Markets in risk-off mode again after weak overnight data.

SUMMARY

ANALYSIS

USDCAD

Dollar/CAD is creeping higher this morning as some mild “risk-off” flows sweep across markets once again.  It all started with a negative sounding US/China trade article from the WSJ late yesterday afternoon titled “US-China Trade Talks Hit Snag Over Farm Purchases”.  More here.  There is no new “news” here again in our opinion (as seems to be the case with much of the US/China trade headlines lately), but you can’t tell that it to the trading algorithms.  If it sounds bad…”risk-off”.  If it sounds good…”risk-on”.  The mild “risk-off” move we saw late yesterday helped USDCAD recover right at 1.3250 heading into the NY close, which was agonizingly not decidedly bullish or bearish in the context of how pivotal we described this level to be yesterday.    

Economic data out of Asia last night then provided more clarity and direction because it was negative for the most part.  Japan reported weaker than expected Q3 GDP growth, the Australian employment report missed expectations big time, and a couple of Chinese data points missed as well (October Industrial Output and Retail Sales).  EURUSD saw a brief pop higher when Germany reported +0.1% GDP growth for Q3 this morning (avoiding expectations of -0.1%, which would have technically been a recession), but this “sigh of relief” bid to EUR quickly disappeared when US and German bond yields continued their “post-Trump speech” move lower.       

December crude oil futures are trading +0.9% higher this morning after some OPEC delegates hinted yesterday at extending the current level of oil production cuts to the end of 2020 (versus the spring 2020 which is currently agreed).  Last night’s weekly API report was also on the mildly bullish side (showing an unexpected draw of 0.5M barrels vs expectations for a build of 1.5M).  OPEC just released its monthly Oil Market Report for November, and while it kept its 2019 and 2020 oil demand forecasts unchanged at 980k bpd and 1.08M bpd respectively, it said it now sees a 70k bpd reduction to surplus supply in 2020 if OPEC keeps overall production at current levels (also mildly bullish).  The EIA reports its weekly oil inventory report at 11amET today, and the expectation here is for a build of 1.649M barrels.

USDCAD now sits nervously at yesterday’s NY highs at 1.3270, with traders wondering where the next thrust of broad USD buying will come from.  If the market is going to firmly break higher here and shift to a new positive trend, it needs to do so quickly in our opinion…otherwise we think recent buyers could bail.  Today’s North American session features a ton of Fed-speak.  Fed members Evans and Clarida are currently speaking.  Jerome Powell will be back at it again on capital hill at 10amET, this time before the House Budget Committee.  Finally, the Fed’s Daly, Williams, Bullard and Kaplan are expected to speak over the lunch hour.  Tonight’s Asian session will feature a speech from Bank of Canada governor Stephen Poloz at the Federal Reserve Bank of San Francisco at 10pmET.

USDCAD DAILY

USDCAD HOURLY

DEC CRUDE OIL DAILY

EURUSD

Euro/dollar traders are fighting to regain the psychological 1.1000 level this morning after the further decline in global bond yields during London trade today overshadowed Germany’s narrow avoidance of recession for Q3.  We can’t say there’s any fundamental merit to the slight bounce we’ve seen since the start of NY trade today, but we do think recent fund shorts might be compelled to take profits on a move back above 1.1005 (that would confirm a reject of the 1.09 handle).  December gold prices have confidently breached the 1468 chart resistance level to the upside this morning, which tells us to be on guard for some more “risk-off” flows (which could be EURUSD positive if the flows are fierce).

EURUSD DAILY

EURUSD HOURLY

DEC GOLD DAILY

GBPUSD

It’s more of the same for sterling today, as GBPUSD remains stuck in the 1.2820s-1.2870s price range we talked about yesterday.  The UK general election campaign raged on today, but there haven't been any meaningful shifts in the polls.  See here for some of the latest headlines from the UK’s Metro.  Traders are unsurprisingly brushing off this morning’s weaker than expected UK Retail Sales data for October (-0.1% MoM vs +0.2%).

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

It’s gone from bad to worse for the Australian dollar over the last 24hrs, and we think it all started with yesterday’s “risk-off” driven move below chart support in the 0.6830s.  We think this sowed the seeds for further technical selling into Asian trade last night, and when Australia reported a much weaker than expected employment report for October, this was the straw that broke the camels back.  Australia shockingly lost 19k jobs last month (versus expectations for a 15k gain) and the unemployment rate ticked higher to 5.3% (mind you, this data point was as expected).  Some weak Chinese data then added insult to injury.  China reported October Industrial Output +4.7% vs +5.4% expected and October Retail Sales +7.2% vs +7.9% expected.  If we combine all these negatives with falling global bond yields today (which validate the “risk-off” tone), we now suddenly see AUDUSD grasping for support in the 0.6770s.  It’s been remarkable how negatively the market has shifted, ever since slipping back below the pivotal 0.6895 level we warned about on Nov 8th.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

By now we think we can safely say the upside breakout that the fund longs were hoping for (since last Friday) in USDJPY has failed.  The US/China trade headlines have taken a turn for the worse.  US 10yr yields failed to ultimately break above the 1.95% level on a closing basis.  We honestly think the entire 30bp rally in yields since the start of the month has been based on unsubstantiated, optimistic, hogwash on the US/China trade front, and we think this is the one of the major reasons why the US money markets are letting the Fed breath a sign of relief for the time being.  Jerome Powell can continue to communicate all he wants that the economy is in a good place and that rates are now on hold, but we think the bond market and the “Fed rate cut trade” will ultimately force his hand very quickly when the next shoe drops.  Japan reported weaker than expected Q3 GDP growth last night (+0.1% QoQ vs +0.2% expected).

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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