According to Mark Cabana the Bank of America head of global research potentially $1 trillion of additional reserves will hit the US banking system over the next two months and almost $2 trillion by the end of June. He pointed out in an interview on Bloomberg TV yesterday that there are about $3 trillion dollars in the banking system which means that there will be almost 66% increase in the total assets in the banking system over the next four or five months. This, Cabana says, will put a lot of pressure on short-term interest rates and could even drive the front end rates to the negative territory. The Fed, however, doesn’t want negative rates and the US Treasury cannot issue notes on negative offerings. This is why, according to Cabana, the Fed is likely to raise rates slightly and pull the short end rates out of the negative territory. The tool the Fed has for this is called IOER (Interest Rates On Excess Reserves). By reading further you agree with our disclaimer at the bottom of this page and acknowledge that we do not provide investment advice.

The above fundamental story provides us with an explanation for the USD strength we have been able to identify based on the recent price action. USD continued to tick higher in yesterdays trading. USDJPY and USDCAD strengthened while EURUSD bulls again didn’t really show commitment to taking the pair higher. The pair is losing upside momentum. As a result of all the above, Cable also corrected lower. Since the US session open yesterday CHF has been the strongest and CAD the weakest against the dollar. US equity indices continued trading sideways yesterday. All the indices closed near their opening levels but the highest prints for the day were lower than the day before. This ties together with the theme we have been focusing on lately. Namely that the USD is showing signs of strength and risky assets are losing momentum. The US unemployment claims disappointed slightly yesterday with 793K new claims while analysts had predicted 755K claims. Today’s economic calendar is almost empty when it comes to significant risk events. The UK preliminary GDP was confirmed at 1.0% while the analysts had forecasted 0.5%. See our economic calendar for more information.

USOIL is trading lower just as we suggested in yesterday’s Price Action Analysis video (here). With the dollar gaining and after such a rally higher USOIL is vulnerable. The price of oil was trading in the upper end of a bull channel and the next significant support level can be found around $54.00 – $54.40. This is where we have the channel low, 20-period SMA and 61.8% Fibonacci level coinciding with the $54 support level. Open a VIP Black account with us. There are no per trade execution or monthly fees on our VIP Black accounts.

USD strength combined with weakness in USOIL makes it a perfect environment for USDCAD to rise. The pair is bouncing higher from the upper end of a wedge at 1.2660 and is likely to test the 1.2758 resistance level if crude oil weakness continues. The 50-period SMA is trading roughly at the same level and therefore could act as a target for intraday traders. Other significant price levels in USOIL are 1.2588 and 1.2881. Open a VIP Black account with us. There are no per trade execution or monthly fees on our VIP Black accounts. 

Recent macroeconomic data releases
Canadian Employment Change -212.8K, -43.5K expected
Canadian Unemployment Rate 9.4%, 8.9% expected
US Average Hourly Earnings 0.2%, 0.3% expected
US Non-Farm Employment Change 49K, 85K expected
US Unemployment Rate 6.3%, 6.7% expected
Canadian Ivey PMI 48.4, 49.5 expected
New Zealand Inflation Expectations 1.89%, 1.59% expected
US CPI 0.3%, 0.3% expected
US Core CPI 0.0%, 0.2% expected
US Crude Oil Inventories -6.6M, -0.9M expected
US Unemployment Claims 793K, 755K expected

Important macroeconomic data releases today

UK Preliminary GDP 1.0%, 0.5% expected

You may access the times and dates in the economic calendar here.

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Janne Muta
Chief Market Analyst

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