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by Charalambos Pissouros

Bank of Canada Delivers a “Hawkish Hike”; Spotlight Falls on ECB Minutes and US CPIs

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Bank of Canada Raises Rates and Maintains Hawkish Stance

The Canadian dollar had a volatile ride yesterday, driven by the BoC rate decision and perhaps the tumble in oil prices. The Bank of Canada decided to raise interest rates to +1.50% from +1.25% as was expected, while in the accompanying statement officials maintain their hawkish stance, noting that they will continue to take a gradual approach on interest rates, guided by incoming data. As for the trade tensions, they said that the impact of trade uncertainty on investment and export is now judged to be larger, but the impact of tariffs on steel and aluminum on growth and inflation is expected to be modest.

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At the press conference following the decision, Governor Poloz added to the hawkish narrative of the statement by noting that although there was talk over trade uncertainty, the Bank raised rates amid increasing confidence in its outlook. “The escalation of trade actions was quite a part of our discussions, but we agreed very early on that it was not going to be the basis for our decision,” he noted.

The Canadian dollar surged at the time of the release as the Bank’s hawkish stance may have come as a surprise to those expecting a more cautious approach and more concerns over the global trade landscape. That said, the party for Loonie bulls did not last for long. Half an hour after the decision, the currency came under strong selling interest, giving back all the BoC-related gains and losing even more, to end the day on the back foot against its neighboring US dollar.

The catalyst behind the slide may have been the tumble in oil prices. Both Brent and WTI tumbled yesterday, perhaps on news that Libya reopened four export terminals, a move that allows the return of up to 850k bpd of crude into the market. Canada is one of the biggest oil producing nations and thus, movements in the black liquid could well leave their marks on the Canadian currency.

Looking ahead, we think that investors will continue closely monitoring Canada’s economic data. After all, the Bank said that its future policy actions will be guided by incoming data. According to Canada’s overnight index swaps (OIS), the market assigns a 65% probability for another hike by December. Thus, upbeat releases moving forward are likely to drive that probability higher, and vice versa.

USD/CAD – Technical Outlook

USD/CAD moved in a roller coaster manner yesterday, after the BoC statement and interest rate decision came out. Initially it fell below the mid-term uptrend, drawn from the low of 17th of April, but the drop was short-lived and the pair quickly reversed back up again. USD/CAD broke the key area of resistance at around 1.3160 and made its way towards the 1.3220 area, marked near the peak of the 2nd of July. Certainly, this move makes the near-term outlook somewhat positive.

For now, we will aim for the highs again, but first, we could probably see a bit of correction to the downside. A good potential area of support could be the 1.3175, from which USD/CAD could bounce and target yesterday’s high at around 1.3220, a break of which could open the door towards the 1.3265 zone, which acted as both support and resistance in the end of June. Further acceleration in the rate could lead to a test of the 1.3340 mark, or even the key area of resistance seen across June at 1.3385.

We could also see a scenario where USD/CAD could move all the way back to the aforementioned uptrend line, test it and then bounce back to the upside towards the previously mentioned levels.

The RSI is currently giving us mixed signals. It sits above 50, which is a positive sign, but at the same time is pointing down. Nevertheless, the indicator remains on an uptrend. Unlike the RSI, the MACD shows a solid momentum move higher, as it is above zero, its trigger line, and is pointing up.

On the downside, we would need to see a break and a close below the aforementioned trendline, in order to start examining the possibility of a trend reversal. We could then see a test of the 1.3060 area that recently acted as good support, which if broken this time, could confirm the reversal and open the path towards the 1.2960 area for a quick test.

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ECB Minutes and US CPIs Under Investors’ Radar

The dollar traded higher against all the other G10 currencies yesterday. The main losers were JPY, NZD and NOK in that order, while the currencies that underperformed the least against their US counterpart were CHF, EUR and GBP.

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The euro ended the day lower against the greenback yesterday, despite getting a boost by a report citing sources saying that ECB policymakers are split over when they may hike rates. According to the sources, some say that July 2019 should not be ruled out, while others suggest that they should wait until autumn. EUR/USD traders are likely to stay on guard today ahead the ECB meeting minutes and the US CPIs for June.

So, let’s get the ball rolling with the minutes of the latest ECB meeting. At that gathering, the Bank signaled a QE-tapering after September and a clear end to the program in December, but the decision was subject to incoming data. What’s more, the Bank noted that interest rates are expected to stay untouched “at least through the summer of 2019 and in any case for as long as necessary”, which came as a disappointment to those expecting a hike in mid-2019. In our view, the interest rate guidance means that rates are likely to start rising in September 2019 the earliest.

