The Bank of Canada kept interest rates unchanged yesterday and left the door open for more hikes, but remained concerned over the global trade front, and especially over the ongoing NAFTA negotiations. The pound surged on reports that Germany and the UK have dropped key Brexit demands, but gave back a large portion of those gains on new headlines that Germany has not changed position on Brexit.
Yesterday, the Bank of Canada kept interest rates unchanged as was expected, while in the accompanying statement officials kept the door open for a rate increase at their upcoming gathering.
Specifically, policymakers noted that recent data reinforce their assessment that higher rates will be warranted, and that they will continue to take a gradual approach guided by incoming data. That said, they remained concerned over global trade tensions, and this time around, they added that “the Bank is also monitoring closely the course of NAFTA negotiations”.
At the time of the release, the Canadian dollar gained slightly, perhaps on the Bank’s willingness to keep raising rates, but it gave back those gains immediately and slid somewhat further in the next few minutes. In our view, this may be due to the trade concerns and the reference on the NAFTA talks.
The key message we got from the statement is that the Bank remains willing to act again soon, if incoming data suggest so, but this will also depend on how developments around trade will evolve. If the US-Canada NAFTA talks fall apart, or the US-China standoff escalates further, then the Bank may decide to pause its normalization process.
Talking about trade, Canada’s Foreign Minister Chrystia Freeland sounded optimistic over the new round of NAFTA talks yesterday, saying that there was progress made in revising the agreement, while US President Trump said that the result of the negotiations may be known in the next few days.
All these positive comments may have been the reason why the Loonie did not depreciated much and ended the day virtually unchanged against its US counterpart. Further encouraging headlines suggesting that we may indeed get a deal soon could increase the likelihood for an October hike and thereby support somewhat the Loonie. That said, we would like to see handshakes before we get more confident with regards to an October hike. Remember that last week, officials from both sides were optimistic that they could sort things out by Friday, something that didn’t happen.
Now, moving to the US-China saga, today is the end of the public-comment period with regards to the US tariffs on USD 200bn Chinese goods. Although the US dollar pulled back yesterday, which suggests that it may have not attracted safe-haven flows, investors remained concerned over the matter and this is evident by the performance of the equity markets. All major European and US indices closed negative, with the only exception being Dow Jones, which ended its session fractionally up. Last week, reports suggested that Trump could proceed with the imposition of those tariffs as soon as the hearings are over and thus, investors may be nervous to see whether this is the case.
After its reversal back to the upside on the 15th of August, EUR/CAD continues to slowly grind in that direction. It seems that the pair is on track of reaching the July highs. EUR/CAD is now trading above its newly formed short-term upside support line, taken from the low of the 15th of August. As long as the line remains intact, we will stay positive on the near-term outlook.
EUR/CAD jumped higher yesterday pushing away from the 1.5250 support level and breaking the key resistance at 1.5325, marked by the peak of the 31st of July. The move opened the path towards potential higher levels, where the pair could find better areas of resistance. The next potential target for EUR/CAD could be the 1.5430 level, marked by the high of the 23rd of July. Slightly above that lies another good potential resistance zone at 1.5470, which was near the highest point of July.
Certainly, let’s not forget a possibility for EUR/CAD to make a move down to test the aforementioned upside support line, which could be a good opportunity for the bulls to take advantage of the lower rate and push the pair back up towards the previously mentioned levels.
That view is derived from our short-term oscillators. The RSI has flattened slightly below its 80 level, while the MACD, although above both its zero and trigger lines, shows signs of topping as well.
On the downside, for us to start considering a change in the short-term trend, we would need to see a break and a close below the abovementioned upside support line. This way we could start aiming for the 1.5175 support level, marked by the low of the 4th of September, a break of which could set the stage for a test of the 1.5115 area, or even the 1.5080 hurdle, which was the low of the 29th of August.
The pound traded higher against the majority of the other G10 currencies on Wednesday. It gained the most against NOK, AUD, USD and CAD, while it depreciated only versus NZD. The British currency traded virtually unchanged against EUR and CHF.
The pound surged yesterday following reports, citing people familiar with the matter, that the German and UK governments have dropped key Brexit demands, in a bit to get a divorce deal done. However, the rally was short lived, and the pound gave back some of those gains following a new report that hit the wires a couple of hours thereafter. The new report cited a German government spokesman who said Germany’s position on Brexit has not changed.
Last week, the pound surged after Barnier said, “We are prepared to offer Britain a partnership such as there never has been with any other third country”, but it tumbled on Monday after Barnier noted that he remains “strongly opposed” to Theresa May’s latest plan. Now, the pattern was more or less the same. The currency rallied on headlines easing concerns over a disorderly Brexit but reversed on the rejection. Therefore, we stick to our guns that for the pound to hold onto any gains, we need clear and solid evidence that the two sides have made notable progress towards securing a deal.
GBP/USD spiked about 130 points up in just 5 minutes following the first report but gave back a large portion of those gains on the second one. That said, the pair closed the day in the green, this way showing that the bulls are still present, and the bears are not the only ones in town. Looking at the overall picture though, GBP/USD continues to trade within a downwards moving channel, drawn from around the beginning of May.
In the short-run, GBP/USD could rebound again and perhaps test yesterday’s high of 1.2985, or the upper bound of the channel, which could be a good area for the bears to take advantage of the higher rate and drive it back down. A break below the 1.2870 level could pull the pair lower to test the yesterday’s low at around 1.2785. A drop below that could open the way towards the lower bound of the falling channel, where the rate could stall for a moment, as the bulls and the bears could start battling it out over who takes control from there onwards.
Alternatively, if GBP/USD moves higher, breaks and closes above the upper bound of the channel, this could be seen as game-changer scenario, at least for the near term. This could be an invitation for more bulls to start joining, in order to lift the pair back into the 1.30s. A good strong move above the 1.3045 barrier could confirm the case and perhaps lift GBP/USD to test the 1.3125 resistance, marked by the high of the 2nd of August. Further acceleration in the rate could lead to the 1.3215 hurdle, which was the high of the 26th of July.
Following the BoC, it is the turn of the Riksbank to decide on monetary policy. At its latest gathering, the Bank kept interest rates untouched and maintained the view that slow repo rate rises will be initiated towards the end of the year. However, apart from the usual dissenter, Deputy Governor Ohlsson, who supported raising rates at that meeting, Deputy Governor Martin Floden advocated for a raise as early as in September.
Latest inflation data showed that the headline CPI accelerated to +2.1% yoy in July from +2.0% in June, while the CPIF rate stayed unchanged at +2.2% yoy, above the midpoint of the Bank’s variation band of 1-3%. However, the core CPIF inflation metric, which excludes energy, slowed further, to +1.3% yoy. Thus, having that in mind, we see it very unlikely for Swedish policymakers to push the hiking button at this meeting. On the contrary, we see a decent likelihood for them to push further back the timing of when they expect interest rates to start rising.
In the US, the ADP employment report is expected to show that the private sector has gained 189k jobs in August, following July’s 219k, while the Unit Labor Costs index for Q2 is forecast to have declined for the second consecutive quarter. The final Markit services and composite PMIs for August are also coming out, as well as the ISM non-manufacturing index for the month. We also get initial jobless claims for the week ended on the 31st of August.
As for the speakers, we have three scheduled for today: ECB Executive Board member Sabine Lautenschlaeger, New York Fed President John Williams, and BoC Deputy Governor Carolyn Wilkins.
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