US stocks plunge, but risk-off sentiment does not help USD broadly
Summary
  • USDCAD:Dollar/CAD is trading comfortably above the 1.30 mark today, with the markets regain of the 1.2960s yesterday sowing the seeds for a strong rally that picked up steam when crude oil starting selling off. Crudes decline appeared to be a combination of risk off (watching US stocks implode) and Hurricane Michael related (US oil supply not threatened, but demand destruction noted in the south). One would have thought that the risk off flows that absolutely crushed US stocks yesterday would have benefited the USD more broadly, but it didnt. Case in point this morning, where we have global equity markets in the red again, the S&Ps off another 25pts, and yet the USD is trading lower. A peculiar market response to say the least, or perhaps a foreshadowing of the Fed being forced to reign in its rate hiking cycle? Trump called the Fed crazy last night, when referring to monetary policy being too tight. Traders now await US CPI data for September, which if it comes in slightly weaker than expected like yesterdays PPI read, may justify the broad USD weakness were seeing today. Expectations are for +2.4% YoY and +0.2% MoM on the headline figure, and +2.3% YoY and +0.2% MoM on core CPI. With USDCAD now breaching trend-line chart resistance in the 1.3030-40s, we think the market has legs to extend to the 1.3080s, but the 1.3030-40s now need to hold and well need to see some broad USD buying to help with that. EURCAD exploded higher yesterday, which helped USDCAD as well.

  • EURUSD:Euro/dollar trades 50pts higher this morning; completely shrugging off yesterdays risk off event in stocks. We think this is noteworthy because when a market doesnt respond to a traditional driver of price, it means something is changing. Chart resistance in the 1.1540-50s has also been surpassed, which is not great for those new fund short positions that entered last week. USDCNH and emerging market FX is also trading broadly stronger today. So we ask again, is the market worried that the Fed will be forced to change course? Will the US CPI figure today disappoint? We have some horizontal chart resistance at the 1.1580 level ahead of the 8:30am figures. Over 1.6blnEUR in options expire at the 1.1600 strike today. We think the market looks vulnerable to short covering here. The next major resistance level after 1.1580 is 1.1675.

  • GBPUSD: Sterling has had a choppy overnight session. The market extended yesterdays NY session gains into Asia on some more positive Brexit enthusiasm, then tradedlower again at the start of European trading today after representatives from Ireland, the UK and the EU confirm there hasnt yet been a breakthrough on the Irish border deal. The market is rallying higher again now into resistance again at the 1.3230s. Support is 1.3190. A break of either of those two will determine the vibe for the rest of the week, but we feel the path of least resistance (pain trade) is higher. The funds are still net short GBPUSD.

  • AUDUSD:The Aussie is bouncing strongly this morning as traders look at broad USD selling today as comforting reason to buy. Yesterdays late day, risk-off driven selloff in AUDUSD halted at trend-line support in the 0.7050s. Resistance today is once again 0.7100. A close above would be bullish. It would also cancel out yesterdays bearish reversal pattern. Copper also has some upward momentum to it this morning as the market reverses higher from earlier losses.

  • USDJPY: Dollar/yen was the obvious victim of yesterdays stock market plunge, falling through support in the 112.50-60s. Weve been warning about a reversal lower in USDJPY since last Thursday, and this intensified on Monday with the break below 113.50-60. That being said, with USDJPY now down five days in a row, we think USDJPY finds support here at 112.10-20, or slightly below here at the 111.90s.

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Erik Bregar - Director, FX Trading
Exchange Bank of Canada
Toronto, Ontario
Email:erik.bregar@ebcfx.com
Phone:888-729-9716

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