January 9, 2023

  • Traders downgrade Fed rate hike expectations
  • China’s reopening and stimulus plans boost global risk sentiment
  • US dollar extends Friday’s losses-Antipodean currencies outperform

FX at a glance

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.3384-88, overnight range 1.3386-1.3443, close 1.3445

USDCAD plunged Friday and extended the losses overnight. The stellar Canadian employment report (actual 104,000 jobs vs forecast for 8,000) combined with the soft US ISM services data drove USDCAD through support at 1.3440.

Analysts suggest that the employment data means the economy is resilient and can easily withstand another 25 bp interest rate hike on January 25.

USDCAD is also seeing additional pressure from the rebound in WTI oil prices which firmed from $73.82-to $76.46/barrel overnight. Traders are hoping that with China accelerating the reopening of its economy it will spur demand for commodities including oil.

USDCAD technical outlook.

The technicals are bearish below 1.3440 and targeting a test of 1.3310, the September uptrend line which guards the 50% Fibonacci retracement level (1.3240) of the June-October range.  A move below 1.3240 will target 1.3072.

A break above 1.3440 negates the near-term downtrend pressure, but while prices are below 1.3650, the outlook is negative.

For today, USDCAD support is at 1.3310 and 1.3240.  Resistance is at 1.3420 and 1.3460

Today’s range 1.3310-1.3410

Chart: USDCAD daily

Source: Saxo Bank

G-10 FX recap and outlook

There is a vast disconnect between what the Fed says about the US interest rate path and what markets are expecting after Friday’s US nonfarm payrolls and ISM Services data.

Average hourly earnings rose 0.3%, down from 0.4% in November, while ISM Services PMI plunged 6.9 points to 49.6, the first drop into negative territory since May 2020, and sparked recession fears.

Markets reacted like the Fed had announced a rate cut.

When the dust settled, the S&P 500 closed 2.28% higher, the US dollar plunged across the board, and the 10-year Treasury yield fell to 3.55% from 3.76%.

An old market adage is “you don’t fight the Fed.”  It’s worth repeating the comment in the FOMC statement that “participant’s stressed that it would take “substantially more evidence of progress to be confident that inflation was on a sustained downward path. It is premature to start positioning for a Fed rate cut.

Asian traders followed the North American lead and continued to sell US dollars and buy stocks. Risk sentiment got an added boost by talk of more fiscal stimulus in China, which fueled commodity price gains.

Hong Kong’s Hang Seng index jumped 1.8% while Australia’s ASX 200 rose 0.59%.  Japanese markets were closed for a holiday.

European bourses are in positive territory. Germany’s DAX index is up 0.91% while the UK FTSE 100 is flat. S&P futures have gained 0.56% as of 5:30 am PT

Gold (XAUUSD) bulls have embraced the “US interest rate topping” scenario. Prices have climbed steadily since bottoming at $1617.00 on November 17 and touched $1880.74/in early NY.

Meanwhile, traders turned a blind eye to news of Chinese aggression towards Taiwan. A military spokesman said China carried out combat drills around Taiwan on Sunday, while another 27 Chinese fighter jets crossed into Taiwan airspace.

EURUSD rallied from 1.0486 to close at 1.0646. It then consolidated in a range of 1.0636-1.0699 overnight. The Euro is being supported by the possibility of the Federal Reserve easing monetary policy at the same time as the European Central Bank becomes more hawkish. Unemployment in the Eurozone remained at 6.5%. If the EURUSD breaks above 1.0705, it could continue to rise and reach 1.0800.

GBPUSD is trading at the top of its overnight 1.2093-1.2173.   Traders are hoping for some monetary policy insight from a speech by BoE Chief Economist Huw Pill today. The  short term GBPUSD technicals are bullish and looking for a break above 1.2205 to lead to a test of 1.2350 resistance.

USDJPY consolidated Fridays looses in a 131.32-132.65 range after dropping from134.59 on Friday.  USDJPY dropped alongside a slide in the 10-year Treasury yield, which is at 3.57% compared to 3.75% on Friday.  Trading volumes were lower than usual due to a holiday in Japan.

AUDUSD broke above its 200 day moving average after prices climbed from 0.6876 to 0.6945 overnight.  A report by JPM analysts suggested Australia’s GDP will get an additional 1.0% bump due to the return of Chinese students and higher Chinese demand for commodities

The US data calendar is empty.

Chart of the Day Gold (XAUUSD) daily

Source: Saxo Bank

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

Source: Saxo Bank

China Snapshot

Today’s Bank of China Fix: 6.8265, previous 6.8912

Shanghai Shenzhen CSI 300 rose 0.81% to 4013.12

China rumoured to be considering a deficit ratio of 3.0% and new special bond quota of up to CNY 3.8 trillion

PboC Guo Shuqing forecasts economic growth will return to its normal path and will use financial policies to boost income of people impacted by Covid.

Six major Chinese cities predicting GDP growth between 5.5-7%.

Chart: USDCNY one month

Source: Bloomberg