June 3, 2022

  • US nonfarm payrolls top estimates
  • Global equities buoyant, ignore economic warnings
  • US dollar trading defensively, opens lower vs G-10 majors

FX change at a glance

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.2562-66, overnight range 1.2557-1.2577, close 1.2570,

USDCAD dropped like a rock yesterday. Bank of Canada Deputy Governor Paul Beaudry didn’t just open the door to a 0.75% rate hike on July 13, he served drinks and hors d’ourves.

Mr Beaudry pointed out that “inflation close to 7.0% is well above our most recent forecast and it is likely to move even higher in the near term.”  The BoC pulled a U-turn, going from “transitory inflation “to “inflation entrenchment paranoia” in record time, after the reality of higher and higher prices forced them to admit its inflation view was wrong. No BoC jobs were lost as a result, but Canadians will pay the price.

Traders concluded that the next hike would be 0.75% after Mr Beaudry said, “If inflation pressures were more persistent, we would likely need to move the policy rate somewhat above neutral to bring inflation back to the target.”  (The neutral rate is between 2.0-3.0%)

WTI oil prices remain steady, trading in a $115.27/barrel -$117.62/b range, following yesterday’s Opec production increase news. Opec raised its production quote by 648,000 barrels/day effective July 1, compared to 400,000 bpd previously agreed. The action was taken to help compensate for Russian crude production losses. However, the announcement is “fake news” as Opec production is already running 2.5 million bpd below its quotas du to production constraints.

WTI is also underpinned by yesterday’s EIA data showing US crude inventories fell 5.07 million barrels last week.

Yesterday’s USDCAD drop was exacerbated by the rebound in the S&P 500 index.

USDCAD technical outlook

The USDCAD technicals are bearish. The intraday downtrend is intact while prices are below 1.2640, looking for break below support in the 1.2540-50 area. Longer term, the break below 1.2660 (38.2% Fibonacci of June 2021-May 2022 range) projects a drop to 1.2420 (61.8% Fibonacci level).

For today, USDCAD support is at 1.2540 and 1.2490. Resistance is at 1.2630 and 1.2660.  Today’s Range 1.2490-1.2630

Chart: USDCAD daily with 200 day moving average

Source: Saxo Bank

G-10 FX recap and outlook

Asia markets were quieter than usual due to Dragon Boat Festival holidays in China.  The other markets followed Wall Street’s lead and bought stocks.  The Nikkei 225 index climbed 1.27% while Australia’s ASX 200 closed with a 0.88% gain.  European equities opened in positive territory and recorded small gains.  DJIA and S&P 500 futures were in negative territory before the NFP report and extended the losses in the aftermath.      WTI is nearly unchanged from the close, while gold lost 0.53%.

Wall Street ignored economic warnings from JPMorgan CEO Jamie Dimon on Wednesday and by Goldman Sachs Chairman John Waldron, Thursday.  Both executives predicted tough economic times ahead, which Mr Dimon described as a “financial hurricane.  Traders also ignored Fed policymakers suggesting a series of 0.50% rate hikes are likely.

Traders also ignored comments from Fed Vice Chair Lael Brainard, who said that “Market pricing for 50 basis points potentially in June and July, from the data we have in hand today, seems like a reasonable path.”

 In 2022, nothing says “bull market” like economic havoc and soaring interest rates.”

The US added 390,000 jobs in May, which at that pace means the US will recover all of the job losses since February 2020 by September.  The unemployment rate ticked higher to 3.6%, while average hourly earnings were unchanged at 5.2% y/y.

A few analysts suggested the data meant the Fed might not need to be as aggressive in raising interest rates.  Bond traders didn’t agree.  The US 10-year Treasury yield jumped to 2.978% from 2.92%.

EURUSD accelerated lower following the US employment report, dropping from 1.0765 in Asia to 1.0705 post-NFP.  Eurozone Services PMI data and April Retail Sales (-1.3% m/m) were weaker than expected and weighed on prices.

GBPUSD traded in a 1.2522-1.2589 range in thin market conditions due to the extended long weekend of the Queen’s Platinum Jubilee.  The price action is tracking EURUSD moves with a break below 1.2520 targeting 1.2470.

USDJPY popped the top of its 129.70-130.19 range following the US NFP data and climbed to 130.64 before pausing.  The move came on the heels of the 10-year US Treasury yield spiking to 2.978%.  The risk of BoJ FX intervention lingers but is diminished because of recent yield curve control actions, which widened Treasury/JGB yield differentials.

AUDUSD broke the bottom of its overnight 0.7244-0.7288 band range and touched 0.7219 in NY.  NZDUSD traded similarly, with both currency pairs tracking general risk sentiment.

US ISM Services PMI is expected to dip to 56.4 from 57.1.

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

Chart: Saxo Bank

China Snapshot -Closed for Dragon Boat Festival

Today’s Bank of China Fix 6.7095 Previous 6.7095

Shanghai Shenzhen CSI 300 CLOSED to 4,089.57

Chart: USDCNY 1 month

Source: Yahoo Finance