May 25, 2023

  • Germany in recession.
  • FOMC minutes reveal divided Fed.
  • USD consolidating gains below peak levels.

FX at a glance

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.3594-98, overnight range 1.3590-1.3611, close 1.3595

USDCAD rallied due to another wave of negative risk sentiment which sparked widespread US dollar demand, yesterday and continued overnight.  Fitch rating putting the US AAA debt rating on negative watch exacerbated the demand.

USDCAD gains were hampered by rising oil prices.  WTI climbed from $73.51/barrel on Wednesday to $74.70/b after the Energy Information Administration reported weekly crude inventories plunged by 12.456 million barrels (as of May 19). Tate drop, combined with the Saudi threat to “short sellers” supported prices while fears of slowing China growth limited gains.

The Canadian data calendar is empty for the rest of the week, leaving USDCAD direction to be determined by US data and debt ceiling discussion headlines.

USDCAD Technical Outlook

The intraday USDCAD technicals are bullish above 1.3510, with the breech of resistance at 1.3590 hanging a target on the 1.3650 level. A topside break would extend gains to 1.3710 then 1.3760.  A break below 1.3510 would extend losses to 1.3400.

For today, USDCAD support is at 1.3560 and 1.3510.  Resistance is at 1.3630 and 1.3660..

Today’s range 1.3550-1.3650

Chart: USDCAD 4 hour

Source: Saxo Bank

G-10 FX recap and outlook  

Markets are dancing a hula, but it is no luau. Sentiment sways between forecasts for the Fed to hike rates or leave them unchanged as pahu drummers pound out a debt default beat. Mai Tai, anyone?

The FOMC minutes revealed that the same concerns that drove policymakers to hike rates 500 bps since March 2022 continue to haunt policymakers. The labour market was tight, and inflation was elevated. Yet, policymakers were divided over whether to raise rates further or just leave them as is and allow previous rate hikes to work through the economy.

Federal Reserve Governor Christopher Waller is not happy about the slow progress on lowering inflation and said, “I do not support stopping rate hikes unless we get clear evidence that inflation is moving down towards our 2% objective.”

His colleague, Atlanta Fed President Raphael Bostic is a tad less hawkish. He said “We’re going to let the data guide us, and we don’t want to be locked into any particular movement. The policies that we’ve done, the tightening that we’ve done, is just starting to show up into the economy.”

A US debt default is inching toward the cliff edge, but the pace appears to be slowing. Reuters reports that Democrats and Republican negotiators had “productive talks” on Wednesday. Meanwhile Fitch ratings put policymakers on notice and slapped a “negative watch” on the US AAA debt rating.

FOMC members claim to be “data dependent.”  Today’s data suggests the US economy is still percolating.

 Initial US jobless claims rose 4,000 to 229,000, but that was only after the previous week’s, number was revised down to 225,000 from 242,000.

The Chicago Fed National Activity Index showed economic growth picked up in April, rising to 0.07 from -37 in March.

 The US economy is stronger than expected Q1 GDP rose 1.3% q/q compared to the forecast for a 1.1% increase.

The data supports calls for another rate hike next month.

EURUSD traded lower, falling from 1.0756 to 1.0715, partly due to negative sentiment from confirmation that Germany was in recession in Q1 2023. The German economy fell 0.3% in the first quarter, following a 0.5% drop in Q4 2022. The EURUSD technicals are bearish with a decisive break below 1.0720 targeting 1.0490, the 38.2% Fibonacci retracement level of the September 2022-May 2023 range.

GBPUSD traded in a 1.2334-1.2386 range on the back of broad US dollar strength. Yesterday’s hotter than expected UK inflation report fueled rate hike expectations with 90 bps of tightening expected before year end. The GBPUSD technicals are bearish below 1.2480 but need to break below support in the 1.2280-1.2310 area to avoid a sharp rebound.

USDJPY rallied from 138.83 to 139.70 on higher US treasury yields. The 10-year Treasury yield is 3.76% today compared to 3.66% on Monday.

AUDUSD consolidated yesterday’s losses in a 0.6528-0.6546 range. NZDUSD continued to suffer from the RBNZ’s dovish pivot and traded in a 0.6078-0.6112 range.

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

Source: Bloomberg

China Snapshot

Bank of China Fix: 7.0529, previous 7.0560

Shanghai Shenzhen CSI 300 fell 0.22% to 3850.50.

Chart: USDCNY 6 month

Source: Bloomberg