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SUMMARY
• Embarrassing Williams fiasco sees “Fed rate cut trade” explode higher, then retrace.
• EURUSD and Italian markets fretting about possible snap election in Italy.
• Canadian Retail Sales for May miss expectations: -0.1% MoM vs +0.3%.
• Fed’d Bullard to speak at 11amET. Says again this morning that 50bp cut not warranted.
• How short are the funds now in GBPUSD?
• AUDUSD breaks higher above 0.7040 resistance, holding half of gains post Williams.
ANALYSIS
USDCAD
Dollar/CAD is exploding higher this morning after the Canadian Retail Sales figures for the month of May surprised to the downside. Traders were expecting +0.3% MoM growth, but we got a contraction of -0.1% instead. The ex-autos figure came in at -0.3% MoM vs +0.4% and the YoY headline figure was reported at just +1.0% vs +3.7% expected. Poor numbers to say the least, with sales down in 4 of the 11 subsectors. More here from Statistics Canada. The market was looking bid heading into the number, after yesterday evening’s NY Fed statement affirmed chart support in the 1.3010s and a broad wave of EURUSD led, USD buying got USDCAD back above trend-line support in the 1.3040s during early European trade today, and so this poor Retail Sales print is a bit of icing on the cake for those who caught the slight positive shift in chart technicals overnight. EURCAD has defended the 1.4640 support level yet again today, despite all the selling that is occurring on EUR crosses. USDCAD, which is now stalling at trend-line resistance in the 1.3110s, is working on a bullish outside day pattern on the daily chart. The day is young but we might have to start thinking about a pause in the USDCAD downtrend here should the market close at these levels or higher.
USDCAD DAILY
USDCAD HOURLY
AUG CRUDE OIL DAILY
EURUSD
Euro/dollar fund shorts were caught off guard yesterday after Federal Reserve member Williams delivered some really dovish remarks in a speech yesterday afternoon.
• It is better to take preventative measures on rates than to wait for disaster to unfold
• Research shows that when a neutral rates are low you should not keep your powder dry
• Policymakers must move more quickly to vaccinate the economy and add monetary stimulus when rates are close to 0.
• When rates are near 0 policymakers cannot afford to take a wait and see approach
• Long-term forces lowering neutral rates set to linger.
• Estimates neutral rates in US around 0.5%
The “Fed rate cut trade” exploded higher in response (US bond yields fell back below 2.05%, gold prices broke out above the 1430 level, the USD moved sharply lower, the whole Eurodollar curve out to 2021 ticked down by 5-6bp, and the odds of a 50bp cut on July 31st shot up to 70% from just 34% the day before!!!). EURUSD surged all the way up to chart resistance in 1.1270-80 area heading into the NY close. This move higher could have sown the seeds for a serious challenge of the 1.1300 to close out the week (possible break of this year’s downtrend), but long and behold, in another comical display of how poor Fed communication has been lately, the Federal Reserve Bank of New York issued a statement after the NY close saying Williams’ comments were merely “academic” and “not about potential policy actions at the upcoming FOMC meeting”. With that, we saw all these markets retrace roughly half of their original moves in the thin trading conditions that typically follow the NY close and precede the Tokyo open, but Asian traders were quick to jump back aboard the “I don’t believe you NY Fed” trade and by midnight ET most markets, including EURUSD, were back on trend with the Williams move. Then came some negative developments out of Italy. The coalition that has struggled to govern collectively over the last year (far right League party, headed by Matteo Salvini and the 5-Star Movement, headed by Luigi Di Maio) has been facing snap election rumors from Salvini’s side for the last couple of weeks and now Italian President Matterella has had enough and wants Salvini to make up his mind in the next 48hrs. Italian markets are not liking this election uncertainty one bit this morning (FTSE MIB -1.5% and Italian 10yr BTP yields +6bp higher) and this seems to be what’s knocking EURUSD all the way back lower to its pre-Williams levels right now. The Fed’s Bullard is doing his best this morning to kill the rate cut party and add to EURUSD’s woes by saying the “current situation doesn’t warrant a larger rate cut”. He’s going to be speaking again at 11amET this morning. We think today’s swift rejection of the 1.1280s to the upside will keep the EURUSD sellers in charge here heading into the ECB meeting next Thursday.
EURUSD DAILY
EURUSD HOURLY
AUG GOLD DAILY
GBPUSD
Sterling is still holding on to half of it’s “Williams” gains as today’s Italian angst keeps EURGBP on the defensive and yesterday’s rally up through the 1.2500 continues to garner positive attention from the market technicians. It will be interesting to see how stretched GBPUSD fund short positioning was as of Tuesday July 16, when the CFTC reports it weekly COT report this afternoon, because the market broke to new lows that day. We think GBPUSD could be vulnerable to a bit of a short squeeze next week should the fund net short position grow sizably in the face of a market that has rallied over 100pts off its lows already.
GBPUSD DAILY
GBPUSD HOURLY
EURGBP DAILY
AUDUSD
The Aussie is holding on to half of the gains it achieved following the comments from Williams as well. With a quite North American economic calendar ahead of us today, we think AUDUSD will focus on the speech from the Fed’s Bullard at 11amET. We’ve already received some “less dovish” headlines from Bullard this morning so we think we might just get more of that. Copper prices are surging 3% today, but AUDUSD traders seem to be completely ignoring it. Perhaps because everybody’s trying to figure out why? All we can see is a clean, technical break back above chart resistance in the 2.5250s, basis September, but we’ve haven’t seen any bullish headlines today.
AUDUSD DAILY
AUDUSD HOURLY
SEP COPPER DAILY
USDJPY
Dollar/yen took it on the chin yesterday following the dovish headlines from Williams and the resulting explosion higher in the “Fed rate cut trade”. All this is getting dialed back now as the NY Federal Reserve Bank, and Fed member Bullard try to dispel everything Williams said. The markets appear to be believing them for the time being, but we think the upcoming blackout period for the Fed (July 20- July 31st Fed meeting) will do the bond and money markets some good. All the confusing Fed member speak over the last couple weeks hasn’t, in our opinion, changed the fact that whatever global money markets are worried about still exists. We continue to believe that chairman Powell will have to cave the more accommodative policy that these markets are demanding, even if he doesn’t truly understand why the markets are demanding it.
USDJPY DAILY
USDJPY HOURLY
US 10YR BOND YIELD DAILY
Charts: TWS Workspace
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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