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July 25, 2017
The big dollar is mixed while European equities, US equity futures, oil and US Treasury yields are strong as the market anticipates the FOMC tomorrow. While the FED is expected to keep rates on hold, we will surely look for clues on the timing of reinvestment tapering alongside the trajectory of interest rate hikes. On inflation, the market will scrutinize any rhetoric suggesting soft inflation is due to common factors versus temporary factors such as lower cell phone prices. The EUR rose after the IFO confidence hit highest levels since 1991 suggesting Europe’s largest economy, Germany, improved for six months in July. Today we see moderate expiries near 1.1645-50 which may act as a pivot in the next couple hours. EUR dips becoming shallower as we target 1.1715/20 in the near-term with 1.1600 acting as good support. We observed a limited impact from the BOJ minutes, although USDJPY trades slightly higher, following US Treasury yields. JPY vols fail to sustain the gain during earlier trading session with 1-week leading the way and grinding lower to 8.12%, 62bps lower from the high. In general, vols are all a touch softer today with the exception of the AUD curve where 1 week vol has jumped as the market realizes the importance of the double whammy tonight of AUD inflation data followed by Gov. Lowe’s speech on the labour market and monetary policy. Starting to feel some similarities between AUD and CAD and wondering at what point central bankers will talk down their respective currencies. On the economic calendar, today we see US housing and consumer confidence data alongside MXN retail sales.

The Loonie finally breached 1.2500 (0.80) yesterday morning to levels we haven’t seen since the summer of 2015. With WTI trading north of $47 as Saudi promises to cut another 1bln barrels of production, we shouldn’t be surprised to see a similar move today. All eyes are on 1.2460 the May 2016 low however we may not get all the way there pre-FOMC/CAD GDP tomorrow and Friday respectively. Our spot trader warns of the following downtrend channel established post-BOC and reiterates there exists little in the way of technical or even psychological levels arguably down to 1.2000 with the only thing stopping us is a hawkish FED or Poloz talking down the currency. On the top, we have our eyes on 1.2550/1.2600 however it will take a very optimistic FED to get us there. CAD vols move lower along with other majors with 2-month at the peak of the term structure up to 6 months as the tenor captures Sep. 6 BoC meeting with no significant expiries of note. Expect a quiet one today as the market gears up for the more lively second half of the week.

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