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by Charalambos Pissouros

Sentiment Stays ‘Risk off’, BoC Decides on Policy

The dollar strengthened, while equities tumbled yesterday as investors remained concerned over the global trade front. Today, Canada and the US return to the NAFTA negotiating table, while tomorrow, the public-comment period with regards to tariffs on USD 200bn Chinese goods concludes. Besides trade, CAD-traders will also focus on the BoC policy decision.

Trade Concerns Keep Markets on ‘Risk off’ Mode

The dollar traded higher against most of the other G10 currencies on Tuesday. It gained the most against NZD, CAD and CHF, in that order, while it lost ground only against SEK. The greenback traded virtually unchanged versus EUR and GBP.

USD performance G10 currencies

The US currency continued to attract safe-haven flows yesterday as investors remained concerned over the global trade front, something that is evident by the performance of the equity markets as well. Most major European and US indices closed their sessions in the red, with the only exemptions being Spain’s IBEX 35, which finished flat, and Italy’s FTSE MIB, which gained around 1.00%. The negative sentiment rolled over into the Asian trading Wednesday as well, with Japan’s Nikkei and China’s Shanghai Composite Index ending 0.44% and 1.68% down respectively.

On Thursday, the public-comment period with regards to the US tariffs on USD 200bn worth of Chinese imports concludes, and investors are sitting on the edge of their seats in anticipations of what President Trump’s next move will be. Last week, reports suggested that Trump could proceed with the imposition of those tariffs as soon as the hearings are over and thus, it would be interesting to see whether this is the case.

Besides the US-China conflict, market participants are also concerned over the future of NAFTA. On Friday, talks between the US and Canada ended without a deal, and the US President notified Congress that he intends to sign a bilateral deal only with Mexico if things with Canada don’t work out. He also threatened to terminate NAFTA entirely if Congress interferes with his plans. The US and Canada are set to return to the negotiating table today, with any sings that a deal can be eventually struck having the potential to improve market sentiment, at least temporarily, as well as to support the wounded Loonie, which has been in a tumbling mode against its neighboring greenback since last Thursday. Having said that though, Loonie’s near-term direction is likely to be impacted by the BoC decision as well (See below).

Elsewhere, the pound has been in a sliding mode during the European morning as the miss in the UK construction PMI for August added to concerns over the nation’s economic performance during Q3. That said, the British currency rebounded and ended the day flat against the greenback, following reports that the EU could adjust the Irish border backstop solution so that it is politically acceptable for the UK. BoE Governor Mark Carney’s willingness to stay in office beyond his planned leaving date may have also helped the pound.

As for today, GBP-traders are likely to focus on the services PMI for August in order to get a better picture on the economy’s performance, given that the service sector accounts for almost 80% of the UK GDP. Following the more-than-expected slides in the manufacturing and construction indices, another disappointment in the services print may raise more concerns on whether the economy can maintain its recovery seen in Q2 and could thereby bring the pound under pressure again.

S&P 500 – Technical Outlook

Overall, the S&P 500 is on an uptrend and the long-term outlook still remains positive. The index is currently balancing above the short-term upside support line, taken from the low of the 2nd of July and until that line is broken, we will aim higher, at least for the short run.

A break of the all-time high level of 2916.7 could lead towards new highs that were never seen before. But before the index could make its way higher again, we could see further correction towards the abovementioned upside support line, which could act as a good bouncing ground for the index.

In order to start examining whether the bears have taken control in the near term, we would like to see a break below the aforementioned short-term upside support line, which could open the path towards the 2845 zone, marked by the low of the 22nd of August. Slightly below that lies the 2834 hurdle, which was the support zone of the 17th of August. If that hurdle doesn’t hold, then we could see the index traveling down towards the 2802 level, marked by the low of the 15th of August. This where the S&P 500 could meet the longer-term upwards moving trendline, taken from the low of the 2nd of April.

