USD/CAD hits resistance ahead of BOC, US PMIs: European open – 06/09/2023

Asian Indices:

• Australia's ASX 200 index fell by -57.5 points (-0.79%) and currently trades at 7,256.80
• Japan's Nikkei 225 index has risen by 136.35 points (0.41%) and currently trades at 33,173.11
• Hong Kong's Hang Seng index has fallen by -141.12 points (-0.76%) and currently trades at 18,315.79
• China's A50 Index has fallen by -63.4 points (-0.49%) and currently trades at 12,767.22

UK and Europe:

• UK's FTSE 100 futures are currently down -30.5 points (-0.41%), the cash market is currently estimated to open at 7,407.43
• Euro STOXX 50 futures are currently down -16 points (-0.37%), the cash market is currently estimated to open at 4,253.16
• Germany's DAX futures are currently down -32 points (-0.2%), the cash market is currently estimated to open at 15,739.71

US Futures:

• DJI futures are currently down -12 points (-0.03%)
• S&P 500 futures are currently down -4.5 points (-0.1%)
• Nasdaq 100 futures are currently down -29.25 points (-0.19%)

With softer PMI surveys released this week from China and Europe, I expect the US service PMIs to be closely scrutinized later today. S&P Global will release the final report for August at 14:45, and a key question is whether the initial print of 50.4 will cross below the 50 threshold to denote industry contraction and spark fears of a recession. The ISM services PMI is also released shortly after, and we'll find out if the ISM suffers the same slump as the S&P Global report did earlier this month. A higher reading for prices paid could also put a wrench in the works and raise concerns of higher levels of inflation, further weighing on sentiment.

If PMIs continue to deteriorate, it further builds the case for the Fed to hold rates and brings forward bets of a potential cut. Yet ironically, that could further support the US dollar due to safe-haven flows, and send yields higher as investors want a higher premium in the face of a feared recession.

Regardless, a Fed hold seems likely this month, with Fed Fund Futures implying it with a 93% probability, and we're slowly seeing odds of a future hike also diminish.

This is the last week that Fed members can publicly speak about policy before the media blackout period begins on Saturday, so expect Fed members to take full advantage as they try to sway market expectations their way. Fed member Susan Collins speaks at 13:30 BST and Logan at 20:00.

The Bank of Canada (BOC) are expected to hold rates at today’s meeting, given GDP unexpectedly contracted in Q2. Still, implied volatility has spiked higher for USD/CAD.

Events in focus (GMT+1):

• 07:00 – German factory orders
• 08:30 – German construction PMI
• 09:30 – UK construction PMI
• 10:00 – European retail sales
• 13:30 – Fed Collins speaks
• 14:45 – US services PMI (S&P Global)
• 15:00 – ISM services PMI
• 15:00 – BOC (Bank of Canada)

• 1-day implied volatilities are all above their 20-day averages, and USD/CAD takes the lead at 202% with the BOC meeting and two key US PMI reports on tap
• Currency ranges were minute during the Asian session, which adds to the potential for larger moves over the European and US sessions
• JPY is the strongest forex major with USD/JPY down a mere -26 pips, after Masato Kanda (ice Minister of Finance for International Affairs of Japan) gave verbal warnings to speculators over a weaker yen
• AUD/USD remains little changed but above yesterday’s YTD low, after Q2 GDP beat expectations. Although growth was driven by exports and investment whilst household spending – a key level of uncertainty for the RBA – remained weak
• USD/CNH rose for a third day in in line with my bias from today’s Asian Open report, despite reports that China’s state owned banks were selling USD/CNH in the face of US dollar strength

USD/CAD technical analysis (1-hour chart):

USD/CAD remains in a strong uptrend, with a large bullish engulfing day forming after its retracement hit my initial 1.35 downside target. Prices have now risen back into the May and April highs ahead of key US data, Fed members speaking and a BOC interest rate decision.

I must say that I am seeing a lot of comments on US strength (and I myself have ben part of that probable this week). But the contrarian within me is wondering if we’re at a small inflection point for US dollar strength. Perhaps the BOC pause will not be as dovish as expected, Fed members tout a hold or the rise of bond yields (and therefore the US dollar) lose steam.

If so, USD/CAD may be better for short bets beneath the April highs. The 1-hour chart shows a lower high which formed with a 2-bear bearish reversal around the weekly R1 pivot point. If the above three factors come into play, a move back towards 1.36 / weekly VPOC’s does not seem far fetched.

Of course, if the dollar continued to surge and the BOC deliver a dovish hold, a break above the April high and rally to 1.37 or 1.372 (weekly R2) seems achievable). Either way, USD/CAD finds itself at an interest juncture.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge