Fed fails. Biden succeeds. Bank of Canada cuts rates by 50bp to 1.25%
Erik Bregar of Exchange Bank of Canada - InsideFutures.com - Wed Mar 04, 11:14AM CST

ANALYSIS

USDCAD

Dollar/CAD spiked above the 1.3400 mark at 10amET this morning after the Bank of Canada cut interest rates by 50bp to 1.25%. A cut of 25bp was largely priced in by the OIS markets earlier this week, but with 50bp odds increasing to 68% going into the release, we think this was the new expectation everybody was watching for. The Canadian central bank indeed delivered a fifty, just like the Fed did yesterday, but we felt the tone of their press release was notably more dovish. Full detailshere. Well have to wait until tomorrow unfortunately to get Stephen Polozs interpretation of all this. The Canadian central bank governor will be speaking at 1pmET tomorrow, with the text of his speech titled Economic Progress Report to be released at 12:45pmET.

Rumors continue to make the rounds this morning that OPEC will surprise oil markets with a larger than 1mln bpd production cut on Friday, but traders seem more pre-occupied with the April contracts inability to break above the 48.10-40 resistance area. Not even this mornings bullish weekly EIA report is helping the market. We think a pullback for oil prices here could add some fuel to the USDCAD long trade currently underway.

USDCAD DAILY

USDCAD DAILY

USDCAD HOURLY

USDCAD HOURLY

APR CRUDE OIL DAILY

APR CRUDE OIL DAILY


EURUSD

Euro/dollar spiked higher yesterday after the bond markets showed a cynical response to the Feds emergency rate cut. The US 10yr yield plummeted over 25bp (from session highs to session lows), and this included a quick and scary move below 1% to a new all time low of 0.9059%! Why bond traders reacted this way, when the Fed gave them more or less what they wanted right away, is the question everybody has been debating since then. Some say this sent a signal that the Fed finally panicked, likely knowing full well that economic/liquidity risks are much worse that they portray (and that bonds have had it right all along). Others say the markets wanted more and this was another feeble attempt by the Fed to stay ahead of the curve, ie. we didnt get 75bp and we didnt get coordinated global rates at the same time. We think it was the disingenuous tone to Powells press conference that rubbed everyone the wrong way. The Fed chairman keeps trying to play the confidence game of telling us that the US economy remains strong but the Feds constant interventionist measures dont jive with this narrative. What is more, Powell admitted that that the effects of the coronavirus have not shown up in the data yet. So if you claim to be data dependent, what the heck are you overreacting for?

We continue to believe that global central bankers are losing whatever credibility they have left, by the day. Were told that interest rate cuts and quantitative easing is simulative to the broader economy, but there is no empirical evidence to suggest that this is true. It hasnt worked in Japan for decades. Its so ineffective in Europe that Christine Lagarde is trying to come up with a rethink of the ECBs entire monetary policy strategy. What we think we saw was a collective middle finger towards the Fed yesterday and anything it says going forward. The global bond markets have, and will always be, in chargeand they will react sooner and more rationally that any central banker ever will.

We think this mornings second retreat off the 1.1160-80s resistance level for EURUSD is technically warranted. The buyers couldnt hold the markets brief spike above the 1.1200 level yesterday and they have failed three times since then to probe higher. This mornings better than expected US Non-Manufacturing ISM report for February (57.3 vs 54.9) is bringing about some USD buying, but its very mild.

EURUSD DAILY

EURUSD DAILY

EURUSD HOURLY

EURUSD HOURLY

APRIL GOLD DAILY

APRIL GOLD DAILY


GBPUSD

Sterling is chopping around between support at 1.2750-70 and resistance at 1.2830 as traders digest rumors that the Bank of England will do an emergency rate cut as well, before its March 26th policy meeting. A report from CNBC is making the rounds to this effect and we think thats probably because the OIS market has now priced in an effective target rate of 0.3315%, which is 34bp reduction from the current rate of 0.75%. The UKs final Services PMI for February mildly missed expectations this morning (53.2 vs 53.3) but traders are largely ignoring it.

