In FX – A Wary Calm Persists

USDJPY dives but holds 105.50
BOC on tap
Nikkei -0.77% Dax -0.5%
Oil $62/bbl
Gold $1333/oz.
Bitcoin $10500

Europe and Asia:
AUD GDP 0.4% vs. 0.5%

North America:
USD ADP 08:15
CAD BOC 10:00

After a flurry of activity in early Asian session trading following the resignation of Gary Cohn, FX markets settled into a quiet range for rest of the night, awaiting the open of North American trade which will bring a bevy of economic and headline event risk.

The resignation of Mr. Cohn had a jarring impact on trade and was seen as a sign that the White House intends to proceed with tariffs despite almost universal opposition from its trading partners and Republicans in Congress who fear that the new policy will sour relations across the world, open the way for retaliatory action and in the worst case scenario stifle long-term investment plans curbing global growth.

USDJPY tumbled below 105.50 on the news but rebounded slightly since then propped by a large barrier option expiry and a rebound in equity index futures. Still, the pair remains vulnerable to a selloff if equities buckle under the weight of negative news out of Washington DC and could probe the 105.00 figure is stock begin to sell off.

For now, capital markets are giving the US economy the benefit of the doubt but traders will be watching the next batch of releases very closely, starting with today’s ADP data. ADP payrolls are projected to print around 200K which would be consistent with current growth and would suggest that Fed’s path to monetary normalization remains on track. But a miss today could serve as a trigger for further USDJPY selling as traders begins to worry that US economy is slowing just as the White House enacts protectionist measures to exacerbate the situation.

Elsewhere, the markets will also get a look at the BOC statement due at 1500 GMT. The expectation is that the central bank will remain stationary but the key surprise will be if its done turns decidedly dovish. The BOC has been the most aggressive of G-7 central banks raising rates 3 times in the past year, but now policymakers face a deteriorating macro background and an uncertain political landscape as tariff threats and NAFTA negotiations threaten to derail growth. As many analysts have pointed out, the OIS market remains undeservedly bullish on the prospect of more tightening pricing in the possibility of three more hikes this year. If the BOC tempers those expectations today, USDCAD could take out the key 1.3000 level as the day proceeds.