China increasingly reluctant to agree to a broad trade deal with the US

SUMMARY

ANALYSIS

USDCAD

Dollar/CAD is trading with a negative tone this morning as the broader USD starts to see sales into NY trade and November crude oil prices rally back above the $53 level.  This weekend’s Bloomberg headline about China being increasingly reluctant to agree to a broad trade deal with the US saw a mild, USD positive, “risk-off” move to start trading in Asia, but these moves have largely reversed course in European trade as we feel traders don’t want to jump the gun here ahead of this Thursday’s US/China trade talks in Washington.  This week’s North American calendar will also feature an important data point for Canada plus lots more Fed-speak.

Tuesday: Canadian Housing Starts (Sep), US PPI (Sep), Fed’s Evans, Powell and Kashkari

Wednesday: Fed’s Powell and the FOMC Minutes

Thursday: US CPI (Sep), Fed’s Kashkari, Daly and Mester

Friday: Canada Employment Report (Sep), Fed’s Kashkari, Rosengren and Kaplan

The funds at CME added marginally to their net short USDCAD position during the week ending October 1st, but we’re wondering if they’ve now bailed considering last Wednesday’s big rally up through the 1.3300 level.  With broad USD buying now turning to selling as we enter NY trade today, we think USDCAD might go on the hunt for buyers here at the 1.3280-1.3300 support level.  Chart resistance today remains in the 1.3330s.

USDCAD DAILY

USDCAD HOURLY

NOV CRUDE OIL DAILY

EURUSD

Euro/dollar continues to shake off negative news as we start a new week of trade.  The market was able to hold chart support in the 1.0950s on Friday after the “Fed rate cut trade” took a little hit following US Non-Farm payroll data that wasn’t as bad as expected.  It’s also been able to shake off this morning’s weaker than expected Industrial Orders data out of Germany for August (-0.6% MoM vs -0.3%) and the weight of over 1.4blnEUR in options expiring at the 1.0950-60 strikes.  With the market now trading firmly back above the 1.0970s, it’s becoming obvious that traders want to take this market higher.  From a fundamental perspective, we think the “Fed rate cut trade” still has legs (we don’t think the market has forgotten about last week’s bad US ISM data).  We also still believe Christine Lagarde risks disappointing the doves when she takes over shortly at the ECB (see here from Bloomberg for more proof that all is not well inside the walls of the European Central Bank).  From a technical perspective though, while we think it’s positive that EURUSD continues to trade where it is, we’d like to see a firm NY close above the psychological 1.1000 mark before becoming more bullish.  The funds at CME marginally increased their net short EURUSD position during the week ending October 1st by adding more shorts than longs.

EURUSD DAILY

EURUSD HOURLY

DEC GOLD DAILY

GBPUSD

All eyes are on the EU this morning after Boris Johnson said that the Brexit ball was in its court this morning and that the bloc should now urgently discuss his proposal in detail.  “What we’re saying to our friends is (that) this is a very generous, fair and reasonable offer we’ve made.  What we’d like to hear from you now is what your thoughts are” said Johnson.  “If you have issues with any of the proposals that we’ve come up with, then let’s get into the detail and discuss them,” he said, reiterating his position that the UK would leave the EU on Oct 31.  GBPUSD re-tested Friday’s chart support in the 1.2290s this morning, but the market has since found some buyers (perhaps on the back of EURUSD strength).  With the market now back above the 1.2300 level, we think the momentum has shifted positive for GBPUSD and we wouldn’t be surprised to see a positive headline take us higher to the 1.2360s.  The funds at CME marginally reduced their net short GBPUSD position for the third week in a row during the week ending October 1st by adding new longs.  We’ll get a UK data dump on Thursday this week (August GDP, Industrial Output, Manufacturing Output, Trade Balance).

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Aussie is lagging the rest of the bunch this morning and while some news outlets are saying this is due to this weekend’s negative US/China trade headline, we think this has more to do with technical selling following the EUR’s initial negative reaction to Germany’s weaker than expected Industrial Orders data.  The initial EURUSD selling ruined AUDUSD’s attempt to regain the 0.6750 chart support level in early European trade and so we think this part in parcel explains today’s AUD underperformance.  The funds at CME increased their net short AUDUSD position during the week ending October 1st, but they appear to be playing catchup with the market and may be at risk again after last week’s bullish hammer close.  Chinese markets will re-open tonight after the Golden Week holidays.  Offshore dollar/yuan has been looking technically weaker (below 7.14) following last week’s broad USD selling off weak US data.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

Dollar/yen has recovered most of its Sunday opening losses from the US/China Bloomberg headline, and the market now looks poised to regain the 106.90s as over 1.2blnUSD in options expire at the 107.00-107.10 strikes shortly.  We think a move back above the 106.90s could usher USDJPY back into the low 107s and we think a upward move in the US 10yr yield back above 1.56% would support it, but we think we will need to see a fundamental hit to the “Fed rate cut trade” before that happens, ie. less dovish Fed-speak.  Japan reports its August Machinery Orders data on Wednesday night. The funds at CME added ever so slightly to their net short USDJPY position during the week ending October 1st. 

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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