Forex Investment and Currency Trading

USD/CAD retains a heavy bias this morning after a rather choppy overnight session. USD/CAD dropped back to the mid 1.09 zone in London, driven by the apparent leak of Chinese data due for release later in the week (showing better than expected gains for industrial production, retail sales and investment) and the continued strength in oil prices. The CAD and crude remain tightly correlated at the moment (positive correlation of 85% on a 90-day rolling basis) so gains in oil (to the highest levels since November last year) should keep the tone in funds very heavy. Traders remain positive on the CAD from a short and longer term perspective (Canada’s relatively stronger structural position, general USD bearishness) and think that short term price action suggests that the market is poised to take another run at support in the low 1.09s this morning. A break under the 1.0930 support point for USD/CAD should trigger a renewed test of the 1.08 area (at least).

The USD retains a softer bias overall this morning, by virtue of a slight loss for the USD (DXY) index on the day so far. Ranges have been frustratingly choppy for traders and investors generally, however, with sovereign demand and supply in a number of the USD pairs reportedly setting the ranges for the day so far. Looking ahead, the USD should continue to struggle to gain significant support from here, however, and will continue to fall from a medium term point of view. In the short term, this morning’s trade data will attract the market’s attention ahead of the US Treasury’s 10-year auction (results at 13.00 ET). With recovery hopes driving Fed rate hike expectations and oil prices topping $71 this morning, the backdrop for the 10-year reopening (USD19bn on tap) does not look that constructive. Foreign central bank participation should be evident but the scale of interest will be crucial for the market, given evidence to suggest that central banks are concentrating their exposure at the very short end of the US yield curve; note that the Russian central bank remarked today that it will reduce the share of its reserves held in US Treasures and buy IMF bonds instead. Inflation worries, which appear to be one of the drivers of the soft USD tone over the past few weeks, will be sustained by the pop in oil prices and the broader strength on commodities – though the tone of the Beige Book (at 14.00 ET) may be downbeat enough to check the Fed tightening concerns to some degree.

Firmer commodities, the Chinese data news and risk appetite have propelled the AUD and NZD to the top of the intraday performance league and driven a little more interest in cross flows against the JPY; EUR cross flows and central bank supply and demand have buffeted EUR/USD this morning; while the break out from the consolidation of the past few days looks a technical positive (bull flag break our, mirroring the USD/CAD bearish pattern, suggesting a renewed test of the low $1.43 area), good selling interest from the mid $1.41 area may put a short term cap on the EUR – or at least hinder a topside move. From here, a break under 1.3810 is needed to put the USD bulls back in the driving seat.