Markets optimistic ahead of Trump speech.

SUMMARY

ANALYSIS

USDCAD

Dollar/CAD drifted higher earlier this morning as US 10yr yields teased traders with another break above the 1.95% level.  This felt like follow-through upside momentum from last week’s yield surge (delayed by yesterday’s Remembrance Day/Veterans Day banking holiday) and it also felt like positive anticipation ahead of a speech from President Trump at the Economic Club of New York later today.  Sources familiar with Trump’s remarks say there will be a “constructive statement on China” when the President speaks at 12pmET, and so we think market participants are bracing for more good news that could hurt the “Fed rate cut trade” even further (USD positive).  The funds, who extended their net short USDCAD position to a new 18-week high during the week ending Nov 5th, are looking very vulnerable here in our opinion.  The first gut shot came from the Bank of Canada’s surprisingly dovish hold to interest rates at the end of October (which saw the market rebound sharply to 1.3200), and the next blow came this past Friday when Canada reported an unexpected loss of jobs for the month of October (which saw the market finally break above 1.3200).  If we combine all this (higher US rates, more concern for the BOC, overstretched USDCAD short positioning, technical break above 1.3200) with a seasonal tendency for the USD to perform well in November (2nd best month of the year going back 10 years), we think USDCAD is on the verge of a positive trend change.  We think a strong NY close above the 1.3250s will confirm this idea, but so far the market is resisting as US 10yr yields back up a bit to 1.93%.

This week’s calendar will feature the US CPI and Retail Sales data for October, as well as a deluge of central bank speak (most notably Jerome Powell’s testimony before the congressional Joint Economic Committee and the House Budget Committee on Wed/Thurs)

Tuesday: Trump 12pmET.  Fed’s Barkin at 12pmET.  Fed’s Harker at 1pmET

Wednesday: US CPI (Oct), Fed’s Powell, Barkin, Kashkari, Harker

Thursday: US PPI (Oct), Fed’s Powell, Evans, Clarida, Daly, Williams, Bullard & Kaplan, Bank of Canada’s Poloz speaks

Friday: Bank of Canada’s Timothy Lane speaks

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DEC CRUDE OIL DAILY

EURUSD

Euro/dollar’s fortunes continue to deteriorate this morning as bond traders bid US yields higher to start a holiday shortened week.  This morning’s less negative German ZEW Economic Expectations survey (-2.1 vs -13.0) saw the market attempt to regain the 1.1030s, but this failed miserably (which should be hugely disappointing for EUR bulls).  The market now appears focused on a 1.2blnEUR option expiry at the 1.1000 strike for 10amET, and then of course Trump’s speech at noon ET.  The leveraged funds at CME started re-adding to their net short EURUSD position during the week ending Nov 5th (the week the market collapsed back below 1.1100).  This week’s notable European economic headline will be the German flash GDP estimate for Q3 on Thursday, which is expected to show Germany entered a mild recession (-0.1% growth).  We would not fight the near-term trend lower in EURUSD for the time being.

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DEC GOLD DAILY

GBPUSD

Sterling has seen some selling in European trade today, but it’s still enjoying some relative outperformance vis a vis euro after yesterday’s announcement from Nigel Farage that the Brexit Party will not compete in 317 seats won by the Tories in 2017.  More here from the BBC.  Market participants celebrated this and bid GBP higher across the board yesterday as it reduces the chances of splitting the pro-Brexit vote and, on the surface, would help Boris Johnson’s Conservatives win the majority in parliament they need to finally pass the Withdrawal Agreement Bill.  Some are chalking up this morning’s GBPUSD pullback however to a negative sounding headline from Nigel Farage: WE WILL GIVE NO MORE GROUND TO THE CONSERVATIVES (Reuters)…taken out of context this sounds negative, but this was said while re-hashing yesterday’s commitment (and so it's not that negative in our opinion).  Today’s rise for the Labour party in the Survation poll (+3 to 29%) is a more notable negative in our opinion for GBPUSD.

Sterling now sits just above chart support in the 1.2820s after having surged to 1.2900 yesterday.  Today’s mixed UK employment report for September didn’t have much effect on the markets (softer than expected wage growth, but lower unemployment rate and less than expected job losses).  Yesterday’s weaker than expected UK Q3 GDP read (+0.3% vs +0.4%) was quickly forgotten about  as well after the Nigel Farage headlines.  Tomorrow’s UK CPI and Thursday’s UK Retail Sales figures will likely get cast to the wayside too, as the UK election remains the dominant focus for markets.  The funds reduced their net short GBPUSD position slightly during the week ending Nov 5th by trimming more short than long positions.

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AUDUSD

The Australian dollar is trying to bounce this morning, after holding chart support in the 0.6830s on two occasions during the overnight session.  The leveraged funds at CME reduced their net short AUDUSD position all the way down to 27k contracts during the week ending Nov 5th, which is now the lowest since June 2018.  It looks like the shorts finally started to capitulate early last week, but we wonder if this occurred at exactly the wrong time.  The market has been on the back foot ever since AUDUSD repeatedly rejected the 0.6920s, USDCNH regained 7.00 and the “Fed rate cut trade” fell apart again.  We think AUDUSD will be continue to be vulnerable if US 10yr yields break above 1.95%.  Australia reports its Q3 Wage Price Index tonight at 7:30pmET and its October Employment Report tomorrow night.  China will also be reporting some data tomorrow night (October Industrial Output and Retail Sales).

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USDCNH DAILY

USDJPY

Dollar/yen is seeing some mild selling at the start of NY trade this morning as US 10yr yields back up from their overnight highs a little bit.  All eyes are now on Trump’s speech today at noonET today and how it will affect US yields.  We think we’re at a pivotal moment here for US yields and USDJPY and we think both markets risk correcting lower big time if we don’t get upside breakouts on the charts.  The leveraged funds at CME continued to add to their new net long USDJPY position during the week ending Nov 5th.  Japan reports its Q3 GDP figures tomorrow night, with traders looking for just +0.2% growth.

USDJPY DAILY

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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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