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by Charalambos Pissouros

CAD Rallies on NAFTA and Oil, Trade Concerns Persist

The Canadian dollar was one of the two gainers against the greenback yesterday, boosted by NAFTA headlines, as well as the rebound in oil prices. As for the US dollar, it remained relatively supported against most of the other G10 currencies, perhaps as investors remained cautious that the US tariffs on USD 200bn Chinese goods could be announced at any moment.

Loonie Surges on NAFTA Optimism, Oil Rebound Helps as Well

The dollar traded higher or unchanged against most of the other G10 currencies on Tuesday. It gained against AUD, NZD, and GBP in that order, while it traded virtually unchanged against CHF, JPY and SEK. The greenback underperformed against CAD and NOK.

USD performance G10 currencies

The Canadian dollar was one of the two gainers yesterday. It strengthened following headlines surrounding NAFTA, as well as the the rebound in oil prices. The other gainer was NOK, which may have gained due to the rise in oil prices as well, given that Norway is also among the world’s major oil exporting countries.

Yesterday, Canada’s Foreign Minister Chrystia Freeland returned to the US to continue NAFTA negotiations with US Trade Representative Robert Lighthizer. She said that talks over the weekend were “constructive and productive”, while later in the day, US President Trump said that talks are going well, and that Canada wants to make a deal. That said, the Loonie remained indifferent on these remarks as they were more or less along the same lines with the comments we got last week. However, it spiked up following a report, citing sources familiar with the talks, that Canada is ready to offer the US limited access to its dairy market as a concession. Canada’s dairy market was a hurdle for the talks, so the concession makes it more likely that the two nations could find common ground before the deadline set for the 1st of October.

Following last week’s hawkish remarks by BoC Deputy Governor Wilkins, increasing chances of a breakthrough in the US-Canada trade talks, may have increased further the likelihood of a BoC hike in October, and could have prompted some market participants to place a few bets that another one may follow in December.

Another development that may have helped the Loonie was the surge in oil prices. Oil prices edged north yesterday, perhaps driven by speculation that the new US sanctions on Iran set for November will result supply disruptions, as well as the large drawdown in weekly oil inventories revealed by the American Petroleum Institute data. Specifically, the institute reported that US crude stocks fell by 8.6mn barrels during the week ended on the 7th of September. The official government data by the US Energy Information Administration will be published today and a confirmation of the API release could boost oil prices even further.

EUR/CAD – Technical Outlook

Yesterday, EUR/CAD had broken through its tentative short-term upside support line, taken from the low of the 15th of August. What’s more, the pair broke below the 1.5190 zone, completing a failure swing top formation, and thus, signalling a possible short-term reversal. Then, it found support near the 1.5130 zone, but the question is for how long? If the CAD buying gets a follow through today as well, the pair might move towards lower levels.

As mentioned above EUR/CAD found support near the 1.5130 zone, which now becomes an important area to keep an eye on. A break below that could interest more bears in joining in and pulling the pair to the next potential area of support at 1.5080, marked by the low of the 29th of August. Slightly lower lies the 1.5055 barrier, which held the rate from dropping lower on the 23rd of August. That said, let’s also not exclude the possibility to see a bit of retracement back up, to test the 1.5190 hurdle, which acted as good support on the 9th of September, where this time it could provide strong resistance. This could be the zone, where the bears could take advantage of a higher rate and jump into the pair again.

At the time of this analysis, the RSI is running below 50 and pointing lower. The MACD is below zero and below its trigger line, and is also pointing lower. The two indicators are currently supporting the possibility to see further downside in EUR/CAD.

Alternatively, for us to get comfortable with the upside, we would need to see EUR/CAD coming back above the aforementioned tentative upside line and also closing above the area between 1.5295 and 1.5305. This way we could start examining higher levels like 1.5370, marked by the peak of the 6th of September. If that level is not able to stop the rate acceleration, more bulls could start coming in in order to lift the pair towards the 1.5470 zone, which was near the high of the 20th of July.

EURCAD 4-hour chart technical analysis

WTI Crude Oil – Technical Outlook

WTI oil got a strong boost yesterday, adding about $2.5 dollars to its price per barrel. Overall, WTI continues to trade above it long-term upwards moving trendline, taken from the low of the 21st of June last year. At the same time, the commodity is trading below its short-term downside resistance line, taken from the peak of the 3rd of July. Nevertheless, we remain somewhat positive on the near-term, as the “black gold” is showing signs of strength.

We can see that WTI oil is trading now just a few cents shy from the 70-dollar mark, a break of which could lead to test of the aforementioned downside resistance line. If the line is not able to withhold the prise from rising, still, for us to get more comfortable with the upside scenario, we would need to see a break and a close above the 71.15 level, marked near the high of the 4th of September. Such a break could initially aim for the 71.80 zone, a break of which could carry more upside extensions, perhaps towards the higher price tags, like 73.35, or even the 73.90, marked by the highest point of July.

On the downside, looking at the short-term picture, a break below the 68.15 level, could open the way to test the 66.70 barrier, which held the rate from dropping lower on the 7th of September. If that doesn’t stop the drop, WTI could easily slide to the 65.60 zone, where it could also test the previously mentioned upwards moving trendline, which could stop the fall.

WTI 4-hour chart technical analysis

Market Sentiment Remains Fragile as Tariffs Loom

Now back to the US dollar, the fact that it remained relatively supported against the other G10s (apart from CAD and NOK), and that the safe havens CHF and JPY managed to resist and finish the day virtually unchanged, suggests that the broader sentiment remained somewhat fragile. Although the EU stock markets ended their sessions mixed, and the US indices actually ended in positive territory, Asian burses were mostly in the red today. Japan’s Nikkei 225 and China’s Shanghai Composite finished 0.24% and 0.33% lower.

In our view, following last week’s conclusion of the public-comment period over US tariffs on USD 200bn worth of Chinese goods, investors remain cautious that the tariffs could be announced at any moment. On Friday, US President Trump threatened to impose duties on virtually all Chinese imports to the US, while yesterday, according to the World Trade Organization, China will seek permission from the organization to impose sanctions on the US next week due to the nation’s non-compliance with a ruling over US dumping duties. 

As for Today’s Events

During the European morning, Eurozone’s employment change for Q2 and the bloc’s industrial production data for July are coming out. No forecast is available for the employment change, while industrial production is anticipated to have fallen 0.5% mom after a 0.7% slide in June.

From the US, we get the PPIs for August. Expectations are for the headline rate to have ticked down to +3.2% yoy from +3.3% in July, while the core rate is anticipated to have risen to +2.8% yoy from +2.7%.

With regards to the energy market, as we already noted, we get the Energy Information Administration inventory data for the week ended on the 7th of September. Expectations are form a 0.8mn barrels slide following the 4.30mn decline the week before. However, bearing in mind that the API report revealed an 8.6mn drawdown, we view the risks of the EIA result as tilted to the downside.

As for tonight, during the Asian morning Thursday, we get Australia’s employment report for August. Expectations are for the unemployment rate to have held steady at 5.3%, while the net change in employment is forecast to show that the economy added 18.4k jobs after a 3.9k decline in July.

We have also one speaker on today’s agenda: St. Louis Fed President James Bullard.

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