Photo: Wikipedia

June 29, 2022

  • Month, quarter, and half-year end rebalancing distortion
  • US GDP a tick worse then expected and PCE Price index higher than forecast
  • US dollar bid due to rebalancing demand

FX change at a glance

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.2885-89, overnight range 1.2860-1.2889 close 1.2877

USDCAD continues to consolidate gains following the US inflation surge in June, which has prices bouncing in a 1.2820-1.3070 range.  The impact of domestic data on the currency pair is fleeting.

That won’t change today.  Traders are focused on Wall Street as sliding stock prices underpin the greenback. In addition, its month and quarter end.  The S&P 500 is down about 7.5% month to date, which implies large scale US dollar buying as managers rebalance their portfolios. Those flows are already occurring.

USDCAD is meeting some resistance due to high oil prices.  WTI broke above the top of its overnight trading range of $110.82-$112.84/barrel and jumped to $113.88 in NY.  Prices are supported by China easing covid restrictions, yesterday’s API report of a 3.8 million drop in USA crude inventories, Opec capacity limitations and Russia sanctions.

The Canadian data calendar is empty.

USDCAD technical outlook

The intraday USDCAD technicals are modestly bearish below 1.2890, looking for a move below 1.2840 to extend losses to 1.2790, then 1.2750.  A break above 1.2890 targets 1.3000, then 1.3050.

For today, USDCAD support is at 1.2840 and 1.2790. Resistance is at 1.2890 and 1.2950. Today’s Range 1.2790-1.2890

Chart: USDCAD quarterly-30 years

Source: Saxo Bank

G-10 FX recap and outlook

US Q1 GDP decreased 1.6% y/y, a tick worse than the 1.5% decrease expected.  It wasn’t a big deal as the data is stale.  Q1 PCE Prices index was higher than expected (7.1% vs 7.0%) and will support views for a more aggressive Fed interest rate response to rising inflation.

Traders are looking ahead to comments from Fed Chair Powell’s participation at the ECB Conference in Portugal.  However, month end and quarter end rebalancing flows will dictate market direction today.

Risk sentiment curdled yesterday and overnight after weak US economic data knocked TKO’d Wall Street.

Traders were unimpressed with Tuesday’s Conference Board Consumer Confidence Survey. Traders keyed in on the Expectations component, which is “based on consumers’ short-term outlook for income, business, and labor market conditions.” It dropped from 73.7 to 66.4, its lowest level since March 2013.

The US dollar caught a bid, stocks plunged, and safe-haven demand sank Treasury yields.

It’s a great story, but suggesting the market volatility was due to the data is probably inaccurate. Markets are focused on the Fed’s interest rate outlook, and some second-tier economic data will not deter them from planned rate hikes.

The magnitude of equity, bond, and US dollar rebalancing flows for month and quarter-end likely played a more significant role.

Nevertheless, Asia equity indexes followed Wall Street’s lead and closed with losses. Japan’s Nikkei 225 and Australia’s ASX 200 lost 0.91% and 0.94%, respectively. European bourses are deep in the red, led by a 1.71% drop in the German Dax. DJIA and S&P500 futures, and gold are modestly lower, while the US 10-year Treasury yield is steady at 3.168%.

EURUSD dropped from 1.0535 to 1.0487 at the European open, then popped to 1.0527 in NY. The bounce was due to the 10.0%y/y inflation print from Spain (previous 8.5%). Traders are hoping that knocks the inflation complacency smile off the ECB and forces the central bank to act more aggressively at its July 21 meeting. The intraday EURUSD technicals are bearish below 1.0580, looking for a break below 1.0450 to target 1.0400.

GBPUSD traded in a 1.2156-1.2211 band. The currency is suffering a litany of woes, including rising recession risks, soaring inflation, political nonsense, and self-inflicted Brexit wounds. Soc Gen’s Head of FX Research Kit Juckes predicts GBPUSD will “inevitably fall below parity.” On the other hand, some analysts believe that UK economic pessimism is overdone, implying limited GBPUSD downside. For today, GBPUSD technicals are bearish below 1.2250.

USDJPY is in demand, rising from a low of 135.79 in Asia to 136.70 in NY trading underpinned by the increase in the US 10-year yield from 3.12% yesterday to 3.169% today.

AUDUSD is bouncing in a 0.6863-0.6919 band.  Traders ignored Australia’s May Retail sales data, which  rose 0.9%, compared to the forecast for a 0.4% increase.

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

Source: Saxo Bank

China Snapshot

Today’s Bank of China Fix 6.7035, Previous 6.6930

Shanghai Shenzhen CSI 300 fell 1.54% to 4,421.36

PBoC announces plans to step-up implementation of prudent monetary policy, while keeping liquidity reasonably ample.

Russia’s central bank governor plans to increase the share of CNY in economy.

Chart: USDCNY 1 month

Source: Yahoo Finance