Photo: pixabay

February 24, 2023

  • Fed-favourite inflation gauge Core-PCE 4.7% vs upwardly revised 4.6%
  • Germany heading into a recession, Q4 GDP -0.4% q/q.
  • US dollar opens higher, extends Thursday’s gains in Europe.

FX at a glance

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.3574-78, overnight range 1.3529-1.3627, close 1.3549

The US dollar is in demand and the Canadian dollar is collateral damage. Escalating geopolitical tensions, exacerbated by China being embarrassed after its spy balloons were shot down and by Beijing’s support for Russia gave the greenback a safe haven bid.

The USDCAD rally got an added boost after US Core CPI was hotter than expected, rising 0.6% m/m (forecast 0.4%) which led to a test of 1.3626.

Gains continue to be fueled by hawkish Fed rhetoric in the wake of the FOMC meeting February 1, alongside the minutes from that meeting, re-affirming at least another 75 bps of rate hikes are on the agenda. Meanwhile, the Bank of Canada announced that Canadian rate hikes were being paused. The overnight US rate is 4.75% enroute to 5.50%, while the BoC overnight rate will be parked at 4.50%.

The Bank of Canada spinning a tale that the Canadian and US inflation paths are different to justify the overnight rate disparity.

Deputy Governor Paul Beaudry essentially blessed a weaker Canadian dollar when he said “Suppose we enter a period during which inflation is lower in Canada than it is in one of our trading partners. Over time, this difference in inflation would create a divergence in price levels between the two economies because the price of goods in Canada would be rising more slowly than the price of goods in the other country.

He then said, “over time the exchange rate will adjust, sometimes slowly- to offset this advantage.“  FX traders may have taken note of Mr Beaudry’s comments and are already adjusting the exchange rate.

A USDCAD rally will not be a one way move. WTI oil prices remain above support in the $70.00/barrel area and are expected to climb towards $100.00/b due to rising demand and reduced production. In addition, the longer term USDCAD momentum indicators suggest it is overbought.

Lastly, the S&P 500 is down 1.56% month to date, suggesting some of today’s US dollar strength may be due to month end portfolio rebalancing.

A decisive break below 1.3440 would suggest that the USDCAD 1.3240-1.3650 range is still intact.

USDCAD Technical Outlook

The intraday USDCAD technicals are bullish with the 100-day moving average at 1.3510 reinforcing support. The hourly uptrend line from Feb 14 broke above resistance at 1.3480 this week, and the trend is intact while prices are above 1.3520.  USDCAD is attempting to decisively break above resistance in the 1.3565-80 area which hasn’t been breached since January 5 and if successful, targets the 1.3650-60 zone.

If the topside breaks, the 76.4% Fibonacci retracement level of the Covid-19 range at 1.4025 is in play.

For today, USDCAD support is at 1.3550 and 1.3510.  Resistance is at 1.3630 and 1.3660.

Today’s range 1.3570-1.3660

Chart: USDCAD daily with Fibonacci retracement and RSI

Source: Saxo Bank

G-10 FX recap and outlook

Today’s hotter than expected Personal Consumption expenditures -Price Index results added support for arguments suggesting the Fed needs to hike 50 bps at the next meeting.  However, there is still a lot of wood to chop until March 21, so a25 bp bump is still the preferred outcome.

There wasn’t much in the way of drama overnight, except in Japan where the government held hearings for Bank of Japan Governor nominees.

The week is ending with traders focused on the US interest rate outlook, with an eye on geopolitics.

The major Asian equity indexes closed higher except for those in China. Japan’s Nikkei 225 index gained 1.29% while Australia’s ASX 200 rose 0.305.

European bourses danced between gains and losses and are trading mixed. The UK FTSE 100 is up 0.33% while the German Dax recouped earlier losses and is flat. S&P 500 Futures are down 1.1% as of 5:45 am PT. Gold dipped 0.40% while WTI oil  is down 0.14% compared to Thursday’s close.

EURUSD is trading defensively in a 1.0545-1.0614 range. The hotter than expected US PCE data combined with German Q4 GDP falling 0.4% q/q (forecast -0.2% q/q) is weighing on prices.

GBPUSD traded in a 1.1947-1.2041 range following the US data and because month-end demand for dollars.

USDJPY churned in a 134.08-135.98 range with prices reaching the top after the US PCE data. and is trading at the top of that band in NY. Trading was very choppy in Asia during the BoJ governor nomination hearings.

AUDUSD traded lower in a 0.6729-0.6823 range.

US Michigan Consumer Sentiment and New Home Sales reports are ahead.

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

Source: Saxo Bank

China Snapshot

Bank of China Fix:  6.8942, Feb. 20, Previous: 6.9028

Shanghai Shenzhen CSI 300 fell 1.04% to 4061.05.

Chart: USDCNY 1 month

Source: Bloomberg