US Treasury Yields Scare Forex Markets As Godzilla Goes Global

The week is ending with a fizzle. US Federal Reserve chairman Janet Yellen’s US Chamber of Commerce speech yesterday was short and devoid of anything to trade off. This left everyone fretting, not only about the Nikkei’s prospects below the key 14,000 – the cause of yesterday’s EUR/USD flash rally – but also how to decipher the Bank of England’s Mark Carney. Once, Carney was considered forthright (for a central banker) but now appears to be channelling Alan Greenspan, the former Fed chairman. Identifying and quantifying the central banker “data de jour” is like catching smoke with a baseball glove. Today’s US housing data and the Reuters Michigan Consumer Sentiment index will provide the data for the North American session.

Interest rate focus – the return of Godzilla

Godzilla, the creature from the deep, will be terrorising cinema-goers from next week while plunging US treasury yields scare forex markets. The US 10-year government bond yield made a new low this week at 2.49, well below April’s high of 2.80 and the 2.99 rate recorded at the beginning of January. It is clear, at this point, that the June Federal Reserve Open Market Committee (FOMC) meeting won’t offer up anything new. A late Q2 2015 hike seems more likely. Not content to allow the FOMC to hog the limelight, the ECB president Mario Draghi dropped a bombshell. He said that the central bank was ready to take action in June after earlier expressing concern about the strength of the EUR. Both these statements have gone a long way in convincing markets that some sort of stimulus package will be announced and EUR/USD dropped. However, the fact that the EUR/USD (currently 1.3690) is well above the February lows (1.3475), demonstrates the markets’ lack of faith in Draghi’s words. There is still three weeks to go before the ECB meeting and almost five weeks until the FOMC, exposing forex markets to more price action similar to yesterday’s EUR/USD move.

The week that was

The highlight of this week was Tuesday, while Thursday gets the award for being weird. On Tuesday, the news wires were reporting that “sources” at the Bundesbank said that they may be willing to support some stimulus measures from the ECB. EUR/USD, already under pressure from Draghi’s suggestion of policy action in June, fell even farther. Not to be outdone by events across the channel, the Bank of England’s Carney took centre stage when he threw a wet blanket over those expecting an early 2015 rate increase, citing concerns about the unquantifiable spare capacity. GBP/USD dropped from 1.6855 to 1.6755 in a hurry. Renewed selling of EUR/USD turned into a mad scramble to buy EUR/USD in the late morning in North America. There are a few theories floating around that have tried to explain the rationale behind the move including speculation (since denied) that Greece had introduced a retroactive tax on foreign holders of Greek bonds. That story also brought the pending Greek elections and the fate of the coalition back into the spotlight.

The week that will be

Canadian markets are closed on Monday as Canada officially kicks off summer with the Victoria Day holiday. That should sap some of the Canadian dollar liquidity out of the market but otherwise should not be a factor in global markets. Tuesday could be an interesting day with the Reserve Bank of Australia (RBA) minutes and the Reserve Bank of New Zealand’s inflation expectations vying for attention in Asia. There is a lot of data from the Eurozone and the UK next week. The British will be eyeing CPI, PPI, and Retail Sales data, the Bank of England (BoE) Monetary Policy Committee minutes and then GDP. Wednesday brings the Bank of Japan interest rate and monetary policy statement, both of which are expected to be unchanged. Friday’s Canadian CPI data could provide the loonie with some support if is on the high side of expectations.

USD/CAD outlook

The Canadian dollar doesn’t get much in the way of data to support or undermine it until next Thursday’s Retail Sales and Friday’s CPI. The Bank of Canada’s concern that weak exports are a drag on economic growth and concern over persistent low inflation will help to limit Canadian dollar gains. News that a local lender, Investors Group has cut its three-year variable mortgage rate to prime minus 1.01 percent or 1.99 percent will reopen chatter about a possible “Canadian housing market crash” which could also act as a drag on Canadian dollar gains. On the other hand, commodity prices, especially WTI remain supportive. Sales of EUR/CAD and GBP/CAD due to bearish technicals in those currency pairs will limit USD/CAD gains.

USDCAD technical Outlook

The short-term USD/CAD technicals are bearish while trading below 1.0940 but need to see a break below 1.0805-20 to extend losses to 1.0735. The break below support at 1.0850-60 and then the subsequent bounce back above that level to retest 1.0920 argues for extra consolidation in the week ahead. US dollar support is at 1.0850, 1.0805 and 1.0780. Resistance is at 1.0920, 1.0950 and 1.0980.