Broad USD rally, funding pressure, eerily takes a breather overnight
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SUMMARY
- USD broadly lower in Asia/London as 3-month CCBS narrows to +1bp, going bid again in NY.
- Japan closed for holiday, RBA starts QE purchases, Trump may intervene in Saudi/Russia oil spat.
- Canadian Retail Sales for January come in mixed, but nobody is paying attention to old data now.
- Bearish intra-day head & shoulders pattern foretold USDCAD weakness today, short term top.
- AUDUSD still trying to bottom, but needs 0.6020s to clear. GBPUSD working on bullish reversal.
- EURUSD downtrend momentum still intact with overnight rejection of 1.08 handle.
- USDJPY focused on new fears in the global bond markets, back near 2020 highs.
ANALYSIS
USDCAD
There’s a lot more green on the screen this morning but we’re finding it a bit hard to explain. Yes, we saw unprecedented intervention from monetary authorities yesterday, but the bearish NY closing patterns for EURUSD, GBPUSD and AUDUSD suggested that market participants were not convinced and we’re already preparing the next leg of the USD funding squeeze. We didn’t get that at the start of Asian trade last night however and instead we saw the USD move broadly lower. Perhaps this was due to the public holiday in Japan today; quite possibly because of the RBA stepping in with its first $5blnAUD QE operation; and maybe even because of continued talk that the Trump administration may intervene in the new Saudi-Russian oil price war. We noted a bearish intra-day head & shoulders pattern on the hourly USDCAD charts yesterday and it was uncannily predictive of the broad USD slump we saw in London this morning.
May crude oil prices rebounded 24% yesterday and they extended another 10% higher at one point this morning, but they’re now trading -2%, which we think has allowed USDCAD to bounce off new trend-line support in the 1.4150-80s during London trade. The early NY high is 1.4350 and the hourly pivot will be 1.4250 today in our opinion. The Canadian Retail Sales numbers for January were reported this morning they came in mixed, +0.4% MoM vs +0.3% expected on the headline and -0.1% MoM vs +0.2% expected for the ex. Autos figure. These numbers all pre-coronavirus though and so that market is not really paying attention.
USDCAD DAILY
USDCAD HOURLY
3-MONTH EURUSD CROSS CURRENCY BASIS SWAP HOURLY
EURUSD
Euro/dollar bounced in Asian/early European trade today as US dollar funding pressures seemed to ease temporarily once again. The widely followed 3-month EURUSD cross currency basis swap (CCBS) reached a high of +1bp in overnight trade versus -46bp yesterday afternoon and -97.5bp at yesterday’s NY open. This morning’s swift upside rejection of the 1.08 handle should be concerning for the EURUSD bottom pickers, because it keeps the market’s downtrend momentum intact. We think the 1.0690 to 1.0790-1.0820 range will be pivotal for EURUSD heading into next week.
EURUSD DAILY
EURUSD HOURLY
APRIL GOLD DAILY
GBPUSD
Sterling jumped as much as 3% in the overnight session today as the USD longs took their foot of the gas pedal a little bit. Failure on the part of GBPUSD sellers below 1.1450 in Asia was a positive technical development and this morning’s rally up through the 1.1790s was even more encouraging. There’s still no fundamental reason to jump in a buy sterling here in our opinion, but we’re seeing signs of technical exhaustion to the downside and signs of a reversal (bullish outside day in the works…would need NY close above 1.1790s to confirm).
GBPUSD DAILY
GBPUSD HOURLY
EURGBP DAILY
AUDUSD
The Australian dollar had a very volatile session yesterday. While we walked in to the possibility of a short-term bottom, this was dashed when traders ferociously sold Tuesday’s lows (turned resistance) in the 0.5950s. An eerie, hard to explain, pause in the USD funding squeeze gave the market some reprieve in overnight trade today, but the sellers have been right back at it in the 0.9550s. We’d be wary of calling a short-term bottom in AUDUSD until the 0.6020 level can be surpassed.
AUDUSD HOURLY
USDCNH DAILY
USDJPY
Dollar/yen ultimately surpassed chart resistance in the 110.10s yesterday after the broader USD rallied strongly into the NY close. This upward move carried into quiet, ill-liquid Asian trade as Japan was on holiday, but the momentum stalled at trend-line extension resistance in the 111.30s.
It’s been truly amazing to witness the stunning recovery in USDJPY in the last two weeks, but it has had nothing to do with risk-on. The market is very much responding to new fears in global bond markets. Will bonds be the proverbial last baby to get thrown out with the bath water as the world increasingly hoards USD and US dollar balance sheet capacity? How will global governments pay for all the emergency stimulus measures that they’ve announced? Are markets finally losing faith in the confidence game that global central banks play? These are all things to ponder as USDJPY now comes close to re-challenging its 2020 highs. We haven’t even talked about the anticipated cancelling of the Tokyo Olympics and what that would do the Japanese economy.
<>Watch the 3 month USDJPY cross currency basis swap as well. While Japanese markets were closed today, this measure of US dollar liquidity for Japan closed near Tuesday lows of -150bp yesterday…which tells us we may just be in the eye of the first storm in this worsening worldwide US funding crisis.
USDJPY DAILY
USDJPY HOURLY
US 10YR BOND YIELD DAILY
Charts: Reuters Eikon
About the Author
Erik Bregar - Director, Head of FX Strategy
Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.
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