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by Charalambos Pissouros

US Tariff List Hits Risk Appetite; Bank of Canada Decides on Interest Rates

 

Market 01

US Announces List of USD 200bn Worth of Chinese Products for Tariffs

The US dollar traded higher against most of its G10 counterparts yesterday. The sole winner was GBP, while the safe havens CHF and JPY traded virtually unchanged against their US counterpart. The big losers were AUD and NZD.

USD perf 110718

The pattern suggests a shift to “risk off”, and once again the word that triggered the switch in investors’ sentiment was “tariffs”. Overnight, headlines suggested that the US is preparing to release a tariff list on 200bn worth of Chinese imports, something that happened a couple of hours thereafter. US officials released a list of Chinese products that will be subject to 10% tariffs including food, tobacco, chemicals, steel and aluminum, as well as several consumer goods like car tires and beauty products. The new tariffs will not take effect until after a public and consultation period that is expected to last two months. China’s ministry of commerce said that the list is “unacceptable” and reiterated that it would be forced to hit back.

At the time the headlines were out, investors abandoned riskier assets, like equities and the commodity linked currencies, to seek shelter to safe havens, like the yen. The Japanese currency surged at the time, and once again it managed to gain the most against its Australian counterpart, confirming our choice to select AUD/JPY as one of our favorite proxies for playing the “Trade war” theme. As for the equity market, both the Shanghai Composite index and Japan’s Nikkei ended the Asian session in the red, around 1.8% and 1.3% down respectively.

Having said all these though, we remain skeptical as to whether the negative sentiment could roll over into the European and US sessions. Yes, EU and US indices are likely to open with negative gaps but barring any further escalation during the day, we don’t believe that they will continue tumbling. The first threat concerning this round of tariffs is dated back on the 18th of June, with risk appetite getting hit hard then as well. In our view, this suggests that the news is actually old news, and that there is little of them left to be discounted. We stick to our guns that for fears and anxiety to surge again, we may need to get something new, something to catch the market off guard. Off course the measures could have a serious impact on the global economy in the longer run, but let’s not forget that market participants are probably trying to figure that out now.

AUD/JPY – Technical Outlook

After a strong move higher, AUD/JPY reversed sharply back down as “risk off” was back on the table. The pair dropped heavily yesterday but found good support at around 82.05 zone. That said, the pair is still above the upside support line, drawn from the 28th of June, which still gives a bit of hope for the bulls. That said, the pair could continue somewhat lower, as the yen-buying could continue.

If we get another test of the 82.05 zone and eventually a break of it, we could see the pair sliding towards the aforementioned support line, from where the bulls could jump in again. If they do so and drive the rate back above the 82.05 zone, then we may see them aiming for the 82.57 territory. Another move above 82.57 could interest more bulls to step in and drive AUD/JPY higher. We could then see a full recovery of yesterday’s drop and the rate going back to the recent highs at around the 83.10 area.

Both of our indicators are currently in support of some further retreat, at least toward the uptrend line. The RSI is now slightly below 50 and pointing a bit lower. The MACD, even though above zero, it has now moved below its trigger line and continues to slide.

For us to become bearish, we would need to see a break and a close below that support line, in order to consider a drop to 81.60. If the bears remain in control, Aussie/Yen could continue falling towards the 81.27 level, marked by the low of the 5th of July. Slightly below that lies the 81.00 area, which acted as good support recently, on the 2nd of July and a few times in June.

2018.07.11 AUDJPY 240 Logo

Bank of Canada Set to Deliver its 2nd Hike for the Year

Today, besides any headlines over the US-China dispute, investors are likely to also pay attention to the Bank of Canada monetary policy decision. This will be one of the bigger meetings, which are accompanied by the Bank’s quarterly Monetary Policy Report and a press conference by Governor Stephen Poloz. At its latest meeting, the Bank decided to keep interest rates unchanged at 1.25% as was widely anticipated, but the tone of the accompanying statement was more hawkish than previously, laying the ground for a July hike and hinting at faster rate hikes thereafter.

