The USD is little changed in broad terms as markets consolidate after Friday’s USD losses made around Fed Chairman Powell’s comments—which teed up a late year taper but which also stressed that higher rates would not necessarily quickly follow the taper. Markets seems to be feeling that the comments did not advance the tapering discussion to any significant degree but that ignores a body of opinion developing among Fed policy which took stronger form last week and appears to favour a fairly rapid wind up of the Fed’s asset purchases next year.
The Fed is stirring, albeit fairly slowly. The DXY is holding the losses seen through late last week as US 10Y yields drift under 1.30% but it may find support in the mid/upper 92s in the near term (month-end rebalancing may drive some USD demand ahead of tomorrow’s fix) and we remain constructive on the broader outlook for the USD as the Fed is liable to start reducing accommodation well ahead of the ECB and BoJ while the US economy seems more likely to outperform its peers moving forward. Note that Friday’s CFTC data showed a large increase in aggregate USD long positioning and a significant reduction on the week in net EUR longs. On the session today, the CHF and AUD are leading losers among the majors whereas minor gains are being registered at writing by the EUR, KRW and NOK. Global stocks are
mainly, if only modestly, positive. WTI and iron ore are lower while copper is a little firmer. There are some second-tier data from the US and Canada this morning (Canada’s current account data and US Pending Home Sales and the Dallas Fed Manufacturing index) but there are some important after hours data from Japan (jobs and IP), China (PMIs—for August which may reflect a greater impact from the Delta variant) and Australia (current account and Building Approvals).
USDCAD (1.2616) • The CAD is little changed on the session. The domestic calendar is a bit fuller this week which means the CAD may have something of a mind of its own after being pulled around by the USD and broader risk appetite for the past week or so. June and Q2 GDP tomorrow is perhaps the data highlight of the week and should reflect further economic gains around the domestic economy’s reopening. WTI prices have dropped as Hurricane Ida is pounding Louisiana but may have spared Gulf rigs. Note that CBC’s election poll tracker has seen the Liberal party’s lead over the Conservatives erased for the first time in 18 months (32.9% versus 31.8%). A Liberal minority government remains the most likely outcome but it may be weaker than the 2019 vintage. Note polls show a strong showing for the NDP which may be able to increase its parliamentary footprint significantly.
USDCAD short-term technicals: Neutral—USDCAD was rejected at 1.2700 twice last Friday but support for the USD remains solid around the 1.26 level after Friday’s drop. In effect, the strong trend line support off the June low noted last week (1.2605 now) continues to prop up funds (note the 38.2% Fib support of the 1.20- 1.2950 move stands at 1.2589 and the 40-day MA at 1.2572. We look for USD support around 1.26 to hold.
EURUSD (1.1799) • The EUR is steady and following the indecisive market mood with data released this morning having little influence on the currency. Regional German CPI figures released overnight point to the national print at 8ET coming in slightly above consensus at 3.9% y/y from 3.8% y/y in July; high inflation (for German standards) reflects year-ago effects when a sales tax holiday was in place, so markets should not react greatly to it. Economic confidence in the Eurozone also ticked a touch lower than expected in August, likely owing to virus anxiety, but remains near record highs. The EUR will likely remain caught in the influence of the broad dollar tone for the rest of the week, with German unemployment and retail sales (released tomorrow and Wednesday, respectively) possibly
providing something to differentiate the currency. Generally, we think the EUR will remain on the backfoot over the medium term as the Fed points to the exits from ultra-accommodative policy, and a firm push above 1.18 looks unlikely to hold at the moment. Over the week, we may see ECB officials begin to tee up the possibility of a reduction in the bank’s pace of purchases under its PEPP ahead of next week’s meeting.
EURUSD short-term technicals: Neutral—Overnight action in the EUR was limited to a <20pips range as it has since Friday’s North American morning, with the 1.18 level restraining a further rebound in the EUR since its Aug 20 low. The broad trend in the EUR since early-June remains negative—though the currency broke trendline resistance on Friday—as it now faces a tough challenge in beating its 50-day MA at 1.1813 that stands as resistance ahead of the mid-figure zone. Support is 1.1780/90 followed by 1.1735/50. Strong EURGBP resistance stands at 0.86, preceded by the 100-day MA at 0.8589.
GBPUSD (1.3749) • The pound is steady to somewhat weaker through quiet range-trading to start the week with the domestic backdrop continuing to provide markets with limited information to trade on. It’s more of the same for the remainder of the week, and there are also no BoE speeches scheduled, so the GBP will remain bound by the broad dollar tone; the data calendar doesn’t pick up until next Friday’s GDP release. Covid contagions have begun trending lower in England in recent days, but overall cases in the UK remain on an ascending trajectory amid steep increases in Scotland (its highest daily rate on record) and Wales. Scottish First Minister’s Sturgeon has warned that her government may reimpose restrictions lest cases decline—although the impact of such an announcement on the GBP would likely be minor to non-existent. We expect the GBP to trade in line with its peers for the rest of the session while gains are likely to remain limited to the 1.38 level.
GBPUSD short-term technicals: Neutral—Sterling corrected Thursday’s loss on Friday while the mid-1.37s area continues to block upward GBP momentum since its strong jump last Monday. The pound’s failure to extend gains toward the 1.38 level points to continued downward weight on the GBP since early-June; the figure alongside the 200- and 50-day MAs (at 1.3806 and 1.3818, respectively) will act as resistance after Friday’s high of 1.3781. There are no clear support levels until 1.37 with Friday’s low of 1.3680 following.
