Everyone's blaming it on trade tensions. Could it be something more?
Erik Bregar of Exchange Bank of Canada - InsideFutures.com - Thu Jul 11, 9:13AM CDT

ANALYSIS

USDCAD

Dollar/CAD had a volatile day yesterday; initially falling lower on Powells dovish remarks before Congress, then spiking higher following the Bank of Canadas more dovish than expected hold to interest rates, and then falling lower again as crude oil prices surged higher. Everyones blaming it on trade tensions, and by everyone we mean global central bankers. Jerome Powells testimony and the FOMC Minutes released yesterday basically re-affirmed the Feds party line that increased trade tensions, slowing global growth and low inflation are the drivers that are going to force them to begin a new rate cutting cycle later this month. Cross-currents have re-emerged, but the Fed wont go into detail. Uncertainties and other developments that have come in since our June meeting continue to weigh on the US economic outlook, but the Fed wont tell us what they are. Even the Bank of Canada referred to global trade tensions, in a more concerned manner, in its announcement yesterday. Stephen Poloz, like Jerome Powell, cited a decent domestic economic outlook, but it seems he too is now caving and falling into line with the global bond markets desire for more accommodative monetary policy. So what are the central bankers not telling us? Could off-shore USD funding markets (money markets) be experiencing some sort of stress in terms of liquidity? The continued inversion of the LIBOR and Eurodollar futures curves would suggest so. What could be causing this stress? Could it be the slow motion train-wreck which is Deutsche Bank? Could it be the real possibility of a no-deal Brexit? Could the rush into global bonds be less about falling inflation expectations and more about a demand for high quality collateral in the anticipation of a negative shock? Whatever it is, interest rate markets continue to reflect an anxiety that goes way beyond the threat of a few tariffs being levied here and there in our opinion. Central bankers appear more and more powerless to control the bond markets, and more and more inept when it comes to forecasting and learning from past policy failures, but yet they have to exude confidence when speaking before usand so what weve been seeing lately in our opinion is a delicate PR dance. How do we sound positive and at the same time explain what the bond markets are saying without causing a panic? The Fed rate cut trade was back on yesterday, for all tense and purposes, and weve since seen some big moves higher in US bonds, gold and Eurodollar prices, and broad USD selling, but all these markets are retracing a bit as we enter NY trade because of a slightly hotter than expected US core CPI measure for June, which was just reported at 8:30amET (+2.1% YoY vs +2.0% exp). The broader USD, which initially saw selling after Powell remarks, is now trying to claw back some of its overnight losses. We think USDCAD, in particular though, will remain under pressure so long as the market stays below the 1.3070 level. A move above could invite some short covering however, so wed be aware of that. Jerome Powell is expected to deliver similar testimony before the US Senate Banking Committee this morning at 10amET. Well also have a ton of other Fed-speak to comb through, with Williams speaking at 11:15amET, Bostic at 12:15pmET, Barkin at 12:30pmET, Quarles at 3:30pmET and Kashkari at 5pmET.

USDCAD DAILY

USDCAD DAILY

USDCAD HOURLY

USDCAD HOURLY

AUG CRUDE OIL DAILY

AUG CRUDE OIL DAILY


EURUSD

Euro/dollar has rallied a good 70pts higher since the dovish prepared remarks from Powell crossed the wires yesterday morning. The 1.1220 resistance level fell to the wayside, as did the 1.1250s as we headed into Asian trade overnight. The market has been struggling however to deal with a confluence of trend-line chart resistance in the 1.1280s ever since, and this mornings beat on core US CPI for June is not helping things here in our opinion. German bund yields have shrugged off the down-tick we saw post Powell yesterday, and are now trading at 1-week highs in the -0.25% area. Were not quite sure what this means yet, especially in light of the dovish ECB Minutes that came out at 7:30amET this morning. Perhaps a little bit of spread trading going on here? (ie. were now sure the Feds going to cut so lets buy treasuries, lets sell bunds until we get more clarity on how much the ECB will actually cut?)

EURUSD DAILY

EURUSD DAILY

EURUSD HOURLY

EURUSD HOURLY

AUG GOLD DAILY

AUG GOLD DAILY


GBPUSD

Sterling has galloped over 100pts higher since Powell re-affirmed the bond markets desire for rate cuts yesterday morning. Traders are now grappling with chart resistance in the 1.2550-85 as NY trade gets underway today, but it appears the swift selloff in EURGBP off the phycological 0.9000 level and rising 10yr gilt yields (now back above 0.80%) appear to helping to keep the market bid.

GBPUSD DAILY

GBPUSD DAILY

GBPUSD HOURLY

GBPUSD HOURLY

EURGBP DAILY

EURGBP DAILY


AUDUSD

A dovish Powell indeed came to the rescue for the Australian dollar yesterday. The Fed chairmans prepared remarks saw AUDUSD surge back above the 0.6930-40 support level. Trend-line resistance at 0.6970 then gave way in overnight trade broad, follow-though, USD selling swept over markets. Weve seen a downside test of 0.6970 following the US June CPI figures, but buyers were quick to defend the level. We think this bodes well for AUDUSD technically heading into the end the week, provided Powell doesnt shock the markets today (US Senate testimony is expected to be the same as what was delivered to the US House Financial Services Committee).

AUDUSD DAILY

AUDUSD DAILY

AUDUSD HOURLY

AUDUSD HOURLY

SEP COPPER DAILY

SEP COPPER DAILY


USDJPY

Dollar/yen was never able to challenge the 109.05 level yesterday as Powells remarks quickly knocked US bond yields and the broader USD lower. So too went USDJPY, and the market broke two key support levels heading into the NY close (108.70 and 108.40). This helped precipitate follow through selling, in our opinion, when Asia woke up and decided to sell USD broadly as well. Buyers stepped in however at horizontal chart support in the 107.80 as European trade got underway today, and weve since seen them push the market higher still after the stronger than expected US CPI report for June. We think USDJPY trades with a range-bound to bid tone today as almost 2blnUSD in options expire here between 108.30 and 108.50. US yields also appear to be feeling some upside pressure from the rally in German bund yields to 1 week highs.

USDJPY DAILY

USDJPY DAILY

USDJPY HOURLY

USDJPY HOURLY

DEC 3-MONTH EURODOLLARS DAILY

DEC 3-MONTH EURODOLLARS DAILY

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