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December 20, 2023
- UK inflation drop prompts rate cut fever.
- PBoC leaves monetary policy unchanged, as expected.
- US dollar continues to slide, JPY rebounds.
FX at a glance
USDCAD Snapshot: open 1.3334-38, overnight range 1.3325-1.3354, close 1.333
“Are you serious?” 80’s tennis star Joh McEnroe frequently asked umpires that question when calls did not go his way. That same question is being asked by analysts after yesterday’s domestic inflation sparked chatter that it could force the Bank of Canada to hike rates. Canada CPI rose 3.1% in November, the same as it did in October while Core-CPI ticked up to 3.5% from 3.4%. Those results are not enough to make the BoC tighten, especially because of the looming mortgage renewal crisis.
That also suggests that USDCAD losses, which followed the data, will not be sustained.
Canada’s Environment Minister, Steven Guilbeault is hell-bent on destroying Canada’s energy industry and the economic benefits to Canada from its $11.7 trillion of proven reserves. Guilbeault released a deranged plan to ban gas powered vehicles by 2035 in favour of sharply more expensive electric vehicles. These EV’s will be recharged from non-existent charging stations, powered by an electrical grid designed in the 1950’s and built for a population of 15 million. The minister did not explain who would pay to retrofit all condo and public buildings to accept EV’s, nor did he mention the environmental disaster that discarded EV batteries represented. Opec is laughing all the way to the bank.
WTI oil prices are getting a boost from developments in the Red Sea. The disruption in shipping because of terrorist attacks has lifted WTI from $71.47/b on Monday to $75.05/b overnight.
The intraday USDCAD technicals are bearish as prices attempt to churn through support in the 1.3330-50 zone to test the uptrend line from April 2022 (weekly chart) in the 1.3300-10 area. A break above 1.3370 suggests further gains to 1.3420, then 1.3460.
Longer term, USDCAD the April 2022 uptrend line comes into play in the 1.3300-10 area. If it fails to stem the downward momentum, USDCAD will drop to 1.3100. The 50% Fibonacci retracement level of the May 2022, 1.2415-October 2022 1.3960 range is 1.3190.
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.
Chart: USDCAD weekly
Source: Daily FX
G-10 FX recap
Global bonds are rallying in anticipation of widespread central bank interest rate cuts, and central bankers are in a snit. A round of lower than expected inflation readings fueled a bond rally, sending bond yields tumbling and putting more pressure on the US dollar.
Elsewhere, those who feared that Israel’s war on terrorists could expand may be right. The US is reportedly considering bombing Houthi camps in Yemen to deter attacks on Red Sea shipping. If they were serious, they would bomb Tehran and cut off the head of the snake.
Central bankers are annoyed as they hate having bond traders pull their strings. Bundesbank President and ECB board member Joachim Nagel said, “We must initially remain at the current interest rate plateau so that monetary policy can fully develop its inflation-dampening effect.” He went on to warn, “I would say to everyone who is speculating on an imminent interest rate cut: be careful, some people have already miscalculated that.” Other ECB policymakers are saying similar things to push back against the nearly 140 basis points of rate cuts that traders have priced in for 2024.
Fed officials are also following Fed Chair Powell’s lead from last week and attempting to dampen enthusiasm for US rate cuts. Its not working.
European bourses are mixed. The UKFTSE 100 index has gained 0.66% while the other indices are flat. S&P 500 futures have slipped 0.17%, and the US 10-year Treasury yield is 3.88%.
EUR/USD is in the middle of its 1.0939-1.0985 overnight range with prices weighed down by ECB officials warning that rate cut speculation was overdone. Gains were limited due to central bankers warning that rate cut enthusiasm needs to be pared back.
GBP/USD chopped about in a 1.2630-1.2737 band after UK inflation fell more than expected. Headline CPI only rose 3.9%y/y compared to forecasts for a 4.4% increase, and core CPI dropped to 5.1% y/y from 5.7% in October. The news dashed fears about rates hike sand the market now expects UK rates to be 140 bp lower by the end of 2024.
USD/JPY gave back some of yesterday’s gain as it dropped to 143.26 from 144.10 overnight. The BoJ does not seem eager to tighten rates especially as the other G-10 central banks have shifted to easing mode.
AUD/USD traded in a 0.6748-0.6777 band, supported by RBA tightening talk and broad-based US dollar weakness.
US consumer confidence data is due.
Chart of the Day 10-year yield spreads as of 4:15 am ET)
FX high, low, open (as of 6:00 am ET)
PBoC fix: today 7.0966, expected 7.1300, previous 7.0982.
Shanghai Shenzhen CSI 300 fell 1.10% to 3297.50.
The PBoC left its 1-year loan prime rate (LPR). And 5 year LPR unchanged at 3.45% and 4.20%, respectively. The inaction was expected.
Chart: USDCNY and USDCNH