Picture: Pixabay

October 6, 2021

Soaring energy costs stoke inflation fears, and crush equities

US debt ceiling debate is another worry for markets

US dollar rallies, opens with gains across the board

FX at a Glance:

Source: IFXA/RP

USDCAD Snapshot   Open 1.2637-41, Overnight Range 1.2580-1.2645, Previous close 1.2581

USDCAD rallied overnight, erasing all yesterday’s losses, while rejecting a downside move below support in the 1.2570-80 area. News Canada’s Trade surplus widened in August (actual $1.94 billion vs July 0.74 billion) was not a factor.

Traders worried that the inflationary impact from soaring energy prices will force central banks to raise rates sooner than expected and boosted Treasury yields.  The US 10-year yield surged to 1.571% in Asia, from 1.481% and sent stock markets tumbling

WTI peaked touched $79.70/barrel yesterday then slipped to $78.28/b overnight following the 951,000 barrel increase in US inventories, reported by API.  Even with the dip, WTI prices ($78.79/barrel in NY) are at October 2018 levels.  High oil prices will serve to limit USDCAD gains.

USDCAD direction will continue to be driven by Wall Street price action and the prospect that a strong NFP report Friday will boost Fed taper expectations in November.

Technical view:  The USDCAD technicals are unchanged from yesterday as the to-ing and fro-ing between 1.2580 and 1.2650 is inside the well-established range.  The bottom is the uptrend line from mid-June at 1.2570-80 and downtrend at 1.2710 is from September 20.  A decisive break below 1.2570 will lead to a test of 1.2400, while a break above 1.2710 targets 1.2810.

For today, USDCAD support is at 1.2580 and 1.2550.  Resistance is 1.2660 and 1.2710. Today’s range 1.2580-1.2660

Chart USDCAD 4 hour

Source: Saxo Bank

G-10 FX recap and outlook

US ADP jobs rose a higher than expected 568,000 jobs in September, easily topping the consensus forecast for a 428,000 gain.  The US dollar barely budged on the news, as this report is a notoriously poor barometer for NFP results.

See-sawing risk sentiment is a typical market reaction in the days ahead of a US employment report.  The difference this week is that the US administration has lobbed a debt-default grenade into the mix and Treasury Secretary Yellen’s October 18 deadline exacerbated the situation.

The Democrats want to spend $3.5 billion for an American Utopia and claim anything less is a Republican hell. The world just wants them to get their s**t together.

Natural Gas prices have soared and extended Septembers steep rally and are at prices last seen in December 2008. European and UK gas prices have a similar trajectory in part due to low inventories and expected rising winter demand.  Traders fear the inflationary impact of rising prices on interest rates.

The major Asian equity indexes closed with losses led by a 1.05% drop in Japan’s Nikkei. The lingering impact of China regulatory actions and Evergrande concerns weighed on sentiment.

European bourses are sharply lower due to soaring energy costs raising inflation concerns but off their worst levels.  The German DAX is down 1.67%.  Wall Street is poised to open in negative territory. S&P 500 futures  pared overnight losses but are down 1.00% as of 5:30 am PT.

EURUSD got clocked, dropping to 1.1530 from 1.1600, on the back of the surge in US Treasury yields and weaker than expected Eurozone and German economic data.

German Factory orders fell 7.7% m/m in august compared to a 4.9% increase in July.  Eurozone Retail sales were a weaker than expected 0.3% in August (forecast 0.8%) but still better than the 2.6% decline in July. Prices are also suffering from ongoing political uncertainty in Germany.

The EURUSD technicals are bearish with the break below 1.1560 setting the stage for a test of 1.1420.

GBPUSD erased yesterdays gains and dropped from 1.3630 to 1.3545 on the back of broad US dollar strength.  

However, rising inflation fears have stoked expectations for the Bank of England to raise interest rates sooner rather than later, which is supporting prices. The long term GBPUSD uptrend is intact while prices are above 1.3390.

USDJPY rode the Treasury yield rally bus and climbed to 111.78 from 111.37.  Resistance is at 112.40 which is unlikely to be tested (if at all) until after the NFP data.

NZDUSD was the focus in Asia. Prices jumped from 0.6945 to 0.6978 immediately after the Reserve Bank of New Zealand (RBNZ) announced a 0.25% increase in the OCR rate to 0.50%, with further increases to come. 

The news was universally expected and NZDUSD plunged to 0.6879, with attention shifting to US interest rates.  AUDUSD followed suit with prices falling from 0.7292 to 0.7228.

Chart of the Day- US Natural Gas

Chart: Saxo Bank

FX open, high, low, previous close

Chart: Saxo Bank

China Snapshot -Closed Golden Week holidays

Today’s Bank of China Fix, 6.4854,  

Shanghai Shenzhen CSI 300 closed

Chart: USDCNH (offshore)

Source: Saxo Bank