Kudlow's comments rescue risk into overnight session.

SUMMARY

ANALYSIS

USDCAD

Our fears regarding the tepid nature this week’s USDCAD upside breakout above 1.3250 came to fruition yesterday.  The market hesitated too much at Wednesday’s highs in the 1.3270s in early NY trade yesterday, didn’t find its catalyst to continue breaking higher and then ultimately collapsed lower amid plenty of USD-negative headlines which crossed into the London close.  See here for what tweeted at that hour.  To make matters worse for USDCAD, EURUSD rebounded back above the 1.1000 level, GBPUSD broke above the 1.2870s, and even the beleaguered AUDUSD was able to bottom out. 

This broad USD selling continued into the Asia session overnight and morphed into a “risk-on” move after NEC Director Larry Kudlow said that a deal with China was “close” and that “we are coming down to the short strokes”.  More here from Bloomberg.  US Commerce Secretary Wilber Ross is now adding a little more “hopium” to the markets this morning by saying the “US-China trade deal will be done in all likelihood”.  We say “take these US/China trade headlines literally at face value at this point”.  Don’t read too much into them, but understand that trading algorithms will react to their tone, and for the time being the overall tone of the US/China narrative has shifted slightly more positive. 

The US reported its Retail Sales numbers for the month of October over the last hour and they came in mixed (+0.3% MoM vs +0.2% exp but +0.2% MoM ex Autos vs +0.4% exp).  The US Industrial Production figures for October have also just been reported and they missed estimates more profoundly (-0.8% MoM vs -0.4%).  Bank of Canada governor Stephen Poloz didn’t shed any additional light on Canadian monetary policy during his speech at the San Francisco Fed last night.  The wave of broad USD selling currently underway in NY could see USDCAD fall further here.  The USDCAD breakout hold-outs will desperately want to see a NY close above the 1.3240s today.  We think new shorts (those who want to put on new USDCAD short positions) will start licking their chops with a move below the 1.3220s.

USDCAD DAILY

USDCAD HOURLY

DEC CRUDE OIL DAILY

EURUSD

Euro/dollar continues to enjoy what we’ve been calling a “technical bounce” over the last 24hrs.  We talked yesterday morning about the sellers potentially losing control of the market if we saw prices move back above 1.1005 and that a further rise in December gold prices could be the catalyst given their move back above 1468.  Sure enough, we saw this occur towards the London close yesterday as US yields started to drop at a frightening pace.  EURUSD toyed with both sides of near-term chart resistance in the 1.1020s since late NY trade yesterday, and is now trying to break above this but we’re not so sure how long this upside momentum can last as “risk aversion” flows have abated in the overnight session (positive US/China headlines), US yields have bounced 4bp and December gold is now trading back below 1468.  EURJPY buying seems to be driver for now.

EURUSD DAILY

EURUSD HOURLY

DEC GOLD DAILY

GBPUSD

A new drama is unfolding in the UK election race and it seems to be coming from rampant talk of Brexit Party candidates being offered jobs to stand down in certain ridings (beyond the 317 Tory seats that Nigel Farage pledged his party would not contest).  More here from the BBC.  Nigel Farage is upset as usual, but at the end of the day, we think anything that hurts his party will help the Tories secure the majority they need to pass Brexit legislation in the UK and we think sterling traders are content to celebrate this for the time being.  BREAKING: The UK Telegraph has just reported that the Brexit Party has confirmed stepping down from 40+ non-Tory seats already, and with that GBPUSD has shot higher once again.

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Aussie shouldn’t be bouncing today, but traders are finding solace from yesterday’s hold of the 0.6770s, the gold-driven USD selloff into the London close, and some positive US/China trade headlines from Larry Kudlow and Wilber Ross in the overnight/early NY session.  We think this morning’s US Retail Sales report was nothing to get excited about and so we think some AUD shorts could lighten up further here into the 0.6810s.  Yesterday's upside reject of the 7.0300 handle in USDCNH during NY was another clue that AUDUSD would trade higher today.  Off-shore dollar/yuan now looks poised to re-test the 6.9900 level it broke above early this week.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

Things were looking a little scary for the net long USDJPY fund position yesterday, after the US yield decline picked up steam into the London close.  The US 10yr bond yield dropped quickly to the 1.80% handle after falling below 1.84%.  Gold spiked higher by $10 and the broader USD was getting slammed.  It wasn’t your classic “risk-off” type scenario because the stock market barely moved, but it was enough to knock USDJPY below its own chart support at 108.50.  Kudlow’s “we are close” US/China comments at the start of the Asian session seemed to come to the rescue believe it or not.  We then saw a wave of EURJPY buying come in during London trade today, which seems to be helping EURUSD oddly enough as well this morning.  The US Retail Sales report has knocked US yields back a tad, which is why we think USDJPY continues to flounder here in the 108.60s.  We think the funds will breathe a sigh of relief if USDJPY finishes the day still above the 108.50s.

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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