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December 21, 2023
- Holiday trading in full swing.
- Canada October Retail Sales rise 0.7% m/m
- US dollar opens mixed-Yen outperforms.
FX at a glance
USDCAD Snapshot: open 1.3351-55, overnight range 1.3339-1.3972, close 1.3369
USDCAD made a half-hearted attempt to test major support in the 1.3300 area yesterday, but was stopped far short of its goal. USDCAD touched 1.3313, then rallied throughout the afternoon to close at 1.3369. That movement mirrored the price action in the S&P 500.
A popular 2024 outlook is for the US dollar to slide as the Fed cuts interest rates and other central banks lag the move. Commodity currencies are expected to benefit greatly from easier monetary conditions in the G-10 and a rebound in Chinese economic growth. Oil prices will rally thanks to renewed global demand and exacerbated by OPEC and Russia’s production alongside threats to Middle East oil shipments.
There are some issues with that view. Specifically, the market is already pricing in 150 basis points of Fed rate cuts in 2024, while the Fed is projecting rates will fall just 75 basis points. The US dollar index has already dropped 5.0% since November.
The tone of the Bank of Canada Summary of Governing Council Deliberations from December 6 erred on the hawkish side. They say they are prepared to tighten policy if needed due to wage growth concerns and the 2023 buzz-term, “shelter-price inflation.” That tone really hit home in the wake of the November inflation data, which rose higher than forecast. Nevertheless, the BoC will only hike if the Fed does, meaning CAD/US interest rate spreads will remain constant.
The Canadian economy is either in a recession or very close to one, contrasting with the US where the Fed appears to have engineered a soft landing. A weak Canadian economy is another Canadian dollar negative. Hostile Federal government energy policies have chased away foreign investment and eliminated a large chunk of the benefit to the Canadian dollar when oil prices rise.
As usual, geopolitical tensions are the wild card. Any escalation of hostilities in Ukraine, the Middle East, or elsewhere will spark a stampede into US dollars.
USDCAD traded in a 1.3111-1.3882 range in 2023. That entire range occurred between July 13 and October 27. Forecasts for USDCAD in 2024 range from a low of 1.2700 to a high of 1.4200. If you disregard the high and low estimates, a 1.3100-1.3900 range seems reasonable for the new year. If so, USDCAD is closer to the low rather than a top, which suggests buying on dips.
Canadian Retail Sales data for October were a tad below forecasts but better than in September. (actual 0.7%, forecast 0.8% m/m, September 0.5% )
The intraday USDCAD technicals are always messy at this time of year. USDCAD is in a downtrend below 1.3380, looking for a break below 1.3320 to extend gains to 1.3280. A break above 1.3380 targets 1.3460 and only a decisive move above this level will negate the short term negative pressure.
For today, USDCAD support at 1.3310 and 1.3300. Resistance is at 1.3370 and 1.3410. Today’s range 1.3310-1.3410.
Longer term, the USDCAD November downtrend is intact while prices are below 1.3580 but the currency pair is heading into a significant support zone. The May 2021 uptrend line comes into play in the 1.3190-1.3220 area, and it is being guarded by 1.3275,which is the 78.6% Fibonacci retracement the July-October 31 range. Bollinger band and RSI studies indicate USDCAD will be extremely oversold in the 1.3200 area.
For the next 3 months USDCAD may trade in a 1.3200-1.3600 range.
Chart: USDCAD daily.
Source: Daily FX
G-10 FX recap
Holiday markets are in full swing, and trading activity was subdued. Asian equity indexes closed mixed, while European bourses are trading in negative territory. However, S&P 500 futures are pointing to a rebound on Wall Street.
US GDP is expected to show growth at a robust 5.2%, quarter over quarter, in Q3, while Initial Jobless Claims are expected to rise by 13,000 to 215,000.
EURUSD remained rangebound in a 1.0935-1.0987 range, and there were no actionable economic reports available. However, trading may get choppy around the 10:00 am ET option expiry window, as $5.1 billion of strikes between 1.0950 and 1.1100 expire.
GBPUSD traded in a 1.2612-1.2675 range, with price action mirroring that of EURUSD. The UK Guardian is reporting that British retailers are experiencing a drop in sales in December and have a gloomy outlook for the start of 2024.
USDJPY traded negatively in a 142.64-143.62 range. The currency remains on the defensive due to the outlook that the BoJ will start tightening in 2024 and because the US Treasury yield is at 3.88%.
AUDUSD is at the top of its 0.6725-0.6765 range, with prices supported by the rise in commodity prices and lingering positive sentiment from the risk of another RBA rate hike.
FX high, low, open (as of 6:00 am ET)
PBoC fix: today 7.1012, expected 7.1401, previous 7.0966
Shanghai Shenzhen CSI 300 fell 1.10% to 3297.50.
Chart: USDCNY and USDCNH