Shock dovish turn in Australian monetary policy outlook punishes AUD

Summary

• USDCAD: Dollar/CAD is trading up strongly this morning, led by heavy selling in its commodity cousin, the Australian dollar.  More on this below.  Trend-line resistance in the 1.3130s, which capped prices during NY trade yesterday, finally gave way in late Asia and then we saw a swift rise up to the 1.3180s (the next trend line level).  Continued AUDUSD selling in early European trade this morning saw this level give way as well, but a small AUDUSD bounce at this hour is stalling the USDCAD rally a bit.  We’re also seeing March crude oil prices trying to regain the 53.40s at this hour, after venturing below the support level earlier this morning (mild USDCAD negative).  Next up are the Canadian Building Permit figures for December (-1.0% expected), followed by a speech from the Bank of Canada’s Timothy Lane titled “The Canadian Approach to Foreign Reserve Management”.  After that we’ll get the weekly EIA oil inventory report at 10:30amET, where traders are expecting a build of 2.179M barrels (last night’s API report showed a 2.514M barrels increase, which was the 3rd consecutive week of builds in inventory).  We think USDCAD wrestles with the 1.3180-90s today in an attempt to find more buyers.  Staying above the level would bode well for further price strength into the 1.3250s.

• EURUSD: Euro/dollar continued its miserable week by slipping further overnight into the next trend-line support level (1.1390-1.1400).  This follows yesterday’s failure to regain the 1.1420s (the pivot we talked about yesterday) and a lackluster NY close (smack between support and resistance).  We’d postulate that all the red across the screens this morning in commodity currencies and the resulting demand for USD can’t be helping trader sentiment either.  Germany reported an abysmal Factory Orders figure for December this morning (-1.6% MoM vs +0.3% expected), and while this led to some EURUSD selling around the 2am hour, the market held support.  We think the market’s inability to fall further here on negative news could lead to a bounce higher today.

• GBPUSD: Sterling has had a quiet overnight session; retesting the NY session lows in the 1.2920s and then bouncing.  Theresa May is in Northern Ireland again today to talk Brexit.  More here.  Tomorrow she heads to Brussels in a bid to get the EU to renegotiate the Irish backstop.  The headlines from Theresa May’s speech yesterday took the “no-deal” Brexit fear level up a notch, and that’s why the market broke so swiftly below chart support in the 1.2990-1.3000 zone in our opinion.  "I can only get a deal through Parliament if legal changes are made to the backstop," the premier told an audience in Belfast.

• AUDUSD: The plunge in the Australian dollar is the talk of the town this morning, following a remarkably dovish turn in monetary policy from the RBA’s Philip Lowe.  In prepared remarks before the National Press Club of Australia, the central bank governor said: “Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down. Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced.”  This led to an immediate sell wave in AUDUSD down to support in the 0.7170s, and then continued weakness down to the 0.7120s when support gave way again.  The AUD selling today has been broad based across all currencies, and it’s dragging down commodity currencies like NZD, CAD and MXN we’d argue.  Some buyers are trying to make a stand here in the 0.7120-30s, but they’ll be fighting negative momentum.  Over 1.1blnAUD in options expire at the 0.7150 strike this morning.  Copper prices are bid for a third day in a row here as iron ore prices continue to surge following Vale’s declaration of force majeure on some contracts, but this traditional AUD correlation is taking a back seat today.  We think today’s shock headlines out of Lowe potentially muddies the technical outlook for AUDUSD here.  The market could fall back into the 0.7000-0.7100 range should the 0.72s not be regained quickly.  Watch out for some potential AUD volatility towards the NY close today, when New Zealand reports in Q4 2018 employment report (4:45pmET).

• USDJPY: Dollar/yen is trading on the defensive this morning, following a some-what combative tone to President Trump’s State of the Union address last night.  More here.  The market gave up any further attempts are regaining the 110.00 level heading into the speech and fell 35pts over the course of the address.  Buyers stepped up at chart support in the 109.60s however, and we continue to hover above there as NY trading gets underway today.  US equity futures have a flat tone to them this morning, but arguably still remain in an uptrend following last week’s dovish turn from Powell.  US 10s are trading back down to the 2.70 level this morning, which is a mild USDJPY negative.  Fed chairman Powell will be on the mic tonight at 7pmET for some brief opening remarks before a teacher town hall meeting in Washington D.C.  We think USDJPY can still take another shot at the upside here should the 109.60s hold. 

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

Market Analysis Charts

USD/CAD Daily Chart

USD/CAD Hourly Chart

March Crude Oil Daily Chart

EUR/USD Daily Chart

EUR/USD Hourly Chart

USD/CNH Daily Chart

GBP/USD Daily Chart

GBP/USD Hourly Chart

EUR/GBP Daily Chart

AUD/USD Daily Chart

AUD/USD Hourly Chart

March Copper Daily Chart

USD/JPY Daily Chart

USD/JPY Hourly Chart

March S&P Daily Chart

Charts: TWS Workspace

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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