Dovish tilt from Fed hawk Mester and USDCNH plunge drives USD lower

Summary

• USDCAD: Dollar/CAD continues to fall this morning after yesterday’s brief oil-driven bounce was derailed by a strong USD selling wave.  Federal Reserve member Mester got things going early by hinting that she would be comfortable with “slowing or stopping” the Fed’s balance sheet unwind.  This was deemed as USD bearish considering Mester is a known hawk (proponent for tighter monetary policy).  Gold prices then broke out above the $1330 mark, which in turn drew some attention.  Pound sterling surged despite the lack of Brexit headlines, but the narrative slowly evolved into “Brexit optimism” heading into today’s “significant” (we’re being told) meeting between the UK’s Theresa May and the EC’s Jean Claude Juncker.  And to then add fuel to the USD selling fire, the USDCNH plunged lower when headlines crossed about the US threatening tariffs should China violate its pledge to keep the Yuan stable.  All this created a broad USD selling atmosphere that saw USDCAD fall swiftly below chart support in the 1.3220-30s.  No attempt was made by traders to buy the dip into the NY close, and so the selling continued overnight and we now sit bouncing, for the 3rd time, off the next trend-line support level in the 1.3180s.  Today’s calendar features the FOMC Minutes from the January Fed meeting, out at 2pmET.  We think USDCAD could bounce here should the broader USD recover a bit, but we think the momentum has swung back to the downside ever since last Thursday’s failed breakout attempt above the 1.3330s.

• EURUSD: Euro/dollar is coasting just shy of chart resistance in the 1.1350s this morning after yesterday’s wave of broad USD selling shifted the market higher to its next plateau.  Germany’s PPI data for January slightly beat expectations when it was reported earlier today, which gave the market a little bid heading into the European open.  The ECB’s Praet spoke about TLTROs briefly but said the decision as to their future use may not be made at the March ECB meeting.  Yesterday’s price action produced a bullish daily candle reversal, which we think is noteworthy.  Buyers would need to close the market above the 1.1350s today in our opinion to confirm this pattern though, otherwise we might slip back into the 1.1300-1.1350 range.

• GBPUSD: Sterling is pulling back a tad this morning after an explosive rally yesterday took the market all the way up to chart resistance in the 1.3050s.  While it was hard to pin down a Brexit headline to explain this swift move higher, we can’t say we were surprised given the positive technical chart structure we talked about it yesterday’s note.  Three Tory MPs have resigned from the Conservative Party today, which is seeing GBPUSD pull back to the 1.3010s.  All eyes are now turning to the much anticipated meeting between the UK’s May and European Commission President Juncker at 12:30pmET today.  A spokesperson for the UK government touted this meeting as “significant” yesterday.  We’d be on guard for GBPUSD selling should this meeting fail to deliver upon the “Brexit optimism” narrative that supposedly drove the market higher yesterday.  Chart support today comes in at 1.3010, then 1.2960, then 1.2925.  Chart resistance is somewhat lacking at this juncture, with the high 1.31s being the next probable destination for prices should we get a significant Brexit breakthrough and the 1.3070s give way.

• AUDUSD: The Aussie is treading water this morning, much like EURUSD.  Yesterday’s broad wave of USD selling took AUDUSD above chart resistance in the 0.7150-60s, and the market is now pulling back to test this level as new support.  Australia reported slightly weaker than expected wage growth in the quarterly Wage Price Index figures released overnight, and so the headlines were not market moving.  Next up are the Australian employment figures for January, out tonight at 7:30pmET.  Traders are expecting +15k jobs gained, and an unemployment rate of 5%.  Yesterday’s price action produced a bullish daily reversal candle, just like EURUSD, and so we think AUDUSD has the potential to move higher here.  We’d need to see a firm close above the 0.7160s to confirm however.

• USDJPY: Dollar/yen got knocked down yesterday amidst the broad wave of USD selling, but traders managed to hold chart support in the 110.50s.  This has given buyers some comfort to return today as the broader USD upticks a tad.  Japan’s poor Trade Balance figures for January (not normally a market mover) appear to be helping USDJPY today as well.  Exports declined 8.4% MoM vs expectations of -5.5%.  We think the market can continue to move higher here, but the price action could continue to be choppy.

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About the Author

Erik Bregar - Director, FX Trading

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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