Article / 20 May 2016 at 7:58 GMT

FX Update: Fed peddles June hike potential

Head of FX Strategy / Saxo Bank
  • New York Fed's Dudley adds fuel to speculation on a summer rate hike
  • USDCAD pressing above 1.30 with potential to 1.33
  • CHFEUR at weakest since January 2015 as Brexit concerns weigh
  • USDCHF could be primed for push on parity

 Wall Street will be closely falling all Fed developments over the summer. Photo: iStock

By John J Hardy

As if we didn’t have enough evidence from prior Federal Reserve developments this week, the New York Fed’s William Dudley was out yesterday also indicating that a “summer” hike is highly likely, provided there are no negatives. "If the economy evolves as I expect it to [then it’s] reasonable to expect a tightening in the summer, the June-July timetable”. 

He even specifically pointed to higher odds of a June move. 

The Canadian dollar should be at the centre of traders’ attention over the next few trading days, as we have CPI and retail sales data up today and a Bank of Canada meeting next Wednesday. Rate spreads after this week’s Fed speakers suggest further upside potential, with the interesting 1.3300 area attracting next.

Could we risk a Canadian CPI miss today after the loonie strength peaked in April from its January lows? Oil has been somewhat less supportive of CAD lately due to the intense wildfires shutting down capacity and the fact that it will take a far more considerable recovery in prices to shift the needle for notable new capital expenditures in Canada’s oil fields and in particular, oil sands.

The Swiss franc is looking to close this week at its weakest level versus the euro since the January 2015 franc revaluation if it sticks above 1.1100. The drive is perhaps the Brexit relief effect for sterling and interesting in both EURCHF upside and GBPCHF upside, but with the USD recovery, USDCHF has ramped rapidly higher and could be staring down parity soon.

USDCAD rides rhetoric wave

USDCAD squirted all the way to 1.3150 on yesterday’s hawkish Fed rhetoric before easing lower into this morning.

Another surge higher will likely focus on the 1.3300/50 zone, where the 200-day moving average and next major Fibo retracement lie, with bulls in the driver’s seat as long as we are north of the recently broken 1.3000 area.

Can USDCAD stay north of 1.3000?
 Source: SaxoTraderGO

The G-10 rundown

USD – continues to stand strong on the rising prospects for a Fed move. A key focus remains on risk appetite for trade selection, i.e. if risky assets can absorb the Fed hawkishness with less fear, the USD/risky pairs are less interesting and USDCHF, EURUSD and USDJPY more compelling, while an ugly risk off move engendered by the Fed’s renewed rate hike talk will see especially USD/EM in the spotlight, but also USD/commodity currencies.

EUR – some measure of relief on the euro perhaps over the Brexit story, as evidenced in EURCHF though the renewal of the ECB/Fed policy divergence story is the key driver and euro negative. The euro is likely a passive participant to the themes shaking the market. Next EURUSD support is down near 1.1100.

JPY – a key resistance point today for USDJPY is the Ichimoku cloud bottom just ahead of recent highs (110.25-ish). The next level higher is the flat-line resistance just ahead of 112.00 and then the falling Ichimoku cloud top. 

GBP – the squeeze has been on lately on the theme of Brexit relief after a number of polls, both telephone and internet, seem to show a trending move in favour of the Remain vote. But rate expectations haven’t caught up to the degree that sentiment and the currency have, so the momentum could slow significantly for GBP upside unless we get specific UK data catalysts soon.

CHF – again, some relief on the Brexit story perhaps as the driver of the move above 1.1100 in EURCHF and interesting to see if that repricing continues higher, with even more focus on USDCHF if parity falls in the sessions ahead. GBPCHF a likely popular trade in recent days as well.

AUD – Any upside here is about simple consolidation/relief from oversold levels as AUDUSD has whiplash-inducing shift in relative rate expectations. If we get bogged down here within the recent range, there is some risk of trading back toward 0.7400 in AUDUSD, but the focus remains lower.

CAD – A key few days ahead for CAD as we look for this second consolidation wave in USDCAD to follow through higher as long as Canadian data doesn’t surprise to the upside. Perhaps greater risk of a negative CPI surprise from Canada today.

NZD – Kiwi stubbornly resilient as focus is elsewhere, generally looking to fade NZDUSD rallies and wondering where the next catalyst is to bring deserved negative attention on the currency.

SEK – EURSEK may be reaching the top of its potential unless we go full bore risk off here, with 9.35/30 the pivot zone.

NOK – Norges Bank governor Øystein Olsen brings up the idea of negative rates and NOK dips, with EURNOK suddenly challenging the 200-day moving average again yesterday. Further upside if oil dips notably and/or if risk appetite falls apart on the hawkish Fed driver.

Upcoming economic calendar highlights (all times GMT)

  • Eurozone Mar. Current Account (0800) 
  • UK May CBI Trends in Total Orders/Selling Prices (1000) 
  • Canada Mar. Retail Sales (1230) 
  • Canada Apr. CPI (1230) 
  • US Fed’s Daniel Tarullo to Speak (1300) 
  • US Apr. Existing Home Sales (1400) 

— Edited by Martin O'Rourke

John J Hardy is head of forex strategy at Saxo Bank
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