Worries of a Global Trade War Increase
The dollar traded higher against most of the other G10 currencies on Thursday. It underperformed slightly against EUR and NZD, while it ended the day virtually unchanged against NOK and CHF. The main losers were CAD, JPY and GBP, in that order.
Yesterday, US Commerce Secretary Wilbur Ross announced the US administration’s decision to impose tariffs on steel and aluminum imports from Canada, Mexico and the European Union, ending a two-month exemption. Responding to the US, Canada’s Foreign Minister Chrystia Freeland said that her nation will retaliate by imposing its own trade barriers. Mexico also hit back, while the EU is planning to act as well.
The main loser among the major currencies was the Canadian dollar, just one day after it surged on the BoC’s hawkish statement, which laid the ground for a July rate hike and hinted faster rate increases thereafter. The Loonie took the first hit by Canada’s GDP data, which showed that GDP slowed to +1.3% from +1.7% on a qoq annualized basis. Although this is in line with the Bank’s projections, in Wednesday’s statement officials noted that activity in Q1 appears to have been stronger than projected. Thus, the slowdown came as a disappointment to Loonie traders. The second hit came from the aforementioned trade developments, which make it even harder for NAFTA members to reach an accord.
As we noted yesterday, a lot of the BoC’s future policy plans may well be affected by trade developments. Thus, the tit-for-tat tariffs make us skeptical with regards to the BoC’s future actions. Even if officials decide to push the hiking button in July, without any signs of ease in the global trade arena, they may decide to delay any forthcoming rate increases.
USD/CAD – Technical Outlook
USD/CAD edged north yesterday after it hit support near the crossroads of the 1.2820 support and the upside line taken from the low of the 17th of April. However, the rally was stopped by the 1.2990 zone, and then, the rate retreated somewhat to find support at 1.2935. Bearing in mind that the pair continues to trade above the aforementioned upside support line, and that it is now back above all our three moving averages, we see the case for some further advances, at least in the short run.
If the bulls manage to take the reins at current levels, then we would expect them to aim for another test near 1.2990, the break of which may set the stage for the 1.3040 zone, defined by Tuesday’s and Wednesday’s highs. If that area does not prove strong enough from preventing the bulls to drive the battle higher, then we may experience extensions towards our next resistance territory of 1.3100.
Our short-term oscillators support the notion for further advances as well. The RSI rebounded from near its 50 line, while the MACD, although negative, lies above its trigger line and looks ready to obtain a positive sign soon.
On the downside, even if we see the rate retreating below 1.2935, as long as it continues to trade above the upside support line drawn from the low of the 17th of April, we would maintain the view that there is a decent chance for the bulls to jump in. We would like to see a clear dip below 1.2820 before we start examining whether the near-term outlook has turned negative. Such a move could confirm the break of the upside support line and could initially pave the way for our next key support obstacle of 1.2750.
Euro Continues to Recover on Easing Concerns Over Italy
The euro outperformed all but two of its major counterparts yesterday. The main losers were CAD, JPY and GBP, in that order, while the currencies that managed to resist were CHF and NZD, which ended the day virtually unchanged against the common currency.
The euro stayed in a recovery mode yesterday as Italy’s Five Star and League agreed to resurrect a coalition, something that removes the risk of new elections. Giuseppe Conte, the parties’ choice for the position of the Prime Minister, received a second mandate and presented his list of ministers. Paolo Savona, which was rejected for the position of the economy minister by President Mattarella, will stay in government as European affairs minister, while the economy ministry will be handed to Giovanni Tria. The government will face a confidence vote in both houses of Parliament next week.
Besides the easing worries over Italy’s political landscape, the acceleration in Eurozone’s inflation may have also added some fuel to the common currency’s recovery. According to preliminary data, headline inflation in the Euro area accelerated to +1.9% yoy from +1.2% in April, in line with the ECB’s goal of “below, but close to, 2%”. The core rate rallied as well, to +1.1% yoy from +0.7%.
Following Eurozone’s weak PMI data last week, and the political turmoil in Italy, investors pushed well back their expectations over an ECB normalization step. However, the rebound in inflation, combined with further easing of tensions in Eurozone’s political landscape, could make them revive some of their bets.
EUR/CAD – Technical Outlook
EUR/CAD surged yesterday after it found support at 1.4975, breaking above two resistance (now turned into support) barriers in a row. The pair continues to trade within the downside channel that’s been containing the price action since mid-March, and thus, we believe that the near-term path remains cautiously to the downside.
If the bears manage to take advantage of yesterday’s rally and drive the battle back below 1.5120, then we may see them aiming for the 1.5060 support. A clear dip below the latter level could pave the way towards yesterday’s low of 1.4975.
Taking a look at our short-term oscillators, we see that the RSI stands flat slightly above its 50 line, while the MACD lies above both its zero and trigger lines, pointing up. These momentum signs suggest that some more recovery maybe on the cards, perhaps for a test near the 1.5205 resistance, or slightly higher, near the upper bound of the downside channel.
However, even if we see further recovery towards the channel’s upper bound, we would still consider the near-term outlook to be cautiously negative. We prefer to wait for a break above 1.5315 before we assume that the outlook has turned positive. Such a break could confirm the upside exit out of the channel and could initially set the stage for extensions towards the 1.5430 resistance hurdle.
US Employment Report Under the Microscope
As for today, traders are likely to continue monitoring developments on the trade and Italian fronts, but they may keep their eyes on the economic agenda as well, and specifically the US employment report for May. Expectations are for non-farm payrolls to have risen 190k, more than April’s 164k. The unemployment rate is expected to have remained unchanged at 3.9%, a 17.5-year low, while average hourly earnings are expected to have accelerated to 0.2% mom from +0.1%. Barring any revisions to prior prints, this could drive the yoy rate back up to +2.7% from +2.6% as the monthly print of May 2017 that will drop out of the yearly calculation was +0.1%.
Overall, the forecasts suggest that we are likely to get a decent report, consistent with further tightening in the labor market. However, market participants may once again turn most of their attention to the earnings print. According to the minutes of the latest FOMC meeting, policymakers are on track to raise rates in June, but they are in no rush to increase the pace of future rate increases, even if inflation overshoots their target in the next few months. What’s more, data yesterday showed that the core PCE index, the Fed’s favorite inflation gauge slowed to +1.8% yoy in April from +1.9% in May. Thus, market participants may need to see wage growth accelerating more than the forecast suggests before they revive bets that the Fed will consider a 4th hike this year. According to the Fed Funds futures, the probability for the FOMC to end 2018 with a total of 4 hikes is now standing at around 27%. A week ago, that probability was near 36%.
As for the Rest of Today’s Events
During the European morning, we have the final manufacturing PMIs from several European nations and the Eurozone as a whole. Eurozone’s flash estimate showed that the manufacturing index slid to 55.5 from 56.2, and the final manufacturing print is just expected to confirm that.
We get manufacturing PMI data for May from the UK as well. Expectations are for the UK index to have slid for the 6th month in a row. Specifically, it is expected to have declined to 53.5 from 53.9 in April. Following last week’s slowdown in the CPIs, and last Friday’s confirmation of a weak economic growth in Q1, another slide in the manufacturing PMI could further wind down expectations with regards to a near-term BoE rate increase.
In the US, besides the employment data, we get the final Marikt manufacturing PMI for May, as well as the ISM manufacturing index for the same month. The final Markit print is expected to confirm its preliminary estimate of 56.6, while the ISM one is anticipated to have risen to 58.2 from 57.3 in April.
As for the speakers, we have one on today’s agenda: Minneapolis Fed President Neel Kashkari.
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