USD trading mildly bid into US Martin Luther King holiday

SUMMARY

ANALYSIS

USDCAD

Dollar/CAD is starting the holiday shortened week towards the top end of its 1.3010-70 range as broad USD demand carries over from Friday’s session.  Sterling weakness is once again leading the way after UK chancellor Sajid Javid told the Financial Times that there would be “no alignment” with the EU after Brexit when it comes to regulation.  The Euro and Aussie continue to suffer under the weight of bearish “head & shoulders” patters on their daily charts.  Off-shore dollar/yuan has reversed higher after the PBOC kept its 1-yr LPR rate unchanged today at 4.15% today, versus expectations of a small cut.  All this contributed to a mild boost for the broader USD during the overnight session but this move will likely grind to halt now as US markets observe the Martin Luther King holiday today. 

The overnight volatility we saw in oil markets following weekend supply disruptions in Libya and Iraq is not getting much in other asset classes, including FX.  More here from BNN Bloomberg.  This doesn’t come as a surprise to us frankly, given USDCAD’s tepid reaction to the Saudi attacks last year and the Iranian airstrikes earlier this month.  While USDCAD still shows a correlation to demand-driven moves in oil, we’ve noticed time and time again now how it doesn’t respond to geopolitical, supply-fear-driven moves.

The leveraged funds at CME re-built their net short USDCAD position for the 3rd week in a row during the week ending January 14th; taking it back to where it was in mid-November.  Given the market’s switch to a more neutral technical structure on January 9th however, we think this now leaves them poorly positioned to deal with a potential break above 1.3070s chart resistance this week.  This week’s calendar has a lot of Canadian-focused items on it that could make this technical break a possibility; most notably the Bank of Canada meeting on Wednesday.
 
Tuesday: Canadian Manufacturing Sales (Nov)

Wednesday: Canadian Wholesale Trade (Nov), Canadian CPI (Dec), Bank of Canada meeting + MPR

Friday: Canadian Retail Sales (Nov)
 
We don’t expect Stephen Poloz and company to change to the Canadian policy interest rate this week, and with the improvement in global trade sentiment over the last month (at least on the face of it), we think the BOC’s GDP and inflation forecasts in the Monetary Policy Report (MPR) will probably steal the limelight of the meeting instead.

USDCAD DAILY

USDCAD HOURLY

FEB CRUDE OIL DAILY

EURUSD

Euro/dollar continues lower this morning as technical selling, from the now obvious “head & shoulders” pattern on the daily chart, weighs on the common currency.  The leveraged funds at CME appear to be missing the boat on this move however, as the CFTC’s weekly COT report showed them covering EUR shorts for the 2nd week in a row during the week ending January 14th.

All eyes will be on the ECB’s Christine Lagarde this Thursday to see if she announces anything new on the strategic review she outlined last time around.  The January flash PMIs should also get some attention this Friday, as it will be the first look at how some major European economies are faring to start 2020.

While it’s quite possible we see EURUSD stall here around chart support in the 1.1080-90s, we think the market’s now increasing negative chart structure will attract sellers.

EURUSD DAILY

EURUSD HOURLY

FEB GOLD DAILY

GBPUSD

Sterling slid on “no-deal” Brexit fears earlier today after UK chancellor Sajid Javid said Britain will have no alignment with EU rules post Brexit.  More here from Politico.  While this shouldn’t come as a surprise given 2020 Brexit transition promises made by UK PM Boris Johnson, we think Javid’s negative tone was enough to perturb the headline scanning trading algorithms this morning.  The early London move lower in GBPUSD has now reversed and we see the market back above the 1.2960-80s support zone.  We think the market’s inability to take out chart support this morning should be taken as warning for the short sellers.  The trend is still negative following the market’s fall below the 1.3080s, but the longs have been dealt a little bit of a life-line here, which could see prices inch higher near term.

The leveraged funds at CME liquidated GBPUSD short positions for the 4th week in a row during the week ending January 14th, which had the effect of increasing the new net long GBPUSD position even further.  We continue to believe that this net positioning statistic is not good news for the funds given the market’s weak technical structure.  This week’s UK calendar features Britain’s employment report tomorrow and its January flash PMI figure on Friday.

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Australian dollar is on the verge of confirming a bearish “head & shoulders” pattern on its daily chart this morning.  The EURUSD chart is undergoing similar technical selling and while we agree we could see AUDUSD bounce a tad here, we think the market’s deteriorating chart structure will attract sellers as well.  Australia will report its December employment report on Wednesday night and its January flash PMIs on Thursday night. 

The leveraged funds at CME cut their net short AUDUSD position for a 2nd week in a row during the week ending January 14th, leaving them the least net short they’ve been now since the spring of 2018.  It is quite clear to us the funds endured pain during the holiday move up to the 0.70s, and used January’s early plunge to get out.  Funny enough though, we think this lack of overstretched short AUD positioning will now encourage new shorts to step in.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

Dollar/yen continues to linger just below chart resistance in the 110.10-20s this morning as the market lacks a real catalyst to move one way or the other.  The US bond markets are closed in observance of Martin Luther King Day, but German 10yr bund yields are trading modestly lower.  The S&P futures are trading just 5pts lower and will close early at 1pmET today.

A majority of economists say the Bank of Japan’s negative rate policy has had little positive impact on the economy and prices, according to survey released by Reuters today.  More here.  We’re inclined to believe this as well as the consensus view that the BOJ will not ease monetary policy any further right now.  The Bank of Japan meets tonight and it’s widely expected that they’ll leave interest rates, and their asset purchase/yield curve control programs in place as-is.  Japan reports its January flash PMIs on Thursday night.

The leveraged funds at CME finally started re-building their USDJPY net long position during the week ending January 14th by adding new longs.  This is not surprising given the market’s 100pt+ rally off the Iran missile strike lows, and we think the fact that net positioning still doesn’t look stretched will embolden new longs to chase a potential break above the 110.10-20s.  

USDJPY DAILY

USDJPY HOURLY

GERMAN 10YR BUND YIELD DAILY

Charts: Reuters Eikon

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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