Photo: Wikimedia commons

August 2, 2022

  • US/China tensions spook markets
  • RBA surprises with somewhat dovish statement
  • US dollar opens mixed-JPY outperforms

July FX at a glance:  

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.2864-68, Monday & overnight range 1.2769-1.2876, Friday close 1.2795

Canadian’s return from a long weekend to somewhat sloppy, thin, and nervous markets.  Russia’s war with Ukraine remained a focus in Europe, while US House Speaker Nancy Pelosi’s Asia cruise had Asian markets on edge. Weaker than expected Chinese PMI data helped drive AUDUSD and NZDUSD lower and USDCAD climbed in sympathy.

USDCAD direction continues to be dictated by the outlook for the Fed, and general risk sentiment. Traders are already looking ahead to Friday when the Canadian employment report is released. Actually, they are not. It is the US nonfarm payrolls data which will determine the USDCAD path. NFP is expected to rise 250,000 while the unemployment rate remains steady at 3.6%.  If so, it would suggest the US economy is resilient, allowing the Fed to hike rates to their hearts content.

There are not any Canadian economic reports today.

USDCAD technical outlook

The intraday USDCAD technicals turned bullish Monday with the break above 1.2820 and are looking to retest resistance in the 1.2950 zone. A topside break targets 1.3070, while a move below 1.2780, targets 1.2710.  the uptrend from July 2021 is intact while prices are above 1.2550.

For today, USDCAD support is at 1.2830 and 1.2790.  Resistance is at 1.2890 and 1.2910.  Today’s Range 1.2830-1.2910

Chart: USDCAD 4 hour

Source: Saxo Bank

G-10 FX recap and outlook

Nancy Pelosi has one foot in the grave, and she appears to want the rest of the world to join her.

Why else would she antagonize China’s wannabe Emperor Xi Jinping, who is only slightly more stable than North Korea’s Kim Jung-un. On the other hand, showing China who is boss is not a bad plan.

Nevertheless, global risk sentiment took a turn for the worse as US/China tensions ratchet higher. In addition, North Korea is planning another nuclear test, while Al Qaeda may be looking to retaliate for the US disposing of its leader, Zawahiri.

The Fed hasn’t decided how high interest rates need to rise to tame the inflation beast, but bond traders are convinced they know when rates will be cut. That will happen at the beginning of 2023 because they believe the Fed will not want to exacerbate a weakening economy by tightening. To that end the 10-year Treasury yield plunged from 2.72% to 2.562% today.

EURUSD started the week by gapping lower at the Asia open on Monday, then rallying from 1.0207 to 1.0993 overnight, before sliding to 1.0230 in NY. Expectations of further ECB rate hikes support EURUSD, but gains are capped by safe-haven demand for US dollars.

GBPUSD traded from a 1.2159 low on Monday to 1.2278 overnight before sliding to 1.2218 in NY today. The UK is still dealing with political uncertainty as the Tories look for a replacement for Boris Johnson. However, the focus is on Thursday’s Bank of England meeting. The markets expects a 50 bps rate hike, but the risk is a disappointing 25 bp hike.

USDJPY dropped from 134.45 Friday morning to 130.40 overnight. The 3% slide was due to the steep plunge in US Treasury yields and from safe-haven demand due to US/China tensions.

AUDUSD dropped from 0.7046 yesterday to 0.6918 after the RBA hiked rate 0.50%, as expected, then issued a somewhat dovish statement. Policymakers merely tweaked the statement from “withdrawing extraordinary monetary support” to “a further step in in the normalisation of monetary policy.”  The RBA raised its inflation forecast for 2022 to 7.754% but expects it to fall to 4% in 2023.

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: Aug.1, 6.7462, Aug. 1 6.7467, previous 6.7437

Shanghai Shenzhen CSI 300 fell 1.95% to 4,107.02

NBS Manufacturing July PMI 49.0 vs. Exp. 50.4 (Prev. 50.2); Non-Manufacturing PMI 53.8 vs Exp. 54.0 (Prev. 54.7)

China’s Peoples Liberation Army conducting live fire drills in East China Sea.

Chart: USDCNY  1 month

Source: Bloomberg