Positive Poloz kills upside USDCAD momentum. US ADP employment report beats expectations.

Summary

• USDCAD: Dollar/CAD is trading with a bid tone this morning, but from the sub 1.34s after the Bank of Canada’s Stephen Poloz threw cold water on last week’s market rally when he spoke before the House of Commons yesterday.  While the Canadian central bank chief reiterated that “an accommodative policy interest rate continues to be warranted”, he took a more optimistic tone when discussing the outlook by saying “there is good reason to believe that the economy will accelerate in the second half of this year”, that the decision to trim the neutral rate forecast was not “permanent”, and that this forecast could be raised again “one day”.  While the weak Canadian GDP numbers provided a bounce to USDCAD yesterday morning, a more optimistic Poloz was the last thing the longs wanted to hear, and so we think the funds rushed for the exits after chart support in the 1.3430-40s gave way.  Traders absolutely hammered the EURCAD cross heading into the London close and we think this exacerbated the USDCAD selling, which didn’t really abate until the afternoon.  The market attempted to regain chart support in the 1.3390s during a very quiet Asian session overnight, failed to do so, moved lower to test Fibo chart support in the 1.3370s, and has since been trying to bounce as some broad USD buying started to creep in around the 6amET hour.  The US ADP Employment Report for April has just come out and the numbers beat expectations (+275k jobs vs +180k).  Next up are the US ISM figures for April at 10amET (55.0 expected), the weekly EIA oil inventory report at 10:30amET (+1.48M barrel build expected), and then of course the FOMC meeting at 2pmET today followed by a press conference from Fed chairman Jerome Powell at 2:30pmET.  We think the Fed stays the course today with it’s patient and data dependent approach to the US monetary policy outlook, acknowledges both the positives and negatives that have occurred since the last meeting (better overall financial market conditions but softer than expected inflation figures), but ultimately delivers a mixed message.  We think the funds, while arguably less long USD over the past few days, will want to see Jerome Powell lean towards the more hawkish (positive) side with his commentary, before re-adding to positions.  Should he not deliver this though, and come across as more dovish (negative), we think we’ll see a further purge in broad USD long positioning and USDCAD will give up on any attempt to regain the 1.3430-40s (which would have otherwise repaired the technical outlook on the daily chart).  Stephen Poloz will be back at it again in Ottawa today at 4:15pmET, this time speaking before the Standing Senate Committee on Banking, Trade and Commerce.

• EURUSD: Euro/dollar is inching higher this morning in very quiet trade as most major market centers in Europe observe the May Day holiday.  The market has broken above chart resistance in the 1.1210s, but is now struggling to get to the next trend-line resistance level in the 1.1250s because of the better than expected US ADP job figures that just came out.  Dollar/yuan is trading offered so far today after US Treasury secretary Mnuchin tweeted “Ambassador Lighthizer and I just concluded productive meetings with China’s Vice Premier Liu He. We will continue our talks in Washington, D.C. next week”.  We think we’ll see some minor market movement around the release of the US ISM figures this morning, but ultimately market activity should remain subdued ahead of the Fed announcement at 2pmET.  We think the funds will likely continue covering short positions and make a run for the 1.1280-90s should Jerome Powell give us a forward outlook that is more titled towards caution.  Conversely, expect broad USD buying and a sell-off in EURUSD potentially down to the mid-1.11s should Powell deliver more upbeat soundbites.

• GBPUSD: Sterling is trading up this morning, following both the EUR and the CNH higher following rather upbeat comments from Mnuchin earlier today.  The Markit Manufacturing PMI for April came out today at 53.1 vs 53.0 for the UK, and this added to the price gains.  However, chart resistance in the 1.3070s has now proven to be the line in sand as NY trading gets underway.  Theresa May’s government is now reportedly planning to pull the plug on negotiations with the Labour party if progress is not made by next Wednesday.  More here from the Mirror.  The Bank of England meets tomorrow morning at 7amET, and the market expectation is for no change to interest rates, the asset purchase program, and the “wait and see approach” to their monetary policy outlook.

• AUDUSD: The Aussie has been marred into a tight trading range over the last 24hrs, and while we saw an uptick following Mnuchin’s comments overnight, we’ve now reversed that move and are trading back below chart support in the 0.7040s.  July copper prices are getting hammered here by 2% as NY trading gets underway, and while we haven’t yet seen a headline to explain it, we think AUDUSD traders need to pay attention.  The OIS market is pricing in a roughly 40% chance that the Reserve Bank of Australia cuts interest rates by 25bp next week on May 7.

• USDJPY: The dollar/yen longs continue to hang in there this morning, as the market fights to reclaim the trend-line that held up prices during NY trade yesterday (111.30s).  The S&P futures are looking a little toppy here in the 2950s as the Fed meeting approaches, despite stellar earnings results announced by Apple last night.  US 10-year yields are pressuring the 2.50% level to the downside this morning as bond traders anticipate more dovish tones from Jerome Powell later today.  The funds remain net long USDJPY and we think they'll need to see a move back above the 111.80s sooner rather than later before they can breath a sigh of relief.

Tune in @EBCTradeDesk for more real-time market coverage.

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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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