March 22, 2023
- FOMC plan-Keep your eyes on the dots
- UK inflation rises higher than expected in February.
- US dollar traded quietly overnight, opens mixed compared to Tuesday.
FX at a glance
Source: IFXA Ltd/RP
USDCAD Snapshot: open 1.3700-04, overnight range 1.3696-1.3717, close 1.3713
USDCAD was largely ignored in overnight FX markets with the Japanese yen and Canadian dollar the only currencies to lose ground against the greenback.
Yesterday’s Canadian inflation data validated the Bank of Canada decision to pause rate hikes. Headline and Core inflation numbers were lower in February than in January, but it is too soon to announce, “job done.”
WTI oil prices have surged from Monday’s $64.15 low and traded at $69.15/b in NY. Technical selling by option traders contributed to drop to this week’s low while news that US crude inventories rose 3.26 million barrels last week hampered gains.
USDCAD will drift inside the well defined 1.3660-1.3760 range until the FOMC meeting.
The only data on tap today is the New Housing Price index.
USDCAD Technical Outlook
The intraday USDCAD technicals are bearish in the context of a minor downtrend channel bound by 1.3730 on the top and 1.3560 on the bottom. However, there is solid support in the 1.3640-60 area representing previous tops and current bottoms since February.
A topside break will extend gains to 1.3890 while a move below 1.3640 targets 1.3560.
For today, USDCAD support is at 1.3650 and 1.3620. Resistance is at 1.3740 and 1.3790.
Today’s range 1.3640-1.3740
Chart: USDCAD 4 hour
Source: Saxo Bank
G-10 FX recap and outlook
The Fed has a dilemma; save the global banking system or beat inflation back to target. Traders believe they can (and will) do both which explains the nervous, but positive risk sentiment tone.
The FOMC is expected to raise rates by 25 bps today and hint at a similar increase in May then maybe indicate a pause is needed to allow time to assess the impact of previous hikes on the economy. They are likely to downplay the recent banking events and reiterate that the banking system is sound and the officials are monitoring risks closely or other such blather.
Watch the dots.
The Summary of Economic Projections (SEP) dot-plot rate projections are expected to suggest rates cuts before the end of the year.
Fed Chair Jerome Powell is not a fan of the dot-plot projections in the (SEP). He constantly reminds reporters that the projections are just a record of individual FOMC member’s estimate of the Fed funds rate and not a Committee view.
Despite Powell’s views, markets are chomping at the bit for a sign that the Fed tightening cycle is near an end and will be off to the races with a dot-plot projection of lower rates in 2023.
Elsewhere, the Xi Jinping/Vlad Putin summit led to China and Russia signing a couple of agreements and China promoting itself as a peacemaker. To that end, the proposal calls for upholding the territorial integrity of all parties but doesn’t suggest Russia leave occupied Ukraine territory.
EURUSD traded quietly but cautiously bid in a 1.0760-1.0792 range with prices supported by hopes of a dovish Fed hike today. ECB President Christine Lagarde warned that recent financial turbulence could increase downside risks. She reiterated that future rate decisions are data dependent and that the ECB is neither committed to hiking or finished with hiking. EURUSD is vulnerable to a drop to 1.0600 if the Fed is less dovish than expected.
GBPUSD popped to 1.2296 from an Asia low of 1.2210 after UK inflation data was hotter than expected. UK CPI was expected to fall from 10.1% y/y in January to 9.8% y/y. Instead, it rose 10.4 % y/y. That was enough to guarantee a 25 bp BoE rate hike tomorrow.
USDJPY returned from a holiday and traded quietly in a 132.26-132.80 range. Prices are supported by a steady US 10 year Treasury yield of 3.587%.
AUDUSD traded sideways in a 0.6663-0.6701 range with FX trading muted ahead of the FOMC meeting.
The US data calendar is empty.
FX open, high, low, previous close as of 6:00 am ET
Source: Saxo Bank
Bank of China Fix: 6.8715, Previous: 6.8763
Shanghai Shenzhen CSI 300 rose 0.43% to 3999.44.
Chart: USDCNY 1 month