- US CPI rises 7.0% y/y, as expected
- Oil price surge gives Canadian dollar an added boost
- US dollar on defensive following Powell’s comments
FX at a Glance
Source: IFXA Ltd/RP
USDCAD Snapshot: Open 1.2537-41, Overnight Range-1.2519-1.2578, previous close 1.2573
USDCAD extended losses after US December CPI came in as expected after falling steadily overnight.
Fed Chair Powell did not deliver any bombshells during his confirmation hearing yesterday. However, he offset a somewhat hawkish tone by indicating that quantitative tightening (QT) will need more than a few meetings of discussion before any decision.
That fueled Wall Street gains, and left US 10-year yields modestly lower. The improved risk tone drove USDCAD below the 100 day moving average (1.2624) to 1.2573 at the close and the “as expected CPI” has prices within spitting distance of the 200 day moving average.
The broad US dollar weakness against the major currencies injected new life into WTI oil prices which rebounded from $78.93/barrel yesterday to $81.96/b in Europe before easing to $81.64 in early NY trading. Prices were boosted by the Energy Information Administration (EIA) monthly report raising its global demand forecast by 3.6 million b/day in 2022, which lifts demand above 2019 levels.
USDCAD is also under pressure due to some major bank economists forecasting that the Bank of Canada raises interest rates by 0.25% at the January 26 monetary policy meeting. Other analysts believe lift-off will be in March giving policymakers time to assess the impact from Omicron.
Technical view: The USDCAD technicals are bearish following the breach of the 100-day moving average yesterday suggesting a test of the 200-day moving average (1.2498) is in the cards. A decisive breach below the June 2021 uptrend line at 1.2440 targets 1.2000.
A break above 1.2660 would suggest a brief period of consolidation but only a move above 1.2720 negates the downtrend.
For today, USDCAD support is at 1.2510 and 1.2490. Resistance is at 1.2550 and 1.2610. Today’s Range 1.2510-1.2590
Chart USDCAD daily
Source: Saxo Bank
G-10 FX recap and outlook
US December CPI rose 7.0% y/y in December, in part due to increases for shelter and vehicles. It is the fastest pace in forty years, but judging by the immediate market reaction, traders do not care. The 10-year US Treasury yield is a touch lower at 1.724%, EURUSD pushed above 1.1400, and S&P 500 futures climbed.
The US dollar retreated following Fed Chair Powell’s comments at his confirmation hearing. The reaction was because of something he said, but more because of what he didn’t say. Many of his colleagues advocate for rate hikes (March is fully priced in) and a faster start to QT. Mr Powell avoided those specifics.
Asia equity indexes followed Wall Street’s lead and closed sharply higher. Japan’s Nikkei 225 gained 1.92%, while higher commodity prices helped lift Australia’s ASX200 index by 0.66%. European bourses are higher, but gains lagged those seen in Asia. WTI oil climbed 4.0% since yesterday’s low, while gold prices consolidated Tuesday’s gains in a $1,814.97-$1,822.38 range.
EURUSD rallied from 1.1311-to 1.1374 yesterday and extended gains to 1.1415 post-CPI, in part because of the dip in the 10-year US Treasury yield. The German Wholesale Price Index missed forecasts while Eurozone Industrial Production was higher than expected in November. The intraday EURUSD technicals are bid above 1.1310.
GBPUSD held on to yesterday’s post-Powell comment gains and then climbed to 1.3682 post-CPI. Traders ignore ongoing Brexit issues and the risk that UK Prime Minister Boris Johnson gets the boot.
Mr Johnson’s job is in jeopardy after news that he and many officials held parties despite locking down the country due to the pandemic. There is no truth to the rumour that Mr Johnson’s team has reached out to Justin Trudeau, a renowned expert in orchestrating a tearful apology, to duck accountability.
USDJPY dropped from the top to the bottom of its overnight 115.24-115.40 range. Japan’s trade surplus widened but was not a trading factor.
AUDUSD and NZDUSD are rallying on the back of broad US dollar weakness and higher commodity prices.
Chart of the Day: Gold (XAUUSD) daily
Source: Saxo Bank
FX open, high, low, previous close as of 6:00 am ET
Chart: Saxo Bank
Today’s Bank of China Fix 6.3658, previous 6.3684
Shanghai Shenzhen CSI 300 rose 1.0% to 4,845.58
Many property developers have large bond payments this week
Chart: USDCNY 1 month
Source: Yahoo Finance