The dollar and the yen traded lower on Monday, while global equity indices were a sea of green. Following Powell’s dovish remarks on Friday, investors’ risk appetite was further boosted yesterday, after the US and Mexico reached a trade agreement, opening the door for Canada to join the talks.
The dollar continued losing ground against all but two of the other G10 currencies on Monday. It gained only against the safe haven JPY, while it traded virtually unchanged versus NZD. The main gainers against the greenback were EUR, CHF and CAD.
The weakening of the dollar and the yen suggest that market sentiment remained supported. Indeed, global equity markets were a sea of green yesterday, with both the S&P 500 and Nasdaq surging to new record highs. The catalysts behind the recent boost in risk appetite may have been Jerome Powell’s remarks at Jackson Hole on Friday, as well as the US-Mexico trade agreement yesterday.
Kicking off with Powell, on Friday, the Fed Chairman repeated that gradual hikes are likely appropriate if strong income and job growth continue, but he also noted that there is little risk for inflation to accelerate beyond the Fed’s target. In our view, although this still keeps the door open for two more rate hikes this year, it suggests that as soon as interest rates reach their neutral level (which the Fed sees close to 3%), policymakers may decide to pause instead of keep tightening. The likelihood of slower rate increases moving ahead, or a pause, may have been the message received by market participants as well. The greenback sold off, while equity indices rallied.
Moving to the US-Mexico deal, yesterday the two nations reached an accord to overhaul NAFTA, opening the door for Canada to join the talks. That said, the scenario where Canada agrees as well may not be a done deal yet. Canada’s Foreign Minister Chrystia Freeland is expected to travel to the US today for the negotiations, but her spokesman said that Canada will only sign a new agreement that is good for the nation. Meanwhile, US President Trump threatened that he could still impose tariffs on Canada’s autos if it refuses to join the deal, while Mexican Foreign Minister Luis Videgaray noted that it is important for Canada to be part of the accord, but if that doesn’t happen, there will still be a deal between Mexico and the US.
USD/CAD tumbled yesterday, falling below the medium-term upside support line drawn from the low of the 31st of January, as well as below the psychological zone of 1.3000. That said, the slide was stopped slightly below the 1.2960 support level and then, the rate rebounded somewhat. Given the break below the medium-term upside line, and also taking into account that the pair is trading within a downside channel since the 27th of June, we would consider the outlook to be negative for now.
We would expect the bears to take charge again soon and perhaps aim for another test near 1.2960. If they manage to clearly overcome that support territory this time, then we would expect theme to pull the trigger for our next support zone of 1.2925, defined by the low of the 8th of June.
However, before the bears decide to shoot again, we see the case for the latest rebound to continue for a while more, perhaps to test the 1.3000 zone as a resistance, or the aforementioned medium-term upside support line. That view is derived by our momentum indicators. The RSI rebounded from slightly above 30, while the MACD, although below both its zero and trigger lines, shows signs of bottoming.
Now, if the recovery does not stop near the upside line and the rate breaks back above it, then we would start examining the case of a decent corrective phase to the upside. Such a break may initially aim for the 1.3065 resistance, the break of which could open the path for the 1.3100 level, or the upper bound of the near-term downside channel.
The Nasdaq 100 cash index surged yesterday, overcoming its prior record high of around 7517, posted on the 25th of July. The index hit a new all-time high at 7582.62 and then, it retreated somewhat. The price continues to print higher peaks and higher troughs within the upside channel that has been containing the price action since March and thus, we would expect the index to continue drifting north and conquering unchartered territories.
Nevertheless, before the next positive leg, we stay cautious of a possible setback, perhaps to test the 7517 zone as a support this time. The case is supported by our short-term oscillators as well. The RSI has topped within its above-70 zone and now looks ready to fall back below 70 soon, while the MACD, although above both its zero and trigger lines, shows signs of topping.
Now, in case the price dips below 7515, we may see the correction extending towards 7460 or the lower end of the aforementioned channel. However, we would still see a decent chance for the bulls to jump into the action and drive the battle higher.
We would like to see a clear close below the channel’s lower bound and the 7400 support before we abandon the bullish case, at least in the near term. Such a dip could initially pave the way for the 7310 support zone, marked by the lows of the 15th and 17th of August. Another break below 7310 could carry more bearish implications and is possible to set the stage for the 7200 area.
The calendar appears very light, with the only economic release worth mentioning being the US Conference Board Consumer Confidence index for August. Expectations are for the index to have declined to 126.8 from 127.4 in July.
Yesterday, we noted that BoE Governor Mark Carney will testify on the August Inflation Report before Parliament’s Treasury Committee. However, the event is now removed from the economic calendars we got the information from, while we can’t find any other sources suggesting the testimony is scheduled for today and thus, we will assume that it will take place another day.
As for the speakers, we have only one scheduled during the Asian morning Wednesday: BoJ Board Member Hitoshi Suzuki.
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