GBPUSD DAILY

GBPUSD DAILY

GBPUSD HOURLY

GBPUSD HOURLY

EURGBP DAILY

EURGBP DAILY


AUDUSD

The Australian dollar spiked higher initially after yesterdays emergency Fed rate cut, but it quickly reversed lower when US bond yields started to plunge. This reversal lower also coincided with AUDUSD hitting trend-line chart resistance in the 0.6620s. Buyers showed up again in Asia though overnight (despite the markets rather negative NY close) and we think the better than expected Australian GDP numbers were the catalysts. The numbers for Q4 2019 came in at +0.5% QoQ vs +0.3% expected and +2.2% YoY vs +1.9% expected. One could argue that this is old data now in light of the cononavirus likely impact on the Australian economy, but were not shocked to once again see markets take data at face value.

The S&P futures kept inching higher in Asia too as Joe Biden staged an impressive comeback in the Super Tuesday primaries and we think AUDUSD buyers welcomed the mild improvement is risk tone that resulted from this as well. Bidens more centrist political stance is seen as more friendly towards the markets or much easier for the Trump campaign to beat (depending on who you talk to).

We think yesterdays break above the 0.6550-60 resistance level has very much allowed the upward momentum weve seen in AUDUSD since the RBA meeting. A firm NY close above the 0.6620s could see this counter-trend AUDUSD rally continue further.

AUDUSD DAILY

AUDUSD DAILY

AUDUSD HOURLY

AUDUSD HOURLY

USDCNH DAILY

USDCNH DAILY


USDJPY

Dollar/yen retested its recent 107 lows yesterday in the aftermath of the Feds 50bp cut, but the buyers put up an impressive defense of the 106.90s, despite a rather tumultuous mid-day plunge in US yields to 0.9059%. They showed up again in Asian trade overnight, in and around the time of the better than expected Australian GDP release. However, theyre struggling to build upon this progress now as the US 10yr yield slips 4bp from its session highs.

We think USDJPY has a chance of forging a short term bottom anchored off trend-line support in the 106.90s, but we dont yet know where the positive fundamental narrative will come from and were not yet seeing the type of seller failure we want to see (swiftly fall below support followed by a sharp reversal higher).

USDJPY DAILY

USDJPY DAILY

USDJPY HOURLY

USDJPY HOURLY

US 10YR BOND YIELD DAILY

US 10YR BOND YIELD DAILY


Charts: Reuters Eikon

Interested in creating a custom foreign exchange trading plan?Contact usor call EBC's trading desk directly at1-888-729-9716.

About Exchange Bank of Canada
Exchange Bank of Canada, EBC Canadas Foreign Exchange Bank, is the only Schedule 1 Canadian bank specializing in foreign currency exchange and international payments for financial institutions and corporations. EBC provides innovative foreign exchange management and integrated international payment solutions tailored to meet business needs on a global scale. Leveraging industry leading technology and a client-focused team of experts EBC delivers comprehensive, cost-effective and trusted payment processes and foreign exchange currency solutions to create financial and operational efficiencies. To learn more, visit:www.ebcfx.com.

Disclaimer:All product names, logos, and brands are property of their respective owners. All company, product and service names used in this website are for identification purposes only. Use of these names, logos, and brands does not imply endorsement.
This publication has been prepared by Exchange Bank of Canada for informational and marketing purposes only. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable, but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the information nor the forecast shall be taken as a representation for which Exchange Bank of Canada, its affiliates or any of their employees incur any responsibility. Neither Exchange Bank of Canada nor its affiliates accept any liability whatsoever for any loss arising from any use of this information. This publication is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any of the currencies referred to herein, nor shall this publication be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The general transaction, financial, educational and market information contained herein is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a "call to action" or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. You should note that the manner in which you implement any of the strategies set out in this publication may expose you to significant risk and you should carefully consider your ability to bear such risks through consultation with your own independent financial, legal, accounting, tax and other professional advisors. All Exchange Bank of Canada products and services are subject to the terms of applicable agreements and local regulations. This publication and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced in whole or in part, or referred to in any manner whatsoever nor may the information, opinions and conclusions contained in it be referred to without the prior express written consent of Exchange Bank of Canada.