BoC rates 110718

Despite the disappointment in Canada’s CPI for May and retail sales for April, recent hawkish remarks by BoC Governor Poloz, an overall upbeat BoC Business Outlook Survey for Q2, and a decent employment report last Friday, kept the market overwhelmed with regards to the prospect of a hike at this meeting. Thus, if this is the case, the attention will quickly turn to the accompanying statement, the economic projections and the press conference by Governor Poloz.

Immediately the day after the previous BoC decision, the US decided to end a two-month exemption and impose steel and aluminum tariffs on imports from Canada (Mexico and the EU as well), with the nation retaliating on the 1st of July. Therefore, it will be interesting to see whether officials keep hinting at faster rate hikes thereafter, or whether developments in the global trade arena will prompt them to return to a “cautious” approach with regards to future policy adjustments.

As for the Canadian dollar, we believe that the risks surrounding its reaction are asymmetrical. As we already noted, the market is almost certain that the Bank will increase rates today, while many participants believe that the Bank will deliver another hike by year end. Thus, if the Bank decides to increase rates by 25bps today and maintains its hawkish stance, the Loonie is likely to strengthen, but not to skyrocket. On the other hand, a hike accompanied with a cautious stance – a so called “dovish hike”- could disappoint those who expect the Bank to proceed with another one by year end and thereby, the Loonie could tumble. Now the third and least likely scenario is the one where the Bank refrains from pushing the hiking button. This will come as a big surprise and the Canadian currency could fall off the cliff.

GBP/CAD - Technical Outlook

GBP/CAD continues to hold above the upside support line, drawn from the low of the 30th of May. That said, at the same time, the pair is getting held by a strong area of resistance at around 1.7445. Thus, we remain flat as we wait for the BoC decision today, which could have its effect on GBP/CAD and force it to break through either the upside support line or the 1.7445 resistance barrier.

A strong break through 1.7445 could open the door towards some higher levels seen in June. The next potential resistance zone could be the 1.7555 area, marked by the peak of the 27th of June.  If that area won’t be able to withhold the rate acceleration, then we could start aiming for the 1.7700 level as the next good area of resistance.

The RSI is currently above 50 and pointing higher. The MACD is just slightly above its zero line and is also trying to make a move above the trigger line. Both indicators detect upside speed, but as we already noted, we would prefer to wait for a break above 1.7445 before we get confident on the upside.

Alternatively, a break below the aforementioned upside support line could worry the bulls and raise some concerns about the upside potential. Certainly, let’s not forget that we could just get a false break like the ones seen on Monday and Friday last week. A good confirmation of a potential move lower could be a close of the 4-hour candle below the 1.7365 level, where we could then aim for some lower areas of support. The 1.7300 hurdle could be seen as strong support, as it also acts as the lower side of the range that the pair has been trading in since around the 28th of June. A break below could trigger some more selling and the rate could drop towards the 1.7255 area or even the 1.7200 level, marked by the 5th of June low.

2018.07.11 GBPCAD 240 Logo

As for the Rest of Today’s Events

From the US, we get PPI data for June. Expectations are for both the headline and core yoy rates to have risen to +3.2% and +2.6% from +3.1% and +2.4% respectively. Although the PPIs are not major market movers, accelerating producing prices could suggest accelerating consumer prices, and thereby raise expectations that the CPI rates, due out on Thursday, may rise as well.

US CPI PPI 110718

As for the energy market, we get the OPEC monthly report. Following the decision between OPEC and major non-OPEC oil producing nations to ease production curbs, market participants may be eager to find out what’s the cartel’s outlook for the foreseeable future.

Besides BoC Governor Poloz, we have five more speakers on today’s agenda: ECB President Mario Draghi, ECB Executive Board member Peter Praet, BoE Governor Mark Carney, Atlanta Fed President Raphael Bostic and San Francisco Fed President John Williams.

 

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