Source: Psychology Today

December 6, 2022

  • RBA hikes 25 bps as expected
  • Dovish Fed view takes a hit
  • US dollar opens bid, CAD underperforms

FX at a glance:

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.3627-31, overnight range 1.3573-1.3630, close 1.3588

Yesterday’s USDCAD sell-off ended abruptly after stronger than expected US data turned the dovish Fed narrative into “OMG! The Fed is gonna keep hiking rates.”  USDCAD soared, taking out minor resistance at 1.3460. then triggered stop loss buying on the break above 1.3520. The rally continued overnight.

The FX response due to the US ISM services PMI (actual 56.5, forecast 53.1, previous 54.4) is the effect of clarity on a “Reality Distortion Field.”  Traders want to believe the rate hike cycle is near and end and prefer to ignore the central bankers who suggest otherwise.

The wild price action is also evidence that the holiday season and proximity to year-end has sapped liquidity from markets.

USDCAD got an added boost after WTI oil prices cratered, falling from $82.66/barrel yesterday to $75.63/b for an 8.5% decline. The US data raised the risk of higher US rates and a recession which offset signs China was easing covid restrictions.

The Bank of Canada meeting is Wednesday. It is a toss-up between a 25 bp or 50 bp rate hike. However, the tone of the statement will be more important, and the RBA statement provides clues.

The RBA statement monetary policy said, “Inflation in Australia is too high, at 6.9 per cent over the year to October. A further increase in inflation is expected over the months ahead. The labour market remains very tight, with many firms having difficulty hiring workers. The Board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt”

It’s a safe bet that the BoC says something similar.

Reportedly, there is a USDCAD $1.04 billion, 1.3615 option strike expiring today at 10: 00 am which could inject a bit of volatility into the market.

USDCAD direction will track S&P 500 moves. Canada Ivey PMI is due.

USDCAD Technical outlook

The intraday USDCAD technicals flipped from bearish to bullish yesterday. The week-long downtrend ended with the break above 1.3460 and continued through resistance at 1.3520.  A topside break of 1.3650 suggests further gains to 1.3810, the November peak. Only a move below 1.3400 will negate the uptrend.

The long-term USDCAD uptrend from May 2021 is intact while prices are above 1.2770 on a weekly chart.

For today, USDCAD support is at 1.3560 and 1.3510.  Resistance is at 1.3650-1.3690

Today’s range 1.3560-1.3660

Chart: USDCAD  4 hour

Source: Saxo Bank

G-10 FX recap and outlook

Traders are humming “Dovish, hawkish, dovish hawkish, leaving financial markets in “nowhere land making all their nowhere plans” until the Fed meeting next week.

Price action may be whippy today due to a lack of top-tier US data and poor liquidity due to the proximity of year-end.

Fitch Ratings got aboard the bearish global economy bandwagon again. Yesterday the ratings agency downgraded their world 2023 GDP growth forecast to 1.4% from 1.7% in September. The US outlook was cut to 0.2% from 0.5%.

EURUSD bounced in a 1.0477-1.0522 range. Markets are directionless ahead of next week’s Fed meeting and traders ignored German factory orders which were weak but better than expected. Yesterday’s EURUSD gains ran out of steam just below the June 2021 downtrend line in the 1.0600 area.

GBPUSD peaked at 1.2340 yesterday then retreated in a 1.2160-1.2222 range overnight. Prices are tracking broad US dollar sentiment. The GBPUSD technicals are bullish above 1.1960 looking for a break above 1.2350 to extend gains to 1.2500.

USDJPY peaked at 137.42 in Asia then dropped to 136.27 in NY coinciding with the dip in the US 10-year Treasury yield to 3.564% from 3.603%. BoJ Governor Kuroda repeated that it was premature to debate specifics on monetary policy. It will happen when the inflation target is in sight.

AUDUSD traded in a 0.6699-0.6737 range. The RBA raised the OCR rate by 25 bps to 3.10 as expected. The statement left the door open to further rate hikes.

US October trade data is due, but it will not be a factor for markets.

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

Source: Saxo Bank

China Snapshot

Today’s Bank of China Fix: 6.9746, previous 7.0384

Shanghai Shenzhen CSI 300 rose 0.54% to 3968.20

Chart: USDCNY 1 month

Source: Bloomberg