The BOC left the overnight rate unchanged at 0.25% and didn’t touch its quantitative easing program. This was in line with the analyst expectations. The central bank believes the Canadian economy would “rebound strongly” as the rate of COVID-19 vaccinations picked up. More tapering is expected soon as the outlook for the economy improves. USDCAD sold off earlier but at the time of the BOC rates decision USD rallied across the board and helped the USDCAD pair to rally approximately 60 pips higher. The rally was significant as it was almost equal to the current daily ATR(14) of 69 pips. The USD rallied against the other major counterparts leaving especially the EURUSD vulnerable for further selling in today’s trading. Today’s main risk events are the ECB press conference and the US CPI release. The month on month CPI change is expected to come in at 0.4% (0.8% previous). By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
Not much happened with the big US equity indices. The S&P 500 (-0.18%) and NASDAQ Composite (-0.09%) closed lower with minor losses while the Dow Jones Industrial Average (-0.44%) and the Russell 2000 (-0.71%) lost some more ground. The overall losses were quite modest, however as traders are waiting for the US inflation data. The so-called Wall Street fear index VIX jumped 4.8% in yesterday’s trading telling about investors’ need for hedging ahead of the CPI release. The best performing S&P 500 sectors were the healthcare (+0.97%) and the utilities (+0.89%) while the industrial (-1.02%) and the financial (-0.94%) sectors saw the heaviest sell volumes.
The CPI release from the Labor Department today will provide, not only a report on the past price increases but more guidance on what the future inflation trends might look like. Investors focus on how demand/supply imbalance impacts the prices in the mids of the ongoing recovery. The US 10-yr Treasury yield fell to 1.4875% and put pressure on the financial sector (-0.94%).
Both oil and gold were also in a wait and see mode as futures in both assets closed near the opening levels. We pointed out yesterday how there was a loss of downside momentum in LTCUSD and BTCUSD and said that it indicated potential direction change. This is indeed what happened. BTCUSD rallied 11.94% while LTCUSD gained 7.35%.
We pointed out some signs of weakness in EURUSD yesterday. The pair had reacted lower closing below the 20-day SMA after failing to challenge the 61.8% retracement level. It was our view that a break below the 1.2164 support could take the pair down to 1.2142 but with the increased USD strength, it seems that after this initial targe is reached a move to the 1.2080 – 1.2103 range (the 50-day SMA and a recent reactionary low) could be in the cards. There was another failed rally yesterday that created a bearish candle in the daily chart. This weakness and the USD strength across the board (against all the major counterparts) indicates that the big money is repositioning and exiting the crowded USD short trades. The key support and resistance levels in EURUSD are 1.2103 and 1.2218.
EURCHF update. The pair hit our target zone after we alerted (here) that the pair could move to the 1.0890 – 1.0906 range. EURCHF is now trading inside the zone and provided TIOmarkets traders with an opportunity to bank approximately 60 pips.
LYFT update. We highlighted LYFT yesterday as a potential short opportunity. After falling over 3% the day before the bids remained soft yesterday too and the stock fell by 3.52%. The technicals are weak in LYFT but so are the fundamentals too. The stock is falling as President Biden plans to nominate David Weil to run a U.S. Labor Department division that oversees worker rights in companies such as UBER and LYFT. Weil has supported government crackdowns on the gig-economy workforce model employed e.g. by Uber Technologies Inc. See yesterday’s report (here) for more details and analysis.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The FED||The Fed has on several occasions repeated its commitment to ultra-accommodative monetary policy. The rates are likely to stay near zero but now some Fed officials have said that the Fed should start considering potentially tapering their asset purchases.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus and the Biden administration has indicated it will seek to deliver another two trillion dollars in infrastructure spending.|
|Yields||After trending higher since the beginning of August 2020, the Treasury yields have been moving lower or sideways. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Payrolls||The latest miss in payrolls was the second in a row (+559K vs +645K expected). The unemployment rate decreased from 6.1% to 5.8% but the fact that it happened while the labour force participation rate decreased makes it less good news.|
|Inflation||As per CPI inflation is running at a 5% annual pace over the last 6 months, while PPI shows annual inflation pace at 7.4% over the same period.|
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Market News & Facts
- US Senator Warren: crypto regulation is needed.
- PBOC Governor Yi Gang: China’s 2021 consumer inflation less than 2%
- US Republican senators saw some progress in infrastructure talks
- RBA may start to dismantle some of the QE structure soon
- China May CPI came in at 1.3% y/y (1.6% expected)
- China PPI was confirmed at 9.0% y/y (8.5% expected)
- China state media to Australia: Diversify your iron ore exports away from China
- Australia NAB business confidence for May 20 (26 previous)
- Australia NAB business conditions for May 37 (32 previous)
- US report: Virus leak from a Chinese lab in Wuhan is plausible
- Yellen will persist with Biden’s $4tr spending plan even if it increases inflation
- The head of Rosneft: the world will face acute oil shortage in the long-term
- President of El Salvador to make Bitcoin a legal tender
- Tesla Tesla cancels its Model S Plaid Plus
- Flexible QE expected from the RBA
The Next Main Risk Events
- EUR – Monetary Policy Statement
- EUR – Main Refinancing Rate
- EUR – ECB Press Conference
- USD – CPI
- USD – Core CPI
- USD – Unemployment Claims
- USD – 30-y Bond Auction
- GBP – BOE Gov Bailey’s Speech
- USD – Prelim UoM Consumer Sentiment
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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