September 21, 2022

  • Traders fear hawkish Fed outcome
  • Putin declares “partial mobilization”, invokes nukes
  • US dollar in demand on elevated risk aversion

FX at a glance: 

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.3361-64, overnight range 1.3360-1.3392, close 1.3368

USDCAD consolidated yesterday’s gains fueled by falling equity prices and the higher US 10-year Treasury yield. Arguably the lower-than-expected inflation report did more harm than good. 

Headline CPI fell to 7.0%y/y in August while core CPI dropped to 5.8% from 6.1% y/y. Those results suggested that the BoC may be less aggressive in raising rates.

Traders ignored a speech by BoC Deputy Governor Paul Beaudry who suggested that the Banks inflation fighting policies would result in a small economic correction, but not a recession.

WTI oil prices jumped from $83.51/barrel to $86.64/b following Putin’s speech.

Is it time to fade the rally?  USDCAD rallied 3.3% in just eight days, rising from 1.2955 to 1.3392 overnight. It is beginning to look overdone. Expectations for a hawkish FOMC meeting are reflected in current rates and unless the Fed hikes 100 bps, the greenback will give back some of its recent gains.

The Bank of Canada has been more aggressive than the Fed in raising rates, and there is no evidence to suggest things will change just yet. The latest Russian news fueled safe-haven demand for US dollars.  Canada’s proximity to America, combined with its relatively robust economic growth suggests the Canadian dollar may see some safe-haven demand as well.   The USDCAD can easily drop to 1.3225 and leave the uptrend intact.  Aggressive traders may consider selling in the 1.3380-90 area, with a Stop loss at 1.3440 for a retest of support at 1.3220.

USDCAD Technical outlook

The intraday USDCAD are bullish above 1.3330 and looking for a decisive move above the 1.3390 area to extend gains to 1.3440.  A topside breach will extend gains to 1.3640.  A move below 1.3330 targets 1.3220. Only a move below 1.3220 will negate the upside pressure.

For today, USDCAD support is at 1.3330 and 1.3270.  Resistance is at 1.3390 and 1.3440. Today’s range: 1.3310-1.3410

Chart: USDCAD 4 hour

Source: Saxo Bank

G-10 FX recap and outlook

“It’s us against the West.” Russian President Vladimir Putin tore a page from Joseph Goebbel’s Nazi Germany Propaganda Handbook and called up 300,000 people with military experience in an attempt to reboot his Ukraine war. 

In a ”State of the Dictatorship” address, Putin declared, “When the territorial integrity of our country is threatened, we will certainly use all the means at our disposal to protect Russia and our people. “Those who are trying to blackmail us with nuclear weapons should know that the wind patterns can also turn in their direction.”

Russia plans to hold referendums in occupied areas of Ukraine to pave the way for a formal annexation of the territory. The head of Russia’s Security Council said, “referendums that fold regions into Russia itself would make redrawn frontiers “irreversible” and enable Moscow to use “any means” to defend them.”

Western leaders call the vote a “sham,” a “parody of democracy.”

Despite the danger to world peace posed by Putin’s actions, European equity indexes are well-above their Covid lows, and Gold prices are depressed, suggesting traders fear the Fed more than Putin.

The Fed is widely expected to hike rates by 75 bps, raise dot-plot forecasts, and issue a hawkish policy statement.

 It is hard to believe the Fed can be any more hawkish than what is expected, which makes the US dollar vulnerable to a correction and equities subject to a sharp rebound.

Wall Street closed with losses, and the major Asia equity indexes did the same. Japan’s Nikkei 225 fell 1.35%, while Australia’s ASX lost 1.56%.

European bourses are trading modestly lower except the UK FTSE 100, which is 0.41% higher. S&P 500 and DJIA futures are modestly higher. Gold rose 0.72%, while WTI oil climbed 1.81%.

The US 10-year Treasury yield is at 3.542%, down from 3.569% yesterday.

EURUSD traded sideways in Asia and then dropped from 0.9974 to 0.9886 early in Europe due to Putin’s comments. Prices rebounded to 0.9925 in early NY. EURUSD was also weighed down by bearish comments by ECB policymaker Luis de Guindos. He warned that the eurozone might suffer a winter recession but the ECB needs to raise rates despite that risk.

GBPUSD fell from 1.1384 to 1.1306 due to the risk of higher US rates and inflationary risks from Prime Minister Liz Truss’s energy support and tax cut plans. The BoE is expected to hike rates 50 bps tomorrow, although some analysts believe a 75-bps bump is in the cards.

USDJPY traded in a 143.35-144.07 range supported by higher US Treasury yields and the belief the Bank of Japan will leave monetary policy unchanged at Thursday’s meeting.

AUDUSD traded with a negative bias in a 0.6656-0.6702 range. RBA Deputy Governor Michele Bulloch said that Australian rates were not restrictive yet and were looking at opportunities to slow the pace of rate hikes.

There are not any top-tier US economic reports today.

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

Source: Saxo Bank

China Snapshot

Today’s Bank of China Fix: 6.9536, previous 6.9468

Shanghai Shenzhen CSI 300 fell 0.74% to 3,903.73


Chart: USDCNY  1 month

Source: Bloomberg