Photo: Pixabay
December 16, 2022
·         Risk aversion stoked by rate hikes in a recession
·         Reportedly $4.0 trillion of option expiries for “Quadruple Witching Hour”
·         US dollar rises on safe-haven demand
FX at a glance:

Source: IFXA Ltd/RP
USDCAD Snapshot: open 1.3682-86, overnight range 1.3620-1.3686, close 1.3661
USDCAD rallied due to broad US dollar demand following yesterday’s ECB meeting and risk aversion. The widening of CAD/US interest rate differentials also underpinned prices.

USDCAD is also bolstered by the belief the Fed will hike rates by another 75 bps while the BoC has indicated it has shifted to neutral.

USMCA Free Trade partner Mexico raised its benchmark rate by 50 bps, to 10.50%, a slower pace than the four consecutive 75 bps hikes. The statement suggests another increase is in the cards.

WTI oil prices retreated from yesterday’s $77.68 peak and are trading at $74.63/barrel in NY. US dollar strength is offsetting hopes for price gains due to increased demand in 2023.

Today’s Canadian New House Price and Wholesale Sales reports are second-tier data and unlikely to impact trading.
USDCAD technical outlook.
The intraday USDCAD technicals are bullish above 1.3630 looking for a break of 1.3700 to extend gains to 1.3850.  A break below 1.3630 shifts the focus to support at 1.3550.
USDCAD has not decisively breached downtrend resistance at 1.3660 on the daily chart. If it is successful, further gains to 1.4000 are likely. Failure to do so, points to a drop to 1.3400.
For today, USDCAD support is at 1.3630 and 1.3570.  Resistance is at 1.3670 and 1.3710
Today’s range 1.3610-1.3710
Chart: USDCAD 4 hourly

Source: Saxo Bank
G-10 FX recap and outlook
Traders are getting ready to close their books on 2022 but first must get through today’s “quadruple witching hour.” At 10:am this morning, a reported $4.0 trillion in stock futures, stock options, index futures and index options expire. Prepositioning by day traders and the like may have contributed to yesterday’s US stock market plunge.

The flurry of rate hikes announced by the ECB, Norges Bank, Bank of England, and Swiss National Bank, followed by hawkish rhetoric from policymakers elevated fears for a nasty recession, exacerbated by even higher interest rates.

Asian equity indexes closed with losses with Japan’s Nikkei 225 index losing 1.87% and Australia’s ASX 200 down 0.79%. The Hong Kong Hang Seng index closed with a modest 0.42% gain.

European bourses are deep in the red after hawkish rhetoric from ECB officials following Thursday’s 50 bp rate hike. The German Dax has lost 0.83% and the UK FTSE, 1.35%.

As of 5:30 am PT, S&P 500 futures are down 0.90% from the close. Gold prices rose 0.44% to $1784.03 while WTI oil fell 2.40%. The US 10-year Treasury yield is at 3.511%.

EURUSD peaked at 1.0735 in the aftermath of the ECB 50 bp rate hike and press conference, then retreated and consolidated in a 1.0611-1.0662 range overnight. A Reuters articles says that “sources” said another three, 50 bp hikes are planned. ECB will begin quantitative tightening of €15 billion/month, starting in March 2023. Germany’s Bundesbank says a recession in Germany is a certainty in 2023. Eurozone PMI data was a non-event.

GBPUSD dropped from 1.2222 to 1.2121 overnight after getting slammed when the Bank of England delivered a dovish 50 bp rate hike. It was dovish because policymakers were cautious about the need for further rate increases. Buyers of EURGBP due to divergent ECB and BoE outlooks weighed on GBPUSD. UK Retail Sales were weaker than expected falling 5.9% y/y in November compared to the forecast for a 5.6% decline.

USDJPY traded in a 136.83.-137.79 overnight range supported by modestly higher US Treasury yields and widening EUR/JPY interest rate differentials.

AUDUSD was on the defensive in a 0.6681-0.6734 range. The currency suffered from US dollar strength against the majors, and softer commodity prices.
FX open, high, low, previous close as of 6:00 am ET

Source: Saxo Bank
China Snapshot
Today’s Bank of China Fix: 6.9791, previous 6.9343
Shanghai Shenzhen CSI 300 rose 0.06%% to 3954.23
Chart: USDCNY Year-to-Date

Source: Bloomberg