Moves across G10 spot during the London morning were instructive, but the more robust indicators of general sentiment were elsewhere: equities and peripheral Europe displayed some very firm price action, and FX implieds bled profusely. As such, the EUR traded higher, with stale short covering and the recent trends in excess liquidity & rates adding support. Along with the CHF, the EUR outperformed even the high yielders, and that says quite a bit. Although pure carry plays were apparent in FX this morning, it appears as if the Fed was actually more responsible for forcing unwinds of the most ‘over-pitched’ divergence play out there: US vs. Europe.
USDCAD traded on the soft side throughout the Asian session and the London morning. The Fed is the obvious culprit for fundamental weakness in the USD, but the current valuation in the pair appears to have moved even further beyond where rate differentials say the pair should trade. The oil price is not helping matters for USDCAD bulls, but the divergence between USDCAD and rates probably reflects a lot of stale long USDCAD covering.
We expect FOMC reverberations to continue to dominate price action and ranges in USDCAD today. Despite what rate differentials are saying, medium-term USDCAD bulls will probably stay to the sidelines until it’s clear that a lot of the stale long USD divergence plays have been unwound. As such, we’d expect the 1.0840/1.0850 range to be tough to break. Jobless claims covering the June NFP survey week will probably be ignored unless they are way out of line. While a sub-300K print will substantially reduce the odds of a 1.0800 downside break today, anything north of 320K-325K should see an attempt at 1.0800. However, new USDCAD shorts should also watch EURCAD carefully, as further upside there will cap CAD strength.
Read the full report: FX Daily