August 4, 2022

  • Markets quiet and ignore China’s blustering belligerence
  • Bank of England hikes rates 50 bps, warns of pending recession
  • US dollar inches higher as JPY underperforms

July FX at a glance:  

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.2831-35, overnight range 1.2820-1.2854, close 1.2841

USDCAD dropped below its overnight low of 1.2833 and is trading at 1.2820 in early NY with the fall driven by rising S&P 500 futures. The improved risk sentiment tone is weighing on prices and helping to offset concerns about falling oil prices.

WTI oil spiked to $98.58/b Wednesday, ahead of the Opec production increase announcement then plunged to $90.35/b by lunch after the cartel delivered a meager 100,000 b/day increase.

Nevertheless, risk sentiment is positive, and Canadian interest rates are going higher, which sets the stage for further USDCAD losses towards 1.2750.

Canada’s June Trade surplus is $5.05 billion, which is pretty close to the $5.32 billion in May (before it was revised lower to 4.78 billion. The gain is mostly due to oil and gold exports.

USDCAD technical outlook

The intraday USDCAD technicals are bearish while prices are below 1.2860 risking further losses to 1.2740 on a move below 1.2805.  The downtrend on the daily chart is intact below 1.2890 suggesting a move below 1.2740 will extend losses to 1.2520, the June low.

For today, USDCAD support is at 1.2805 and 1.2740.  Resistance is at 1.2860 and 1.2890.  Today’s Range 1.2805-1.2860

Chart: USDCAD 4 hour

Source: Saxo Bank

G-10 FX recap and outlook

Global markets are ignoring risks from Xi Jinping’s Taiwan temper tantrum while global leaders merely shake their heads and its business as usual.

Wall Street futures are grinding higher, extending yesterday’s gains with traders shrugging off US recession concerns and Fed policymaker comments suggesting much higher US interest rates.

Wednesday, Neel Kashkari, Minneapolis Fed President, said, “Some financial markets are indicating they expect us to cut interest rates next year. I don’t want to say it’s impossible, but it seems like that’s a very unlikely scenario right now given what I know about the underlying inflation dynamics. The more likely scenario is we would continue raising (interest rates) and then we would sit there until we have a lot of confidence that inflation is well on its way back down to 2%.”

EURUSD traded with a modestly bullish bias in a 1.0155-1.0197 range. Traders turned a deaf ear to Ukraine warnings about a new Russian offensive. However, the fall-out from that war is handcuffing the ECB’s ability to deal with rising inflation and a slumping economy. EURUSD technicals are in an uptrend above 1.0110 but need to extend above 1.0300 to avoid a retest of the low.

GBPUSD rallied from 1.2130 to 1.2195 ahead of the Bank of England monetary policy announcement.  Prices jumped to 1.2208 on the news of the widely expected 50 bp hike which lifted the overnight rate to 1.75%, then plunged to 1.2067 in the wake of dire warnings about 13% inflation and a looming recession.

The Bank of England said the UK will be in a recession later this year and inflation will hover in the 10% area for most of 2023.

USDJPY has suffered from a mix of safe-haven demand for yen and a steep slide in 10-year Treasury yields which knocked the currency pair down to 130.50 on Tuesday. Prices have recovered with USDJPY trading in a 133.43-134.42 range overnight, coinciding with a recovery in the US 10-year Treasury yield from 2.535% Tuesday to 2.727% today.

AUDUSD rallied from 0.6937 to 0.6988 due to better than expected trade data and general US dollar weakness. Australia’s trade surplus surged to $17.670 million from $15.01 million helped by increased coal shipments.

NZDUSD mirrored the AUDUSD move, rising from 0.6267 to 0.6312.

US jobless claims rose 260,000 from the revised lower 254,000 last week.

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

Source: Saxo Bank

China Snapshot

Today’s Bank of China Fix: 6.7636, previous 6.7813

Shanghai Shenzhen CSI 300 rose 0.85% to 4,101.54

China unleased a massive military exercise designed to intimidate Taiwan after the Taiwanese government hosted US Speaker of the House Nancy Pelosi. Xi Jinping’s show of strength was nowhere to be seen when the US Navy’s USS Ronald Reagan and its escort ships were in the area.

Chart: USDCNY  1 month

Source: Bloomberg