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Following recent reports that some ECB policymakers are uneasy that market participants are not expecting a hike until December 2019, as well as yesterday’s story that some officials see July as a hike candidate, we will scan the minutes in order to get a clearer picture on the Bank’s future plans. According to Eurozone’s overnight index swaps, the market is pricing in a 10bps rate increase in the deposit facility rate in October. Any hints that this may come earlier, or any discussions that July should be included in the guidance, are likely to bring those expectations forward and the euro under buying interest.

Moving to the US CPIs, expectations are for the headline inflation rate to have risen for the 5th consecutive month. Specifically, it is expected to have ticked up to +2.9% yoy from +2.8% in May. The core rate is expected to have ticked up as well, to +2.3% yoy from +2.2%. Although the Fed drives the monetary policy wheel mostly based on the PCE inflation metrics, further acceleration of the CPIs above the Fed’s 2% objective could raise speculation that the PCE rates may continue to edge higher as well.

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The main message we got from the minutes of the latest FOMC gathering is that policymakers are willing to continue hiking rates this year and the next, and that they could allow rates to rise above their neutral level for some time. Thus, accelerating inflation is likely to further strengthen the case for the Committee to hike two more times this year, and thereby help the dollar extend the gains it posted yesterday. According to the Fed funds futures, the probability for the Fed to end 2018 with a total of 4 hikes is around 55%. On the other hand, a disappointment in today’s data could pour some cold water to those expectations and thus, the dollar could reverse some of its latest gains.

EUR/USD – Technical Outlook

EUR/USD still cannot get out of its range that it is trading in. The pair sits between a strong area of support at 1.1510 and a key level of resistance at around 1.1840. Until it decides to make a break through one of the sides, we will continue monitoring the price action within that range and take a somewhat neutral position.

This week, EUR/USD found its resistance at around the 1.1790 mark and then moved lower to break the 1.1690 level yesterday. Although within the range, the pair looks weak and this could lead to a further drop towards the 1.1600 area, a break of which could open the path towards the lower side of the range at the 1.1510 hurdle. This where the rate could stall, as the bulls and the bears may start battling it out over who takes control there.

The RSI is below 50, and although it is pointing slightly up, it remains on a downtrend structure. The MACD has turned negative, as it dropped below the zero line and its trigger line. Both indicators detect negative momentum and support the case for the rate to continue drifting lower for a while more.

Alternatively, a move back above the 1.1690 hurdle could open the door to the 1.1790 level, which was the highest point this week, for a possible test. If the bulls remain in the driver’s seat, then a break of that level could lead to a test of the upper side of the range at 1.1840. This is also a point, where the bulls and the bears could start fighting over the faith of EUR/USD.

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As for the Rest of Today’s Events

We get inflation data for June from Germany and Sweden as well. From Germany, we get the final prints for the month, which, as usual, are expected to confirm the preliminary estimates.

As for Sweden’s numbers, both the CPI and CPIF rates are expected to have risen to +2.1% yoy and +2.3% yoy, from +1.9% and 2.1% respectively. At its latest meeting, the Riksbank kept rates untouched as was widely expected and maintained the view that slow repo rate rises will be initiated towards the end of the year. However, apart from the usual dissenter, Deputy Governor Ohlsson, who supported raising the repo rate to -0.25%, this time around, we had another member with reservations. Deputy Governor Martin Floden advocated for a repo rate path with an initial increase of interest rates by 25bps in September or October.

Thus, accelerating inflation could spark more speculation that the Bank may act before December, and thereby bring SEK under buying interest. However, we would like to wait for July’s data – and especially the excluding energy CPIF rate – before we start assessing that likelihood, as the July prints will be the last inflation data officials will have in hand ahead of their next meeting, which is scheduled for the 6th of September.

In the US, besides the CPIs, we get initial jobless claims for the week ended on the 6th of July. Expectations are for a decline to 226k from 231k, something that will bring the 4-wk moving average down to 224.25k from 224.50k the previous week.

Overnight, during the Asian morning Friday, we get China’s trade data for June and Japan’s final industrial production for May.

As for the speakers, we have two on the agenda: Minneapolis Fed President Neel Kashkari and Philadelphia Fed President Patrick Harker.



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