June 8, 2023

  • BoC rate hike roils US markets.
  • Eurozone falls into “technical” recession.
  • US dollar inches higher-CAD outperforms.

FX at a glance

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.3343-47, overnight range 1.3336-1.3374, close 1.3371

It’s not often that Bank of Canada actions roil US markets. In fact it happens about as often as smoke from Quebec wildfires blanket New York City. Wednesday was one of those days.

New Yorkers experienced flashbacks to their college days, when they huddled in smoke-filled dorms, danced with Mary Jane, and sang ‘don’t bogart that joint, my friends.  Others just choked on the fumes from billowing clouds of smoke from the fires.

Photo: CNN

The Bank of Canada’s somewhat surprising decision to increase its benchmark rate by 25 bps to 4.75% has caused considerable concern in US markets. If policymakers at both the BoC and Australia’s RBA misinterpret the economic indicators and find themselves compelled to raise interest rates after pausing hikes for a few meetings, it may not be the appropriate time for the Fed to maintain unchanged rates next week.

The US 10-year Treasury yield rose to 3.81% from 3.65%, although Treasury issuance was likely the true driving force. Wall Street closed on a mixed not with the risk barometer S&P 500 index losing 0.38%. Gold prices dropped on fears of higher US interest rates while oil prices remained rangebound.

The BoC raised rates because underlying inflation remained “stubbornly high” and monetary policy was not sufficiently restrictive to bring supply and demand back into balance. That sets the stage for another hike in July or September.

Outgoing Deputy Governor Paul Beaudry will explain the BoC decision in a speech in Victoria B.C today at 3:25 pm EDT.

USDCAD Technical Outlook

The intraday USDCAD technicals are bearish while trading below 1.3405 and looking for break below support in the 1.3290-1.3330 zone to accelerate the downside toward 1.3000. A break above 1.3405 would target 1.3550 and argue for more 1.3300-1.3550 consolidation.

Longer term, the USDCAD downtrend from March is intact while prices are below 1.3630 while the uptrend line from May 2021 is intact above 1.3030.

For today, USDCAD support is at 1.3330 and 1.3290.  Resistance is at 1.3380 and 1.3410.

Today’s range 1.3305-1.3390.

Chart: USDCAD daily

Source: Saxo Bank

G-10 FX recap and outlook  

You know markets are in disarray when the Bank of Canada’s actions make headlines. With the FOMC meeting less than a week away, traders are searching for justifications to support their positions. They couldn’t find them in Europe, and today’s data from NY won’t provide any either.

US weekly jobless claims rose 28,000 to 261,000 in the week ending June 3. It is the highest level for initial claims since October 2021 and serves to add another layer of uncertainty around the FOMC hike or pause debate.

Asian equity indexes closed with losses. Japan’s Nikkei 225 index dropped by 0.85%, while Australia’s ASX 200 fell by 0.26%. Chinese markets, however, stood out with the Hang Sang and Shanghai Shenzhen CS! 300 experiencing gains.

European equity markets are in positive territory, although the gains are modest, except for the UK FTSE 100, which is down by 0.27%.

EURUSD traded within a range of 1.0698-1.0733, rising despite a 0.1% q/q contraction in Q1 GDP, pushing the Eurozone economy into a technical recession. This news is outdated, and prices were supported by expectations for a hawkish ECB meeting next week.

GBPUSD rose from 1.2438 to 1.2480, receiving some support from the better-than-expected (but still poor) RICS Housing Price Balance data. GBPUSD is simply following the broader movements of the US dollar. In the short term, GBPUSD technicals are bullish above 1.2400, with further gains anticipated up to 1.2550.

USDJPY traded between 139.63 and 140.22, driven by higher US Treasury yields and expectations for a hawkish outcome from the FOMC. Japanese Q1 GDP rose by 2.7% y/y, easily surpassing the expected 1.9%.

AUDUSD rallied from 0.6654 to 0.6689 due to general weakness in the US dollar and the recently hawkish outlook from the RBA. Australia’s trade surplus narrowed in April.

US weekly jobless claims and Wholesale Inventories are yet to be released.

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

Source: Bloomberg

China Snapshot

Bank of China Fix: 7.1280, previous 7.1196

Shanghai Shenzhen CSI 300 rose 0.81% to 3820.19

Chart: USDCNY 6 month

Source: Bloomberg