August 26, 2022

  • Fall-out from Powell speech hammers markets
  • UK closed for Bank Holiday
  • US dollar soars post-Powell, USDX back to 2002 levels

FX at a glance: 

Source: IFXA Ltd/RP

USDCAD Snapshot: open 1.3067-71, overnight range 1.3017-1.3074, close 1.3032

USDCAD shot higher Friday, rising from 1.2910 to close at 1.3020, then accelerated higher in Asia.  The gains were due to widespread US dollar demand in the face of a plunging S&P 500 index.  The move was also exaggerated as FX markets remain thin due to summer holidays.

USDCAD traders just followed the herd, forgetting that Bank of Canada Governor Tiff Macklem led Powell in the “inflation fighting” transformation. Canada’s inflation level is lower than the US, but the BoC has matched Fed rate hikes.  Mr Macklem promised to continue the inflation fight as well.

USDCAD gains may be overdone, and prices could come under pressure Wednesday on stronger than expected June GDP data.

USDCAD Technical outlook

The intraday USDCAD technicals are bullish with Friday’s break above 1.2960.  However, the failure to take out resistance in the 1.3070-90 area today’s move below 1.3030 targets 1.2960.  Longer term, the August uptrend from 1.2920 targets a definitive break above the 1.3090 area looking for a test of 1.3220

For today, USDCAD support is at 1.3010 and 1.2960.  Resistance is at 1.3070-90 and 1.3140. Today’s range: 1.3030-1.3090.

Chart: USDCAD 4 hour

Source: Saxo Bank

G-10 FX recap and outlook

“Pivot! Shmivot!”  That about sums up Fed Chair Powell’s highly anticipated Jackson Hole speech on Friday.

Mr Powell didn’t just push back on the financial market notion that Fed rate hikes will pause in 2022 and then pivot to rate cuts as early as January 2023; he stomped all over the idea.

He said, “In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause.”  He further emphasised the statement adding, “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.

Cleveland Fed President and FOMC voter Loretta Mester said she thought rates would be above 4.0% by early next year and didn’t see a rate cut in 2023.

The news knocked equity bulls for a loop, fueled a scramble for US dollars, and crushed commodity prices.

Meanwhile, traders ignored news that Russia and Ukraine were taking turns trying to blow up a nuclear power plant while US warships taunted China by cruising the Taiwan Strait.

Asian equity indexes followed Wall Street lower. A plunging yen helped sink Japan’s Nikkei 225 index by 2.66%, while lower commodity prices drove Australia’s ASX 200 down 1.95%. It didn’t get any better in Europe with the French CAC index losing 1.66% and leading the rest lower. S&P 500 futures are down 0.93%, and DJIA futures have fallen 0.82% signalling a weak open on Wall Street.

The US 10-year Treasury yield rallied from 3.02% late Friday to 3.114% in early NY.

EURUSD plunged from 1.0087 before Powell’s speech and finished Friday at 0.9965. The losses were extended in Asia, dropping to 0.9915, before profit-taking and hawkish ECB-speak lifted prices to 1.0018 in NY. ECB policymaker Isabel Schnabel said that Central Banks must act aggressively, even if the action leads to a recession. Her colleague, Martin Kazaks, agreed and advocated a minimum of a 50 bp rate hike in September. EURUSD technicals are bearish below 1.0020.

GBPUSD mirrored the EURUSD move, falling from 1.1897 Friday, to 1.1650 in Asia, then grinding higher to 1.1734 in NY. GBPUSD losses are fueled by broad US dollar demand and UK recession risks from the energy crisis and labour unrest. The intraday technicals are bearish below 1.1780.

USDJPY rallied from 136.60 Friday to 138.99 in Asia on the back of soaring US 10-year Treasury yields and resolutely dovish Bank of Japan monetary policy.

AUDUSD and NZDUSD dropped on the widespread US dollar strength and from lower commodity prices.

There are no US or Canadian economic reports today.

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

Source: Saxo Bank

China Snapshot

Today’s Bank of China Fix: 6.8698, previous 6.8486

Shanghai Shenzhen CSI 300 fell 0.44% to 4,089.52

Chart: USDCNY  1 month

Source: Bloomberg