Fed rate-cut trade get nervous ahead of Powell testimony

SUMMARY

ANALYSIS

USDCAD

Dollar/CAD has drifted higher in overnight trade today as new 6-month lows in the British pound lead the US dollar broadly higher.  There isn’t a headline we can point to per say, but GBPUSD slipped precipitously when it fell below trend-line support at the 1.2500 level.  We’ve also seen the “Fed rate-cut trade” get nervous again over the last 24hs as August gold prices moved back below the 1404 level, Eurodollar futures leaked lower again and US 10yr treasury yields edged up past Friday’s post NFP highs.   This is now leading USDCAD to toy with Friday’s chart resistance levels in the 1.3120-30s as traders digest some conflicting Canadian data items (June Housing Starts BEAT, 245.7k vs 208.6k exp but May Building Permits MISS, -13% MoM vs -10% exp).  Fed-speak gets going today with Powell about to deliver opening remarks in a speech regarding banking stress tests in Boston.  The Fed’s Bullard will speak shortly after 10amET.  Finally we’ll have Quarles and Bostic speaking around the 2pmET hour.  The CFTC released its weekly COT report yesterday (which shows fund positioning as of July 2nd) and it confirmed what we thought last week, in that leveraged money has abandoned the long USD 2019 bet and has gone net short USDCAD.

USDCAD DAILY

USDCAD HOURLY

AUG CRUDE OIL DAILY

EURUSD

Euro/dollar has given up the 1.1200 level this morning as GBPUSD extends to new 6-month lows, Christine Lagarde gets the nod from EU finance ministers to be the new ECB President, and more and more market chatter starts to circulate about the ECB being forced to re-introduce its bond buying program later this year.  The CFTC’s COT report showed a fair bit of EURUSD short covering during the week ending July 2, and we suspect this came from entrenched short positions that stomached losses following the Fed meeting but got their lucky break to get out following the market’s steep correction lower on July 1.

EURUSD DAILY

EURUSD HOURLY

AUG GOLD DAILY

GBPUSD

Sterling is leading the G7 FX space lower today as technical selling appears to be taking over ever since the market broke back below the 1.2500 level.  The “Fed rate-cut trade” continues to get dialed back as we await comments from Jerome Powell tomorrow, “no-deal” Brexit uncertainty continues to mount with the Dominic Grieve amendment not being allowed to be brought to a vote in the UK House of Representatives today, and Bank of England rate cut talk has re-emerged following last week’s dovish comments from Governor Carney…all fundamentally negative factors that continue to weigh on GBPUSD so far this week.  The CFTC’s COT report showed that the funds piled into new GBP short positions for the third week in row ending July 2nd.  EURGBP buyers have returned as well, and are challenging the physiological 0.9000 level to the upside as we speak.

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Australian dollar has slipped lower in the last 24hrs after the 0.6980 level gave way in NY trade yesterday and this seemed to coincide with August gold losing the 1404 level once again.  Last night’s weak NAB Survey for June (+2 vs +7 for May) did not help sentiment during Asian trade in our opinion, nor has GBPUSD selling in European trade so far today.  Copper is falling 1% lower this morning as the USD rallies broadly and we now think recent AUDUSD longs face a real test at chart support in the 0.6930-40s.  We think the market could recover and trade higher should Powell re-iterate rate cutting guidance when he speaks to Congress tomorrow, however watch out below if he tries to through cold water on the idea.  The funds reduced their net short AUDUSD position, by the most in 7 weeks, during the week ending July 2 (according the CFTC).

AUDUSD DAILY

AUDUSD HOURLY

SEP COPPER DAILY

USDJPY

Dollar/yen continues to drift higher as the “Fed rate-cut trade” gets nervous ahead of Powell’s testimony in Congress tomorrow.  US treasuries and Eurodollar futures are inching lower and this has allowed USDJPY to sit comfortably above trend-line chart resistance in the 108.70s so far today.  While we don’t think Powell will blatantly try to disappoint markets tomorrow, we think the Fed chairman will provide something for all listeners, possibly even confuse us…all in a bid to buy more time so that the FOMC can figure out what the bond markets are worried about.  The funds continued to purge long USDJPY positions, for the 5th week in a row, during the week ending July 2.  They now sit net neutral the market, which oddly enough helps USDJPY sentiment here in our opinion as all the scared USD longs are now out of the market.

USDJPY DAILY

USDJPY HOURLY

US 10YR BOND YIELD 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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