U.S. stocks sold off sharply today as the decline in equities sent currencies tumbling lower. Unlike prior moves that may have been fueled by Fed speak or data, heavy selling of tech stocks drove today's decline. Risk aversion was the primary theme with the Australian and Canadian dollars falling the hardest. The U.S. dollar rose against all of the major currencies including the Japanese Yen and Swiss Franc as investors sought safety in U.S. assets.

The resilience of USD/JPY in particular is surprising because the latest economic reports and Fed speak give market participants very little reason to double down on the greenback. Housing starts missed expectations while building permits declined. We do not anticipate any impressive readings out of Wednesday's durable goods and existing home sales reports. So between the sell-off in stocks, ongoing U.S.-Japanese trade tensions and cautionary comments from Fed officials, USD/JPY should be trading lower especially after President Trump reaffirmed his desire to see Fed rates lower. Technically, USDJPY rebounded to the 50-day SMA but we still see the pair dropping to 112.00 because of significant resistance between the 50-day SMA at 112.84 and the 20-day SMA at 113.10.

USD/CAD rose to 4 month highs as the pressure continued to mount on oil prices. Oil dropped to its weakest level in more than a year ahead of next month's OPEC meeting. The U.S., Russia and Saudi Arabia are pumping crude at record levels and with President Trump standing with the Crown price in the Khashoggi killing, its unlikely that they will be cutting production at time when Trump has been openly calling for lower oil prices. The Trump Administration also granted waivers on sanctions to major Iranian crude buyers, a day after slapping sanctions on Iranian and Syrian energy companies. As long as oil prices continue to fall, the path of least resistance for USD/CAD will be higher with resistance at the June high of 1.3386. Its also worth mentioning that major changes could be in store for the Bank of Canada according to Deputy Governor Wilkins who said they will be conducting a complete review of their inflation targeting mandate to see if its worth switching to another an alternative framework. The Australian and New Zealand dollars also fell sharply. Although another decline in dairy prices pushed the New Zealand dollar lower, AUD/USD fell purely on risk aversion because according to the RBA minutes, the central bank believes that the next move in rates will be higher but there's no strong case for a near term adjustments. Dairy prices in New Zealand have been falling consistently this year but the 3.5% drop in dairy prices today is the largest since September.

Euro and sterling also declined with the euro coming under pressure from widening Italian and German yield spreads. According to our colleague Boris Schlossberg, "For now the risk of a credit crunch remains under control, but market consensus is that if the spread widens towards 400 bps the threat to Italian banks could become very serious and the market is sure to act way before that point is reached and while the threat of insolvency remains at bay, the German/Italian bond spread may become the key driver of trade into the end of the year, much like was during the PIIGS crisis of 2012." We still have our eyes on the UK and the possibility of a no-confidence vote. The slide in sterling has been stemmed by the fact that Tories don't have the 48 votes yet needed to trigger a no confidence vote but the risk is still there.

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