Coronavirus headlines cause Asian session volatility once again. Bank of Canada up next.

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SUMMARY

ANALYSIS

USDCAD

Dollar/CAD put on a classic display of “buyer failure” in Asian trade last night.  The market broke above the 1.3070s with “risk-off” flows around the 8pmET hour as the Asian news cycle began with reports of the coronavirus spreading to 440 cases in China with nine deaths.  However, these flows reversed course quickly around the 10pmET hour after Chinese health authorities displayed a sense of calm during a news conference.  The effect was USDCNH-led USD selling, which then knocked USDCAD back into the 1.3070s.  This was a very poor technical setup heading into European trade today and was fuel for the USDCAD sellers to pounce in our opinion when the British pound started surging (more on this below).  The selling halted at familiar trend-line support in the 1.3030s and the market is now bouncing a bit following a slightly weaker than expected MoM print for Canadian December CPI (flat vs +0.1% expected).

Up next is the Bank of Canada’s interest rate decision and monetary policy report (MPR) at 10amET, followed by a press conference with Stephen Poloz and Carolyn Wilkins at 11:15amET.  We don’t expect any change to interest rates this morning (in-line with market consensus), and with global growth concerns seemingly pushed aside for now, we think traders need to be on guard for potential downgrades to Canadian GDP and inflation forecasts (which would be USDCAD positive).

USDCAD DAILY

USDCAD HOURLY

MAR CRUDE OIL DAILY

EURUSD

Yesterday’s better than expected German ZEW survey is now long forgotten as EURUSD traders go back to hugging Monday's lows in the 1.1080-1.1100 region, where almost 1blnEUR in options expire today.  We think sterling’s crazy rally today is helping EURUSD from falling further over the last couple hours and we think the 1.1090 level will now act as the pivot for today’s price action.  A move back above this level will likely invite another small wave of short covering whereas a move back below it will likely see last week’s bearish “head & shoulders” pattern complete itself with a more pronounced sell-off.  The European Central Bank meets tomorrow morning at 7:45amET, following by a press conference from Christine Lagarde at 8:30amET.

EURUSD DAILY

EURUSD HOURLY

FEB GOLD DAILY

GBPUSD

Sterling is ripping the face off new short positions this morning after the UK reported a surge in manufacturing optimism in its CBI survey.  More here from the Financial Times.  This report is not normally a market mover, but considering the coin flip odds now in place for a 25bp cut at the Bank of England’s next policy meeting following yesterday’s better than expected UK employment report, we think it’s getting special attention.  The OIS market is now showing just a 48% chance of a cut vs 70% at the beginning of the week, and all those shorts that came in following the slip below the 1.3080-1.3100, over a week ago, appear to be scrambling to get out.  GBPUSD has smashed up through the 1.3100 level and now looks poised to trade higher still, should we close NY trade above it.

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Australian dollar continued lower at 8pmET last night following the new coronavirus headlines out of China, but it too has recovered since the news conference put on by Chinese health officials.  The think sterling’s big rally today (on the back of the market re-price BOE rate cut risks more hawkishly) is helping AUDUSD as NY approaches as well.  We think the fund shorts, who have probably been enjoying the bearish “head & shoulders” pattern develop over the last week, may have to endure a creep up in prices to the 0.6870s near-term.  Tonight’s much anticipated Australian employment report for December at 7:30pmET could also be viewed as another reason to lighten up positions for now.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

Dollar/yen weakened again last night around 8pmET with another coronavirus-inspired “risk-off” wave, and while it recovered nicely in European trade today as the broader markets calmed down a bit, it’s taking another leg lower now following some more negative headlines out of China:

CHINA'S HUBEI PROVINCE SAYS CONFIRMS 17 DEAD, 444 TOTAL CASES IN CORONAVIRUS OUTBREAK - STATE TV

The US 10yr yield is following suit; trading lower once again to pressure chart support at the 1.77% level.

USDJPY DAILY

USDJPY HOURLY

GERMAN 10YR BUND 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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