Broad USD demand from post ISM beat spills over into quiet start to the week.
Summary
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USDCAD: FX markets are off to a quiet start this morning as China starts its week-long, Lunar New Year holiday. The broader USD is trading with a bid tone; following through Friday’s upward momentum from the better than expected US ISM report. Dollar/CAD, which failed to benefit from broad USD buying post ISM, is finally getting a bit of a bounce here. March crude oil’s drop back below $55, and USDCAD’s breach of near-term chart resistance in the 1.3110s appears to be helping with that. This week’s calendar will relatively less eventful when compared to last week’s, with the key feature being Friday’s release of the Canadian employment report for January. Before then, we’ll get the US Non-Manufacturing ISM and Trump’s State of the Union address tomorrow, Canadian Building Permits and a speech from the Bank of Canada’s Lane on Wednesday, and Canadian Housing Starts early on Friday. February marks the beginning of a seasonally strong time of year for the Canadian dollar (February to June), which has traditionally correlated well with seasonal strength in oil prices. We think this is something traders need to be mindful of here when USDCAD makes corrective rallies higher. Chart resistance today resides in the 1.3120s-1.3150. Support lies at 1.3110, then the 1.3080s.
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EURUSD: Euro/dollar is slumping a little further lower this morning, as Friday’s downward momentum into the NY close spills over into today. There’s been some renewed focus on Italy since data last week confirmed that Italy slipped into recession in Q4 2018. The BTP/Bund yield spread rallied strongly on Friday, and now sits just shy of +260bp. While we don’t think we need to worry about the level of Italian bonds again just yet, we’d be mindful of any moves above +270bp as potentially adding negative headwinds for EURUSD. This week’s European calendar features the pan-European Services PMIs (tomorrow), Germany’s Factory Orders and Italy’s Retail Sales (Wednesday), Germany’s Industrial Production figures (Thursday), and Italy’s Industrial Output figures (Friday). The correlative influence from USDCNH would suggest EURUSD doesn’t do much this week because of the Chinese holidays. February seasonals suggest the Euro doesn’t trend one way or the other this month.
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GBPUSD: Sterling has slipped back down to Friday’s trend-line support level this morning following the UK’s release of weaker than expected Construction PMI data for January. Tomorrow brings the release of the UK Services PMI. We’ll get an update on the Bank of England’s monetary policy outlook this Thursday, but traders are not expected any major developments considering the market’s continued focus on Brexit negotiations. The latest headlines out the UK this weekend suggest Theresa May will be returning to Brussels soon with renewed confidence following the parliament’s firm mandate to renegotiate the Irish backstop. We also heard talk of that the UK PM could be planning for a general election in June, but this was later downplayed by Boris Johnson. We think GBPUSD could weaken further into Thursday, should trend-line support in the 1.3050s give way.
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AUDUSD: The Aussie is trading lower this morning, as broad USD demand from Friday carries over into today. We also got some dismal December Building Permits data out of Australia last night, which is not helping the cause this morning. The main event for AUDUSD comes tonight, when the Reserve Bank of Australia (RBA) meets for its first interest rate decision of the year. While no changes are expected as usual, traders will be paying close attention to see if the RBA drops its mantra that the first rate move will likely be higher. Some Australian data points have been notably weak of late (NAB survey, housing prices, slowing credit growth, and now the Building Permit data) and so there is growing chatter that the central bank may have to acknowledge this, and in doing so may take a more cautious (dovish) stance on the monetary policy outlook. AUDUSD is trading between support at the 0.7180s and resistance at the 0.7260s at this hour. The RBA announcement will be out at 10:30pmET tonight.
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USDJPY: Dollar/yen is leading the USD higher this morning, after chart resistance in the 190.60s gave way in Asian trade overnight. This market benefitted the most from Friday’s upbeat US ISM figures, and some broad USD demand today (along with less liquidity out of Asia), is helping to propel prices further today. We’d also note a bullish outside day recorded on the EURJPY chart from Friday, which could spill over into dollar/yen’s technical outlook. Over 1.6blnUSD in options expire at the 110.00 strike this morning, which could keep the market gravitated towards that level for the time being, but we think the market now has legs to continue higher. The US 10-yr bond yield is trading confidently back above the 2.70 level this morning after falling below the technical level on Thursday. Follow-though bond selling (further uptick in bond yields) would help USDJPY here we feel.
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