USDCAD and US 500 Index

Markets are shaping up for another volatile session as the weekend arrives. News broke as yesterday’s US session drew to a close, that the US FED has cut the size of its overnight repo operations from $120B to $100B, leading to a volatile selloff in stock markets. However, US equities managed to rebound into the close. Many analysts are pointing to the injection of liquidity into markets by the FED as the primary source of the rally in stocks in recent months. This downsizing may result in a stall in the trajectory higher and so traders are looking for evidence of a slowdown in the trend. The FED has also announced that they would cut the Tuesday and Thursday term repos to $25B from $30B previously for February and trim that amount to $20B for March. In a speech last month, FED Chair Powell said that the FED would continue term and overnight repo operations through the month of April as conditions warranted. He also said that they would adjust operations as conditions warranted leaving the door open for unexpected events like the spread of the coronavirus. The market reaction to this news was an immediate selloff and as we have seen in recent weeks Friday has tended to produce a selloff as traders trim risk into the weekend. There is a concern that the market may pullback as a perfect storm of fundamentals, overbought conditions as global events play out. Asian markets recovered somewhat overnight as Chinese markets held their ground into the weekend. However, the Japanese 225 Index closed lower by 0.59% and US 10 Year yields moved lower by 1.5bps to 1.60%. The concern for the European open is that German GDP is showing a fall to 0.0% from 0.1%. The fallout from the closure of Chinese production is yet to be seen in the data but there is little doubt that it may fall disproportionately on Germany as a major industrial producing economy. However, on the positive side German WPI rose to 0.3% from an expected 0.1% and 0.0% previously. In Japan earlier the Tertiary Industry Index for December fell down to -0.2% from an expected 0.1% and a prior 1.4% revised up from 1.3%. Gold has moved lower on the session to trade at 1575.00 while Oil is trading around $51.66 in the US and £56.37 in the UK.

Later this morning, Eurozone Flash GDP is expected to remain at 0.1%, while the Trade Balance is expected to fall to 19.1B from 19.2B. In the afternoon, US Retail Sales are forecast to remain at 0.3% but Core Retail Sales are expected to fall to 0.3% from 0.7%.

USDCAD

The USDCAD pair is now trading around 1.3250 this morning after breaking through resistance at that level last week. The high created on Monday at 1.3329 represents the resistance level to beat, followed by potential resistance at the 1.3347 level. The next area may prove to be resistive at 1.3338. Beyond this the 1.3350/1.3345 area has been used as resistance through the months of August to October and this has created a visual area of price action. The single instance of a break higher past that line during that time found resistance at 1.3382 ahead of the 1.3400 level. A break above these levels might seek to test 1.3452, 1.3500 or the high at 1.3566.

Support for the pair has formed around the 1.3236 level in the short term, with further support around the 1.3220 area. The 1.3200 area may be used as support, along with 1.3155 and is followed by the 1.3100 round number in the short term. A loss of this area may open the way to a retest of the 1.3000 area followed by the current low at 1.2952. Below this level, potential lower areas of support at 1.2900 followed by 1.2898. Below this level the 1.2850 area may be used as potential support ahead of the 1.2800 round number. Traders may potentially lean on this area followed by the 1.2760 level if the round number is broken.

US 500 Index

The US 500 Index has smashed through resistance and reached a high of 3388.00 this week as the market shrugged off fears of the coronavirus and the planned reduction of Fed liquidity. The Index has retested the former resistance area at the 3300.00 round number as support. If buyers continue to try to push price higher, potential resistance at 3390.00 may be tested and used to try to continue the move up to test the 3395.00 area and possibly breakout higher to engage potential resistance at 3398.00 and the 3400.00 round number. It is at this point that there may be some profit taken off the table but price may push through the 3400.00 level as volatility increases. To give these moves some contest some analysts have given 3350.00 as 2020 year end targets for the index.

Resistance for the Index may form at the 3390.00 level or the 3400.00 area in the short term. Support was tested after the selloff earlier this month, at the 3214.00 level and this led to a rebound higher through this week. Yesterday’s low at the 3350.00 area may represent the immediate support for the index. The 3300.00 level is followed by potential support at 3293.00. Below these levels the 3275.00 area and the 3263.00 level might be followed as potential support by the 3250.90 area as the high from earlier this month. The 3234.00 has become the level to lean against and break down from this point might allow a retest the higher low at 3214.00 followed by the 3200.00 round number level as support. The 3181.00 area was used as support as the month began and a loss of this level may open the way to 3158.00.

Phillip Konchar

Core Spreads

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