Super Mario unleashes dovish surprise ahead of Fed meeting tomorrow

SUMMARY

ANALYSIS

USDCAD

Dollar/CAD is trading with a bid tone this morning as EURUSD selling leads the USD broadly higher, and this selling has come in the wake of some surprisingly dovish comments from the ECB’s Mario Draghi at the Sintra Forum today.  The European central bank chief said additional stimulus will be required if the outlook doesn’t improve and that rate cuts remain part of the ECB’s toolkit.  Bloomberg then added to the dovish mood with a report suggesting ECB officials prefer rate cuts as the primary policy tool for any new stimulus (as opposed to quantitative easing).  European equities have shot up in price as traders celebrate the prospect of more easy money and European bonds yields are plunging (German bund trade to new lows < -0.32%, French 10s below 0% for the first time and EIONA curve now looking for 10bp ECB rate cut by October 2019).  President Trump has even responded this morning by saying the resulting move lower in the Euro is “making it unfairly easier for them [Europe] to compete against the USA” and that “they have been getting away with this for years, along with China and others”.  We think the sharp rally higher in USDCAD on Friday, fueled by upbeat US Retail Sales and Industrial Production data, broke the near-term downtrend lower for the market and we think this now opens things up for a potentially volatile 1.3370-1.3500 trading range going into the Fed meeting tomorrow.  Looking at plunging US treasury yields, rising gold prices, and a still lofty price for December Eurodollar interest futures would suggest the Fed goes uber dovish tomorrow, but it appears USD traders have already reversed or un-winded these bets.  Canada reported weaker than expected Manufacturing Sales data for the month of April (-0.6% MoM vs +0.4%).

USDCAD DAILY

USDCAD HOURLY

JUL CRUDE OIL DAILY

EURUSD

Euro/dollar fell hard this morning after Mario Draghi unleashed a little bit of chaos for markets that are normally used to being quiet before a big Fed meeting.  The market resumed its near-term downtrend and broke chart support in 1.1210 area.  President Trump’s tweet saw EURUSD spike higher in attempt to regain the level, but that move fizzled out.  We’re now seeing bids return however after some comments from former ECB chief economist Praet about today’s market move being a bit exaggerated given improving wages and inflation in the Eurozone.  We think over 2blnEUR in option expiries between 1.1195 and 1.1205 should keep EURUSD contained here this morning and after that we’ll get a sense of how strong chart support in the 1.1180s really is.  Germany reported a much weaker than expected Economic Sentiment reading in its June ZEW Survey.

EURUSD DAILY

EURUSD HOURLY

AUG GOLD DAILY

GBPUSD

Sterling has continued its slip lower following the break below trend-line chart support in the 1.2580s yesterday.  Buyers appear to be stepping in at the next support level just above the 1.2500 level and EURGBP saw a swift wave of selling earlier on Mario Draghi’s comments, and it now looks like this will hinder the cross’ ability to hold trend-line support in the 0.9840s (which could help GBPUSD a little bit).  Tory MPs will be casting a second round of ballots today to decide who will make it to the next stage of the Conservative leadership race.  More here from the BBC.

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Aussie is bouncing off trend-line support in the 0.6830s this morning and it looks like six days of selling following the June 7/10 bearish reversal might finally take a pause here.  The RBA Minutes, released last night, confirmed that the Australian bank’s next move was likely to be lower for interest rates, but this shouldn’t come as a surprised for traders at this point we feel.

AUDUSD DAILY

AUDUSD HOURLY

JULY COPPER DAILY

USDJPY

Dollar/yen benefited yesterday from it’s Friday’s close above the 108.50s, but the 108.70s was all the market could muster before further trend-line chart resistance capped prices.  Today’s rush to buy bonds globally in the wake of Draghi’s dovish comments is not doing any wonders for USDJPY and we think this puts the funds longs under pressure heading into tomorrow’s Fed meeting.  An magnitude 8.4 earthquake has just struck Japan near the west coast of Honshu, and with that USDJPY has seen a quick 20pt move lower.

USDJPY DAILY

USDJPY HOURLY

JUN S&P 500 DAILY

Charts: TWS Workspace

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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