November 08, 2017
The dollar is moderately soft across the board on the back of Washington Post headlines suggesting the GOP may delay tax cuts one year but we know Trump will push hard against this as his party needs at least one victory this calendar year. The prospect of easier monetary policy in Japan for the foreseeable future coupled with a hawkish Fed should eventually send USDJPY higher and the pair will likely remain a buy on dips starting at 113.25 near term support followed by 112.70. At least until mid-morning we may see USDJPY pinned around current levels as decent sized expiries lie between 113.50 and 113.75. The British Pound the single laggard on further news headlines, specifically an FT article suggesting Wall street banks had a private meeting last Friday with Wilbur Ross to discuss Brexit and the staffing implications that could lead to thousands of jobs overseas in the near future. The Pound is also under pressure on concern that U.K. PM Theresa May could lose a second member of her cabinet within a week as she ponders whether or not to fire her International Development Secretary Priti Patel who held unauthorized meetings with Israel behind her back. Brexit negotiations are due to resume tomorrow and in reality, GBPUSD has been consolidating between 1.3050 and 1.3250 and only a break of the range should see continued momentum. On the docket, we have the RBNZ 3PM ET where rates will likely remain unchanged with a neutral outlook, however, we look for changes in growth protections and any comments about the dual inflation/employment mandate. Today we see fair sized expiries near 0.6950 about 20 points higher than current market. Even the AUD has recovered somewhat despite a weaker than expected China trade surplus as we trade at session highs near 0.7680 from a low of near 0.7640 (near key 61.8% Fibonacci support at 0.7633) yesterday but we still believe and rallies will be faded. Nothing notable on the docket today.
Yesterday’s speech from BoC Governor Poloz on "Central banks’ ability to understand inflation” proved to be a non-event, leading to short-lived, knee-jerk gains for CAD. Poloz rattled off familiar guidance: “It’s premature to say something is amiss in inflation dynamics as recent shortfalls have fallen “within a reasonable amount of error.” 2y Canada-US interest rate spreads have reached -25 bps and we don’t expect much further widening from here. Crude is a touch softer as yesterday’s inventory data showed a smaller draw than expected and today we get round two with NA oil inventories at 10:30 am ET with the forecast for a 2.2m draw. Oil may very well resume center stage in the coming weeks given WTI broke its $55-$56 resistance last week and with the door open to test $60-$65 which could easily get USDCAD back towards 1.2500.We expect decent support at 1.2600 & 1.2425 which could see good profit taking as we have seen a decent amount of USD selling in past few weeks. In options, implied vols are moving lower against most, if not all major crosses however the USDCAD implied vol curve is steepening. CAD 1-week vol is up 40bps as the date captures US CPI and Retail Sales numbers. Gamma was a lot cheaper yesterday with 1-week vol at the lowest since mid-June. On the docket, CAD housing starts came in stronger than expected with little effect on the currency and we have building permits out in short order. On levels we see 1.2820 resistance with 1.2705 support in the near term.