The DXY remains stuck near the 105 psychological level as markets are eagerly awaiting tomorrow’s FOMC policy decision. On a positioning basis, the USD has been looking a bit stretched looking back over the last 52 weeks with institutional long positions looking a bit on the stretched side. That means the more attractive opportunity for USD trades right now would be to the downside on a dovish surprise from the FOMC.If the FOMC’s median dot for 2023 no longer projects a hike for the rest of the year that should be enough to see recent USD longs unwind some of their positions.
For Treasury yields which remains stuck at the recent cycle highs the picture looks very similar. However, one element that could keep yields elevated despite a dovish FOMC is the recent pop higher in commodity prices, especially energy, which places upside risks to near-term headline CPI.
On the equity side,futures are trying to put in a bit of a bounce today after a few sessions of selling pressure. The recent push lower has received a ton of attention from the perma bears (as usual) but it’s possible that it’s all just profit taking heading into the many central bank decisions this week.
In FX Today
In FX the CAD is leading the major currencies to the upside alongside the AUD and NZD as risk sentiment tries to recover some of its recent losses. The JPY is the weakest of the majors with the only catalyst in view the slightly better risk sentiment.
On the calendar side, the only highlight is the Canadian CPI data.
Markets are pretty certain that the BoC is done hiking rates for the next few meetings, but interestingly the odds of a hike for 1Q24 are still relatively high. The CAD has seen a recent push higher, and by the looks of it has mostly been driven by the push higher in oil prices.
As a key oil exported the CAD is usually sensitive to oil prices fluctuations, but to be fair that correlation has been hit and miss over the course of the last few months.
Personally, I am not too excited to be trading the CAD on this CPI print because whether it’s a big miss or a big beat I don’t see that changing the BoC’s mind for the upcoming meeting. Thus, a very big miss or beat could be something worth trading in the very short-term but will be a risky trade to hold for anything longer, especially with the series of key events coming up this week.
In the event that Canadian CPI surprises meaningfully to the upside, some short-term USDCAD downside could be an option to consider.
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