June 6, 2022

  • Risk sentiment sours with US 10-year Treasury yield above 3.0%
  • RBA hikes rates by 0.50%, more than expected
  • US dollar opens higher, JPY is the worst-performing G-10 currency.

FX change at a glance

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.2594-98, overnight range 1.2570-1.2617, close 1.2580,

USDCAD continues to consolidate recent gains but was unable to break below support in the 1.2540-50 area. The spike in in US 10-year Treasury yields above 3.0% turned sentiment negative and former Treasury Secretary Summers comments equating today’s inflation with Volker -era numbers shifted the focus to US interest rates.

WTI oil prices churned in a $117.79-$119.46/barrel band with supply concerns and an expected increase in Chinese demand underpinning prices. The uptrend is intact while prices are above $114.00/b.

USDCAD direction is at the mercy of global risk sentiment determined by S&P 500 moves. The BoC may be on an aggressive rate hike path but its only the Fed’s outlook that matters. That view is confirmed by the AUDUSD reaction to a bigger than expected rate hike.

Canada’s April Trade surplus narrowed to $1.5 billion from $2.49 billion in March.

USDCAD technical outlook

The USDCAD technicals are unchanged from Monday. The intraday technicals are bearish below 1.2620. A break above 1.2620 targets 1.2680 then 1.2710.  A move below 1.2540-50 targets 1.2500, then 1.2460.

For today, USDCAD support is at 1.2540 and 1.2490. Resistance is at 1.2590 and 1.2620.  Today’s Range 1.2540-1.2620

Chart: USDCAD  4 hour

Source: Saxo Bank

G-10 FX recap and outlook

Monday morning’s optimism didn’t last beyond the first coffee break. Traders started selling bonds, driving the US 10-year yield to 3.05% from 2.937%, which knocked Wall Street lower and boosted the US dollar. Negative risk sentiment permeated markets overnight.

Yesterday, former Treasury Secretary Larry Summers spooked markets. He and a group of economists recalculated 1980’s inflation data using current day spending patterns. They discovered that core inflation was 9.1% in June 1980, not 13.6% as reported. Volker only dropped inflation by 5%, not 11%. They concluded that 2022 inflation is at a scale closer to 1980’s.

Asia equity indexes closed on a mixed note. Japan’s Nikkei chopped erratically and managed to close with a tiny 0.10% gain. Australia’s ASX index dropped 1.53% following the larger than expected RBA rate hike. In Europe, the German DAX and French CAC indexes are down 0.86% and 0.66%, respectively, while the UK FTSE 100 is flat. DJIA and SP500 futures are underwater. WTI oil price is down while gold gained marginally. The US 10-year Treasury yield is 3.02%.

The US April Trade deficit improved to $87.1 billion from $107.7 billion.

EURUSD consolidated yesterday’s losses in a 1.0659-1.0704 range. Prices were weighed down due to the jump in the 10-year US Treasury yield to 3.05% yesterday and the consolidated losses overnight. Germany’s factory orders fell 2.7% in April (forecast 0.5%), providing policymakers with further evidence of German economic woes.

Traders are biding their time until Thursday’s ECB meeting. ING economists suggest that the ECB has all the elements to raise interest rates at this meeting., but they won’t. President Lagarde seemed committed to a July rate hike, so that’s when it will happen.

GBPUSD traders were busy and bounced the currency pair in a 1.2432-1.2533 range. Prices fell steadily in Asia, and news that Prime Minister Boris Johnson survived a no-confidence vote didn’t help. That could be because 42% of Conservative MP’s want him gone. Investors were already worried about economic growth and have now added political uncertainty to the list.

USDJPY rallied from 130.60 in NY yesterday to 132.99 overnight, fueled by the surge in US Treasury yields as the Bank of Japan’s yield curve control YCC) policy caps JGB yields at 0.25%. BoJ and Finance officials continue to make noises about the currency’s volatility. The Finance Minister said ““It’s important that exchange rates remain stable and reflect economic fundamentals. The government is watching foreign exchange market moves and their impact on the Japanese economy with a sense of urgency.” Eventually they will intervene to inject some two-way risk to the currency pair.

AUDUSD had a wild session jumping from 0.7161 pre-RBA to 0.7246 following the announcement of a larger than expected 0.50% rate hike to 0.85%. Traders expected a 0.25% or 0.40% hike. The RBA blamed the move on increased inflation.  The gains were fully erased and AUDUSD is at session lows in NY.  Only a few months ago, Governor Philip Lowe promised Australian rates would be unchanged until 2024. He has now trained his forecasting abilities on CPI, predicting inflation will rise this year and then drop to 203% next year.

NZDUSD tracked AUDUSD moves in a 0.6442-0.6496 range with prices weighed down by poor risk sentiment.

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

Chart: Saxo Bank

China Snapshot

Today’s Bank of China Fix 6.6649, Previous 6.691

Shanghai Shenzhen CSI 300 rose 0.31% to 4,179.13, Previous close 4,166.09

The easing of covid restrictions has lifted Shanghai Port’s daily volume to 95% of normal level.

Chart: USDCNY 1 month

Source: Yahoo Finance