A cautious tone was apparent during the London morning with European equities continuing to slide, following similar losses in NY and Asia overnight. The current preoccupation appears to be with the ‘tech’ sector, but regardless, the net impact has probably been to dampen activity and ‘risk’ within the G10 space. USDJPY was trading higher but price action has been particularly soggy, and FX investors looking to add to EUR longs here are probably watching equities first.
The confluence of factors currently facing USDCAD should keep the pair confined to 1.085 on the downside and 1.094/60 on the topside. Restraining the downside, we don’t have the BoC or weak US data impetus to force us materially lower yet. Restraining the topside, we’re only just slightly below short-term ‘fair value’.
There is no clear reason as to why the moderate ‘risk-off’ we’ve been experiencing this week should lead to a broad rally in the USD, unless commodity prices really tumble, but an equity market re-pricing alone probably can’t trigger the latter. This puts the US yield curve in the driver’s seat for the USD somewhat. We’d keep an eye on both 5yr and 10yr yields in the US in case a further equity market sell-off triggers a decline in US rates. USDCAD is now a bit more sensitive to movements in the 10yr sector of the swap curve, but 5s/10s still has room to re-steepen back to its pre-FOMC levels too. A fall in yields in either of these areas could initially knock the USD a bit lower.
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