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Canadian dollar retesting resistance

- Eurozone core inflation remains unchanged.

- Fed expected to hike rates by 25 bps today.

- US dollar opens on the defensive following yesterday’s sell-off.

USDCAD snapshot open 1.3309-13, overnight range 1.3291-1.3323, close 1.3307, WTI $78.90, Gold $1926.43

The Canadian dollar looked like it was going to fall off a cliff yesterday, except it didn’t.

The Loonie was under stress when New York opened Tuesday but some better-than-expected economic data and portfolio manager demand for Canadian dollars reversed its fortunes.

USDCAD opened with a bid at 1.3470 in New York on Tuesday, after breaking through the January downtrend line at 1.3410 and triggering stop loss buying. That move proved to be a “false-break”. The 6.1% gain in the S&P 500 index forced portfolio managers to rebalance their portfolios necessitating large scale USDCAD selling, driving the currency to 1.3301.

Canada GDP rose 0.1% in November, as expected. The results were dismissed by FX traders for being both stale and expected.

WTI oil prices consolidated yesterday’s gains in a $78.79/barrel-$79.70 band overnight. Prices continue to be supported by expectations for increased crude demand from China and the impact of G-7 sanctions on Russian oil exports. However, China and India have increased their purchases of Russian crude which reduces the impact of the sanctions and limits price gains.

The Federal Open Market Committee (FOMC) meeting today is being eagerly anticipated to see if the Fed bows to market pressure and hints that they will soon be pivoting from a rate hikes to rate cuts. However, numerous Fed officials have argued that it is too early to consider pausing rate hikes and that cutting rates isn’t even on the agenda.

EURUSD traded in a 1.0853-1.0896 range. Eurozone headline inflation fell to 8.5% in January while core CPI was unchanged at 5.2% y/y. The core inflation numbers should motivate the ECB to hike rates 50 bps at Thursday’s meeting.

GBPUSD drifted in a 1.2305-1.2333 band. The recent round of dire UK economic forecasts combined with a hawkish Fed leave GBPUSD vulnerable to a drop to 1.2120 on a break below 1.2270.

USDJPY traded defensively in a 129.67-130.40 band and opened in NY at the bottom of the range. Japan’s Jibun Bank Manufacturing PMI was unchanged at 48.9.

AUDUSD is at the top of its overnight 0.70380.7082 range supported by the mildly improved risk seeking tone and by better-than-expected S&P Global Manufacturing PMI (actual 50 vs forecast and previous 49.8).

NZDUSD firmed in a 0.6419-0.6450 band, underpinned by another strong labour report. The unemployment rate was 3.4%, a tick higher than the 3.3% expected.

Today’s US economic calendar includes ADP employment change (forecast 178,000) and ISM Manufacturing PMI (forecast 48, unchanged from December).