday, sets the stage for a test of the 200-day moving average at 1.3150.

For today, USDCAD support is at 1.3350 and 1.33100.  Resistance is at 1.3430 and 1.3460

Today’s range 1.3340-1.3430

Chart: USDCAD daily

Source: Saxo Bank

G-10 FX recap and outlook

Global risk sentiment is cautiously optimistic after Friday’s weaker than expected US ISM services data fuel speculation that US rates are closer to a peak than previously thought. However, the upbeat sentiment faded somewhat after two Fed officials said it was too early to declare victory.

Traders are patiently awaiting Fed Chair Powell’s remarks from Stockholm, Sweden. He is not likely to deviate from his hawkish comments at his December 15 press conference, which suggests the US dollar may recoup some of its recent losses today.

Asian equity indexes closed on a mixed note with Japan’s Nikkei 225 index rising 0.70% and Australia’s ASX 200 falling 0.20%. European bourses opened weak and grinded lower throughout the morning led by a 0.51% dip in the German Dax index.  S&P 500 futures are trading down 0.29% (as of 6:45 am).

EURUSD drifted in a 1.0715-1.0751 range awaiting Powell’s comments today, and US inflation data on Thursday.

ECB Executive Board member Isabel Schnabel reiterated her hawkish outlook. She predicted that, “Interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target.”

Goldman Sachs analysts gave EURUSD a bit of additional support. They are suggesting that there will not be a recession in the Euro area in 2023 and the economy would expand by 0.6%, even with the ECB hiking rates to 3.25% by May. The EURUSD technicals are targeting 1.0800 while above 1.0680.

GBPUSD inched higher in a 1.2141-1.2197 band. On Monday, BoE Chief Economist Huw Pill predicted inflation would ease with slack in the economy and higher unemployment.

USDJPY climbed from 131.39-132.46 where it is trading in NY following the rise in the US 10-year Treasury yield to 3.60%. Tokyo CPI was 4.0% y/y in December, higher than 3.8% in November but below the forecast for a 4.5% y/y increase.

AUDUSD traded in a 0.6845-0.6927 range  with the low occurring in early NY trading as traders re-evaluate their optimistic Fed interest rate outlook. Australian Retail Sales and CPI data are on tap Wednesday.

The US data calendar is a non-event.

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

Source: Saxo Bank

China Snapshot

Today’s Bank of China Fix: 6.7611, previous 6.8265

Shanghai Shenzhen CSI 300 rose 0.11% to 4017.47

Chart: USDCNY one month

Source: Bloomberg