S&P 500 4-hour chart technical analysis

Bank of Canada Decides on Interest Rates

Besides the resumption of trade talks between the US and Canada, the BoC policy decision will also keep Loonie traders busy today. Expectations are for the Bank to keep interest rates unchanged at +1.50%, so if this is the case, then attention is likely to fall on the accompanying statement. At their latest policy meeting, BoC officials decided to raise interest rates by 25 bps, and maintained a hawkish stance, noting that they will continue to take a gradual approach on interest rates, guided by incoming data.

Bank of Canada interest rates

Since then, most Canadian economic data have been more than encouraging. Both the headline and core inflation metrics accelerated more than anticipated in July, while the unemployment rate for the same month slid to 5.8% from 6.0% in June. As for economic growth, it accelerated in Q2, to +2.9% qoq from +1.3% qoq on an annualized basis, but fell just shy of the +3.0% estimate. Meanwhile, June’s monthly rate fell to 0.0% from +0.5% in May. Although the quarterly data suggests the fastest pace in one year, this may have not been enough to bolster expectations that the BoC will proceed with hiking rates at this meeting.

As for our view, we agree with the consensus for no September hike. Officials just raised rates at their prior meeting and they may want to see more evidence that the economy is on a solid footing before pushing the hiking button again, perhaps in October. What’s more, with all this uncertainty surrounding the NAFTA talks, Poloz and his colleagues may prefer to wait for the dust around the matter to settle down before acting again.

As for the Loonie, we view the risks surrounding its reaction as asymmetrical. With expectations for an October hike at already elevated levels, a hawkish statement that keeps the door open for that action could support CAD, but we don’t expect the currency to skyrocket. On the other hand, anything suggesting that an October hike is not as likely as the market believes may cause the currency to tumble further. Now, in our view, the most unlikely scenario is the one where the Bank decides to hike today. In such a case, the Loonie could surge.

USD/CAD – Technical Outlook

After returning above the medium-term upwards moving trendline taken from low the 31st of January and breaking the upper bound of the short-term falling channel drawn from around the 18th of June, the bulls may be feeling confident to drive USD/CAD higher, perhaps towards its July, or even June highs. That said, before that happens, we could see USD/CAD retracing a bit lower, where the upper bound of the aforementioned channel could act as a good bouncing ground for the pair to move higher. For now, we remain positive on the near-term outlook.

A strong break through the 1.3210 level could invite even more bulls to the table and perhaps lift USD/CAD higher to test the 1.3290 zone, marked by the high of the 20th of July. Further acceleration of the rate could lead towards the 1.3385 barrier, marked by the highest point of June this year.

That said, as mentioned above, there is a possibility for the pair to move down a bit to test the upper bound of the channel, near the 1.3090 area, which acted as good resistance and support between the 31st of August and the 3rd of September. This is the area where the bulls could take charge again and push the rate back up.

In order to start examining whether the bulls have abandoned the battlefield, we would like to see a clear dip below the 1.3045 level, marked by the low the 3rd of September. This will bring the pair below the previously mentioned upwards moving trendline and could aim for the psychological 1.3000 zone. Slightly below that lies the 1.2965 barrier, marked by the inside swing high of the 29th of August.

USD/CAD 4-hour chart technical analysis

As for the Rest of Today’s Events

During the European day, we get the final services and composite PMIs for August from the European nations of which we got manufacturing data on Monday, as well as the Eurozone as a whole. As usual, the final prints are expected to confirm their preliminary estimates.

Later in the day, we get trade balance data for July from both the US and Canada. Expectations are for the US trade deficit to have widened to USD 50.3bn from USD 46.3bn in June, while Canada’s deficit is anticipated to have widened to CAD 0.80bn from 0.63bn previously. Canada’s Labor Productivity Index for Q2 is also coming out.

As for the speakers, we have three on the agend: ECB Executive Board member and Chief Economist Peter Praet, New York Fed President John Williams, and Minneapolis Fed President Neel Kashkari.

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