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February 8, 2023

  • Powell’s hawkish remarks largely dismissed.
  • BoC and Fed interest rate paths diverge.
  • US dollar extends yesterday’s losses overnight.

FX at a glance

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.3374-78, overnight range 1.3362-1.3410, close 1.3398

USDDCAD traders ignored BoC Governor Tiff Macklem as he rehashed the reasons why the central bank decided to stop raising interest rates. He repeated comments from January 25 saying, “If new data are broadly in line with our forecast and inflation comes down as predicted, then we won’t need to raise rates further.”

Instead, Fed Chair Jerome Powell’s comments got all the attention. His comments were hawkish. He warned of more rate increases and said that strong data like the recent labour report means the Fed may “have do more and raise rates more than what is price in.”

Traders decided that Mr Powell’s comments were not hawkish enough and concluded US rates would be cut before year end.

USDCAD dropped from 1.3465, pre-Powell comments to 1.3378 afterwards and closed at 1.3398. The sell-off was fueled by a rebound in the S&P 500 index with a bit of help from WTI oil which climbed from $74.70/barrel to $78.41/b overnight.

USDCAD Technical Outlook

The intraday USDCAD technicals turned bearish with the failure to break above downtrend resistance at 1.348 and the subsequent breach of the February uptrend line at 1.3370. That move suggests further losses to the 1.3260-70 area.

Longer term, the uptrend line from August 17 is intact above 1.3260, while the downtrend line from mid-October sits at 1.3570. A break either side of those levels suggests a 0.0200-point move.

For today, USDCAD support is at 1.3340 and 1.3305.  Resistance is at 1.3420 and 1.3450

Today’s range 1.3340-1.3420

Chart: USDCAD 4 hour

Source: Saxo Bank

G-10 FX recap and outlook

Fed Chair Jerome Powell is channeling Rodney Dangerfield. The Mr Dangerfield was a comedian who made a fortune with he catch=-phrase “I get no respect.”  Mr Powell knows how he feels.

The Fed Chair detailed an outlook that interest rates were going higher and that the market was underpricing the risk. Traders heard ““The disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy,” but ignored the caveat “it has a long way to go. These are the very early stages.”

The USD fell while stocks and commodities rose.

Asian equity markets closed mixed while European bourses are higher led by a 0.76% gain in the German Dax. S&P500 futures are unchanged, and gold rose 0.47% from yesterday’s close.  Biden’s State of the Union address did not have any impact on markets.

EURUSD traded in a 1.0724-1.0760 range. Prices are weighed down by the prospect of renewed US dollar demand from Fed rate hikes which continues to overshadow hawkish comments from ECB officials.  Goldman Sachs analysts suggest the ECB rate will peak at 3.5% in the summer but say risks are skewed to an earlier pause. The intraday EURUSD technicals are bearish below 1.0780.

GBPUSD is at the top of its 1.2040-1.2108 overnight range in NY. The gains are mainly due to EURGBP selling pressures. Some analysts warn that GBPUSD is vulnerable to rising inflation risks.

USDJPY is trading defensively and is near the bottom of its 130.61-131.37 range because of the firmer US 10-year Treasury yield which rose to 3.66% from 3.60% yesterday.

AUDUSD rallied in a narrow 0.6951-0.6995 range. The currency is benefitting from the hawkish rate outlook from the RBA and by the markets dismissal of Fed Chair Powell’s hawkish comments yesterday.

The US data calendar does not have any top-tier releases.

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

Source: Saxo Bank

China Snapshot

Bank of China Fix: 6.7752, Previous: 6.7967

Shanghai Shenzhen CSI 300 fell 0.44 % to 4076.14.

Fitch raises 2023 GDP forecast to 5.3% from 4.1% previously

Chart: USDCNY 1 month

Source: Bloomberg