VBCE Foreign Exchange Wrap Up for Feb. 24 – 28, 2020

Steve Brown, Senior Corporate Trader | Stevebrown@vbce.ca

This was one of the most volatile weeks on record that recent market gains unravel in dramatic fashion. The CAD had been the best performing currency heading into the week trading near 3 week highs against the USD, 14 month highs against the JPY, and 3 year highs against the EUR. Reports of a rise in coronavirus cases outside of China (namely in South Korea, northern Italy, and Iran) sparked widespread risk aversion flows. Global indices saw sharp losses with Canada's TSX falling 10% towards 6 month lows. The DJIA lost as much as 15% before a late 3.5% rally in the final minutes of trade Friday. Oil prices plunged nearly 20% towards 15 month lows while U.S. 10 year yields are approaching historical lows near 1%. Markets are now pricing in 3 interest rate cuts by both the U.S. Fed and Bank of Canada this year. The decline in interest rate advantage along with the steep equity market sell-off has led to a massive covering of carry trades (borrowing a low-yield currency to purchase / invest in a higher yielding currency) The JPY has soared to 5 month highs while the EUR has climbed to 7 month highs. The CAD, GBP, and AUD are subsequently the worst performing currencies on the week. USDCAD opened the week at 1.3225 before rising to 1.3308. The 1.3300 level was proving to be a tough level to crack into Wednesday's session but USDCAD finally broke the Feb 2020 and November 2019 high of 1.3328. The pairing rallied to 1.3348 before extending up to 1.3394 on Thursday. USDCAD climbed to 1.3464 during Friday's London session – the highest since June 2019. Canadian GDP came in as expected while North America equity markets staged a sharp rally in the final minutes of trade. The DJIA surged 1,000 pts to finish in positive territory. USDCAD fell towards session lows closing the week just under the 1.3400 mark. There were reports of a possible coordinated central bank intervention (in terms of lower interest rates) to help stabilize markets.

Weekly Open

Low

High

Weekly Close

USDCAD

1.3225

1.3225

1.3464

1.3395

EURCAD

1.4345

1.4341

1.4871

1.4774

GBPCAD

1.7150

1.7095

1.7295

1.7176

JPYCAD

0.01190

0.01186

0.01247

0.01239

AUDCAD

0.8745

0.8640

0.8818

0.8715

Key Events:

*USDCAD climbs from 3 week lows to 9 month highs

*EURCAD climbs from 3 year lows to 7 month highs

*GBPCAD falls towards 3 month lows

*JPYCAD falls towards a 14 month low

*AUDCAD falls to 10 year lows

*Crude oil (WTI) plunges 16% towards 15 month lows (range $52.66 - $44.01)

*USD index DXY falls from 3 yr high towards 1 month low (range 97.96 – 99.64)

*U.S. 10 yr Treasuries fall towards historical lows: range 1.41% to 1.12%

*Canada wholesale sales:0.9% exp 0.5% prev -1.1%

*Germany GDP Q4 y/y: 0.3% exp 0.3% prev 0.3%

*U.S. new home sales: 764,000 exp 710,000 prev 694,000

*U.S. durable goods orders: -0.2%exp -1.5% prev 2.9% ex trans: 0.9%exp0.2%prev 0.1%

*U.S. GDP Q4 annualized: 2.1% exp 2.1% prev 2.1%

*Japan Tokyo CPI ex fresh food y/y: 0.5% exp 0.6% prev 0.7%

*Japan unemployment rate: 2.4% exp 2.2% prev 2.2%

*Japan retail trade y/y: -0.4% exp -1.1% prev -2.6%

*Japan industrial production y/y: -2.5% exp -9.5% prev -3.1%

*Germany unemployment rate: 5% exp 5% prev 5%

*Germany CPI y/y harmonized: 1.7% exp 1.6% prev 1.6%

*U.S. core personal consumption expenditure price index y/y: 1.6% exp 1.7% prev 1.5%

*Canada GDP Q4 qoq: 0.3% exp 0.3% prev 1.1%

On Tap for next week:

Mon Mar 2: China Caixin manufacturing PMI: 40.3 exp 45.7 prev 51.1

Germany Markit manufacturing PMI: 48 exp 47.8 prev 47.8

Eurozone Markit manufacturing PMI: 49.2 exp 49.1 prev 49.1

UK Markit manufacturing PMI: 51.7 exp 51.8 prev 51.9

Canada market manufacturing PMI: 51.8 prev 50.6

U.S. Markit manufacturing PMI: 50.7 exp 50.8 prev 50.8

U.S. ISM manufacturing PMI: 50.1 exp 50.5 prev 50.9

Tue Mar 3: Australia central bank interest rate decision: 0.5% exp 0.75% prev 0.75%

Eurozone core CPI y/y: 1.2% exp 1.2% prev 1.1%

Unscheduled U.S. Fed interest rate decision: 1.25% prev 1.75%

Wed Mar 4: Australia GDP Q4 qoq: exp 0.3% prev 0.4%

Germany retail sales m/m: exp 1% prev -3.3%

Eurozone retail sales y/y: exp 1.1% prev 1.3%

U.S. ADP employment change: exp 170,000 prev 291,000

U.S. non-manufacturing PMI: exp 54.9 prev 55.5

Bank of Canada interest rate: exp 1.75% prev 1.75%

Fri Mar 6: Australia retail sales m/m: exp 0% prev -0.5%

Canada net employment change: exp 10,000 prev 34,500

Canada unemployment rate: exp 5.6% prev 5.5%

Canada average hourly wages: prev 4.43%

Canada int'l merchandise trade: exp -$0.67 billion prev -$0.40 billion

U.S. non-farm payrolls: exp 175,000 prev 225,000

U.S. unemployment rate: exp 3.6% prev 3.6%

U.S. avg. hourly earnings m/m: exp 0.3% prev 0.2% y/y: exp 3% prev 3.1%

U.S. trade balance: exp -$46.1 billion prev -$48.9 billion

Technically, USDCAD is bullish. The trend reversal from the previous week was sharp with 5 consecutive days of gains. The November 2019 high which had capped USDCAD rallies in February 2020 and in November 2019. The October high of 1.3350 and the September high of 1.3383 were also breached. Friday's high of 1.3464 felt short of the June 2019 high of 1.3525. Providing momentum can be sustained, 1.3525 is the next major target for USDCAD. A move back below some of the broken resistance levels (1.3350 / 1.3383) should pave the way for a further corrective move towards 1.3300.

Topside targets to consider: 1.3464, 1.3525, 1.3565, 1.3650

Downside targets to consider: 1.3380, 1.3350, 1.3320, 1.3270

1 Week Chart

6 Month Chart

1 Year Chart

Sources: Reuters, Bloomberg, FXStreet, RBC Capital Markets, Bank of Canada.S. Federal Reserve, CNBC, Forexlive, CME Group

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