February 28, 2020

USDCAD open (6:00 am EST) 1.3442-46     Overnight Range 1.3380-1.3462

USDCAD didn’t suffer from this mornings Canadian GDP report.  Statistics Canada said “Growth in real gross domestic product (GDP) slowed to 0.1% in the fourth quarter, owing to a decrease in business investment and weak international trade. These declines were offset by increased household spending. Final domestic demand edged up 0.2%, after rising 0.8% in the third quarter. The annual growth rate of Canada’s real GDP was 1.6% for 2019, a deceleration from the 2.0% growth in 2018. By comparison, real GDP in the United States increased 2.3%.”

It’s been a financial maelstrom for the past 24 hours, and it is likely to get messier today.

Traders are a nervous as Secretariat was at Maxim’s de Paris after yesterday’s 4.42% plunge in the Dow Jones Industrial Average and the S&P 500, which sparked similar losses in the major global indexes, overnight.

New coronavirus cases in New Zealand, Lithuania, Nigeria, and Belarus, along with news that Korea added another 671 virus cases, and Japan closed schools for a month, raised fears that the outbreak was becoming a pandemic.

Turkey reported that an airstrike in Syria killed 33 soldiers.  Russia claims the deaths resulted from artillery strikes by Syrian troops engaging rebels.  Turkey demanded an emergency NATO meeting and upped the ante by reopening the refugee route into Greece, using the migrants to force support from the EU.  Russia responded by sending two warships to the Syrian coast.

Portfolio rebalancing flows planned a large role in the currency mayhem.  The 7.65% drop in the S&P 500, suggests substantial US dollar buying to allow portfolio managers to maintain their benchmarks.

The US dollar is poised to end the week with gains against the commodity currency bloc led by a 1.18% rise against AUD, while losing against the safe-haven currencies led by a 2.4% drop in JPY.

Chart: Currency gain/loss (%) against the US dollar from Feb 24 NY open to  Feb 28 NY open (6:00 EST)

Source: Saxo Bank/IFXA

FX Recap and outlook:  EURUSD continued to climb overnight, underpinned by a mixture of EURGBP, EURAUD, EURAUD, EURCAD buying alongside safe-haven demand, although EURJPY selling limited gains.  The single currency also got a healthy boost the near-unanimous expectations for the Fed to cut overnight interest rates on March 18. How would a 0.25% US rate cut do anything to cure a pandemic, rebuild a global supply chain disrupted by COVID-19, or boost a US economy that can’t get goods from overseas? Turkey’s implied threat to reopen the refugee highway into Europe also suggests limited EURUSD upside if the migrant crisis flares again.  There was plenty of Euro-area data today, including German employment, but it was ignored by FX traders.  The intraday EURUSD technicals are bearish below 1.1060, looking for a retest of support at 1.0940.

GBPUSD is closing the weak on the defensive in part because the UK government outlined a rather aggressive EU trade negotiating posture.  Prices consolidated yesterday’s month-end selling losses in a 1.2860-1.2918 range, and are trading just above the low in New York.

USDJPY sank as a tsunami of safe-haven sellers drove prices from 110.32 yesterday to 108.52 in New York. The steep plunge in US Treasury yields, which dropped from 1.48% last Friday to 1.20% today, exacerbated the selling pressure.

AUDUSD and NZDUSD suffered under the one-two punch of mon-end demand for US dollar’s and slowing global growth concerns due to COVID-19.  A noted Australian analyst, Terry McCrann predicted the RBA would cut interest rates on March 3, which weighed on AUDUSD

Oil prices went into free-fall.   WTI dropped from $47.00 to $44.98. The breach of support at $48.20/barrel represents the 76.4% Fibonacci retracement of the January-May, 2019 range and suggests further losses to $42.50./b.  However, month-end rebalancing flows may have distorted the moved.  That is evident in gold prices.  XAUUSD dropped from $1,649.38 to $1,621.47, which is counter-intuitive in an otherwise risk-averse market.

USDCAD rallied alongside the plunge in WTI and the antipodean currencies.  Traders have increased the odds for a BoC rate cut on March 4 to 50/50. The BoC said they talked about an “insurance rate cut” at their October 2019 meeting due to the “deteriorating” global outlook. The global outlook has since, sharply deteriorated. Wednesday because not only has COVID-19 has negatively impacted the global outlook; the domestic economy is going off the rails as well.  Some economists predict the railway blockades could reduce GDP growth by 0.2%.  The BoC may also opt for an insurance rate cut because of the risk to Canadian manufacturers from supply chain disruptions, as COVID-19 spreads.

FX markets will ignored economic data and focus on Wall Street price action and COVID-19 headlines.

USDCAD Technical Outlook

The USDCAD technicals are bullish.  The break above 1.3380 overnight, sets the stage for a retest of the 1.3650 January 2019 peak, if prices do not retreat below 1.3260.  The intraday uptrend is intact above 1.3410, looking for a move above 1.3480 to extend gains to 1.3530. For today, USDCAD support is at 1.3410 and 1.3380.  Resistance is at 1.3480 and 1.3530. Today’s range 1.3430-1.3530

Chart: USDCAD daily

Source: Saxo Bank