Source: Wikimedia

March 8, 2022

  • LME suspends Nickel trading after prices rise 250% touching 100k/ton
  • Germany balks at sanctioning Russia oil imports, WTI steady around $122.70/b
  • US dollar grinds out gains except vs EUR

FX at a Glance 24 hours

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.2833-37, overnight range-1.2798-1.2838, close 1.2820

USDCAD tested support in the 1.2680 area yesterday just before NY opened then rallied throughout the day, closing with a bid at its session peak of 1.2820. The rally continued overnight thanks to broad-based safe-haven demand for US dollars.

The US dollar demand makes sense.  It is the currency of the most powerful nation on earth, and it is the world’s reserve currency.  The US economy is humming along tickety-boo, and the Fed has finally acknowledged it needs to hike rates to combat rising inflation.

Canada is in the shadow of the US literally and figuratively.  Generally, what’s good for American is good for Canada due to the closely entwined trading relationship. So why isn’t the Canadian dollar benefitting?

The Bank of Canada has already raised interest rates 0.25% and it is expected to raise them another 1.5% before the end of the year, which will match or exceed expected Fed rate hikes.

The BoC announced it would begin quantitative tightening while the Fed is still in the discussion stage. Nevertheless, US 2 year and 10-year Treasury yields are higher than the comparable yields in Canada.

Advantage USA-Buy USDCAD

Rising commodity prices are usually the Loonie’s BFF, except when they fall-out. That seems to be the case today. The last time WTI prices were at $122.90 was in June 2008 and USDCAD was in the 1.0460 level.  The Bank of Canada Commodity Price Index (BCPI) measures 26 commodities produced in Canada and priced in US dollars.  That index (750.63 as of Feb.1, 2022) is also at its highest level since 2008

Advantage Canada-Sell USDCAD

However, there is a school of thought that suggests the Russian invasion of Ukraine is creating stagflation as world economic growth slows sharply and unemployment rises.  If so, commodity demand will drop and that supports buying USDCAD. 

Source: Bank of Canada

Soaring housing prices in Canada are always near the top of the list of major economic risks and the prospect of steeply rising Canadian interest rates has elevated them further. Even so, those same risks are evident in the G-10 economies as well.  Arguably, if Canadian house prices fall sharply, it won’t be in a vacuum.

Advantage- Tie USDCAD neutral.

The long term USDCAD technicals are bullish with the uptrend line from August 2011 (weekly chart) intact while prices are above 1.2020, a level guarded by a daily uptrend line from May 2021 at 1.2500.

Advantage-USA Buy USDCAD

Conclusion:  The benefits from the Canadian dollar being a commodity currency and its proximity to the USA are quickly forgotten during bouts of risk aversion, but they still act as a drag on USDCAD gains. The Canadian dollar should outperform against AUD, NZD, and EUR.

USDCAD technical outlook

The intraday USDCAD technicals are bullish while prices are above 1.2780, looking for a break above the 1.2840-50 area to extend gains to 1.3050.  A break below 1.2780 targets 1.2740 then 1.2680.  The momentum indicators suggest that USDCAD is overbought and ripe for a correction.

For today, USDCAD support is at 1.2780 and 1.2740.  Resistance is at 1.2840 and 1.2860. Today’s Range 1.2740-1.2840

Chart USDCAD 4 hour

Source: Saxo Bank

G-10 FX recap and outlook

Market risk sentiment turned modestly positive in Europe and in early NY trading, following a downbeat Asian market.  There are reports that the EU is considering a massive bond sale to finance energy and defence spending.

The London Metal Exchange LME halted trading in Nickel after prices soared 250% and touched $100,000 /ton. The steep rise margin calls became a problem, especially for China’s Tsingshan Holding Group Co., the world’s largest nickel and stainless steel producer,

European stock markets rallied int the wake of reports about new EU stimulus, but those gains were erased after another report said that the US would sanction Russian oil imports, regardless of EU actions.  The S&P 500 futures gave back earlier gains in choppy trading.  Gold and oil prices are higher, while the US 10-year Treasury yields slipped to 1.848% from 1.866%.

President Biden is speaking at 7:45 PST and expected to confirm that the US will ban imports of Russian crude

EURUSD rallied from 1.0850 to 1.0921, before retreating to 1.0895 in NY trading.  The single currency benefited from a short squeeze sparked by the talk of a new EU stimulus package to finance defence and energy spending. Eurozone Q4 GDP (unchanged at 4.6% y/y) and Germany Industrial Production data was ignored. .

GBPUSD is trading just above its overnight session low after trading in a 1.3083-1.3132 range.  The price action is headline driven with domestic influences largely ignored.

USDJPY is at the top of its 115.29-115.78 range supported by the rise in the 10 year Treasury yield from 1.736% yesterday to 1.844% in NY today.

AUDUSD and NZDUSD retreated as traders shifted their focus from higher commodity prices to risk aversion trading.

Chart of the Day: Nickel

Source: Bloomberg

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

Chart: Saxo Bank

China Snapshot

Today’s Bank of China Fix 6.3185 previous 6.3478

Shanghai Shenzhen CSI 300 fell 2.01% to 4,265.39

China say’s “some people (read USA) who are being vocal about the principal of sovereignty on the Ukraine issue have kept undermining China’s sovereignty and territorial integrity on the Taiwan question.  This is a blatant act of double standard.”

Chart: China 1 month

Source: Saxo Bank