Yesterday's optimism largely holding ahead of Powell / Mnuchin testimony
Erik Bregar of Exchange Bank of Canada - InsideFutures.com - Tue May 19, 10:23AM CDT

ANALYSIS

USDCAD

Global risk sentiment went through the roof yesterday after Fed chairman Powell pledged unlimited ammunition to support financial markets in a CBS interview; after Modernas coronavirus vaccine showed some promise in a small trial, and after France/Germany formally proposed a 500blnEUR recovery fund to support virus-stricken Eurozone economies. This combination of headlines led to a surge higher in global stock markets and bond yields, and a plunge lower in the safe-haven US dollar; and while we definitely think there are holes in all three of the above mentioned risk-on narratives, its beentough to fight the global markets thirst for positive news since the start of the new week.

Some renewed US/China and Aussie/China tensions saw the broader USD regain some ground in Asian trade overnight, but this has been erased following this mornings continued rally in Italian bonds and following the release of a higher than expected Germany ZEW Economic Sentiment Index for the month of May. Some mild caution returned at the NY open after the Bank of Japan announced an unscheduled monetary policy meeting for 8pmET this Thursday night, but one could also make the argument that were seeing some cautious position squaring ahead of todays feature event at 10amET. Federal Reserve chairman Jerome Powell and Treasury Secretary Steven Mnuchin are expected to testify in an online hearing titled The Quarterly CARES Act Report to Congress before the Senate Banking Committee.

The latest Commitment of Traders Report released by the CFTC late Friday showed the leveraged funds largely maintaining their net long USDCAD position during the week ending May 12; which made sense given the unwinding of negative US rate speculation early last week. Yesterdays surge in risk appetite, however unwarranted we think it is, serves as a reminder that dollar/CAD is still technically operating within a well-defined trading range, and this pullback below 1.4000 should come as no surprise given last Thursdays noted buyer failure in the 1.4120s.


USDCAD DAILY

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USDCAD HOURLY

JUNE CRUDE OIL DAILY

JUNE CRUDE OIL DAILY


EURUSD

We talked about a euro/dollar market that was potentially positioned a little too short on Friday, and it looks like this was the case again yesterday heading into the Moderna vaccine headlines. The excitement led to broad USD selling and then the recovery fund news out of Germany/France added some icing onthe cake. The market closed NY trade ingood technical form; comfortably above the 1.0900 mark.

We felt that this technical achievementput the EURUSD buyers in charge near-term and allowed for the follow-through buying we saw earlier today as the BTP/Bund yield spread compressedfurther. The market has now pulled back swiftly however following a breakout attempt above the 1.0950s in early NY trade and so we may now need to wait until Powell/Mnuchins testimony to see how strong these buyers really are.

The leveraged funds at CME added marginally to their net long EURUSD position during the week ending May 12, but the size of this net position is still shy of the peak (87,218 contracts) recorded during the week ending April 21.


EURUSD DAILY

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GBPUSD

Yesterdays broad risk-on rally very much rescued sterling to start the week after the BOEs Haldane told the Telegraph newspaper on the weekend that the UK central bank was more urgently looking at options such a negative interest rates and buying riskier assets. The economy is weaker than a year ago and we are now at the effective lower bound, so in that sense its something well need to look at are looking at with somewhat greater immediacy, he said in an interview. How could we not be?

This mornings better than expected UK employment for March (released around 2amET) seemed to correlate with GBPUSDs rally up through 1.2230s chart resistance, but wed caution that this is pre-coronavirus lockdown and nothing to celebrate. Perhaps sterling traders were simply following euro traders this morning as peripheral European bond markets continued to show their vote of confidence in the recovery fund that Germany and France had agreed to (in principle) yesterday?

The market is now hovering on top of the 1.2230s as FX traders await comments from Powell & Mnuchin at 10amET. The latestCommitment of Traders Report released by the CFTCshowed the leveraged funds adding marginally to their new net short GBPUSD position during the week ending May 12. This has turned out to be a good move so far, in light of the bearish head & shoulders pattern that got confirmed on May 6.


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AUDUSD

The Australian dollar is flirting with an upside breakout above its April highs this morning as yesterdays surge in global risk sentiment is largely holding for now. Theres a lot to be skeptical about however:


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USDJPY

Dollar/yen has pushed above trend-line chart resistance in the 107.60s this morning and, while risk-on flows are being cited as the reason, wed argue this has more to do with yen sales on the back of the unexpected BOJ meeting announcement. What does the Bank of Japan see that warrants a special meeting this Friday (Thursday night ET)?

Some sellers have now emerged at the 108.10 level as the dollar goes broadly offered ahead of Powell/Mnuchin. The leveraged funds at CME began re-adding to their net long USDJPY position during the week ending May 12, after trimming their position in the week prior.


USDJPY DAILY

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USDJPY HOURLY

US 10YR YIELD DAILY

US 10YR YIELD DAILY

Charts: Reuters Eikon

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