The Canadian dollar was yesterday’s main loser, tumbling after the BoC altered its language on interest rates, stressing the uncertainty surrounding the timing of future hikes. As for today, the central bank torch will be passed to the ECB. Investors may be eager to see whether this Bank will also make changes to its rate guidance and whether there will be any announcement on new TLTROs.
The US dollar corrected lower against all but one of the other G10 currencies yesterday. It gained only against CAD, which tumbled after the BoC rate decision. The currencies that gained the most against their US counterpart were GBP, NZD and SEK in that order.
As we already noted, the big loser was the Loonie and responsible for that was the Bank of Canada. The Bank kept interest rates unchanged at +1.75% as was widely anticipated, but the accompanying statement was much more dovish than the previous one. Officials noted that recent data suggest that the slowdown in the global economy has been more pronounced and widespread than the Bank had anticipated in January, and that the domestic economy will be weaker than expected in the first half of 2019. They also repeated that CPI inflation is expected to be slightly below 2% throughout most of the year.
Having said all that though, the most important change was that policymakers altered their interest-rate guidance. They removed the part saying that “the policy interest rate will need to rise over time into a neutral range to achieve the inflation target” and instead noted that “the outlook continues to warrant a policy interest rate that is below its neutral range”. They also highlighted the uncertainty surrounding the timing of future rate increases and said that they will be closely watching developments in household spending, oil markets, and global trade policy.
Yesterday, we said that a dovish statement by itself may not be enough to push the Loonie off the cliff. After all, the currency was already in a sliding mode ahead of the decision, which suggested that traders were already positioned for a dovish outcome. We said that a change in the interest-rate guidance was needed for further declines, and this was the case. Now the BoC has joined the chorus of the Banks which are expected to stand pat throughout the year, two of which are the Fed and the ECB, with the latter deciding on monetary policy today. However, bearing in mind that the market has already digested the case of a “patient” stance by the Fed and the ECB, the BoC switch may continue weighing on the Canadian dollar in the foreseeable future, at least against the greenback and the euro. Given the ECB meeting today, we will remain somewhat more cautious on EUR/CAD, but with US data recently easing fears with regards to the health of the US economy, we believe that USD/CAD has some more room to the to the upside.
EUR/CAD got a strong boost, yesterday, after the BoC rate decision. The pair soared, reaching the 1.5225 barrier, which held the rate from accelerating further. Given that the Canadian dollar is currently on the weaker side and the euro is somewhat neutral, which results in higher highs and higher lows on the 4-hour chart of EUR/CAD, we expect the pair to climb a little bit more to the upside, at least in the short run.
Before pushing up again, the pair may come down to test some of its key support areas, one of which could be around the 1.5145 hurdle. If the pair fails to drive below it, this may be a good signal for the bulls to jump in again and push the pair back up again. We will then target the recent high again, at 1.5225, a break of which could push the rate further north and test the 1.5265 barrier, marked by the peak of January 11th.
If suddenly the selling momentum picks up, this could lead to a re-test of the 1.5120 obstacle, marked near the highs of March 1st and 5th. The area may hold EUR/CAD temporarily, until the bulls and the bears decide who takes control from there onwards. But if there are still more sellers at that level, then we may see a further slide towards the support area between the 1.5058 and 1.5050 levels. The last-mentioned level acted as a strong resistance on February 11th, 14th, 26th and 28th. A break below that area could put the 1.5010 zone back on the radar.
The euro gained somewhat against the greenback but remained on the back foot against most of the other major currencies. It outperformed the wounded CAD, while it traded virtually unchanged against JPY and CHF.
Today, the central bank torch will be passed to the ECB. At the January meeting, the Bank made no changes to interest rates and the accompanying statement, but at the press conference following the decision, ECB President Mario Draghi noted that the risks surrounding the bloc’s economic outlook have “moved to the downside”. He also said that the fact that the market places the first hike in 2020 shows that investors understood the Bank’s reaction function, something that was mentioned in the minutes as well. With regards to whether they have started looking into a new round of TLTROs (Targeted Long-Term Refinancing Operations), which are cheap loans to banks, Draghi said that several policymakers raised the issue, but no decision was taken.
Since then, economic data continued to suggest a weak economic outlook. Headline inflation ticked up to +1.5% yoy in February, but the core CPI rate slid back to +1.0% yoy from +1.1%, which is well below the Bank’s objective of “below, but close to 2%”. The composite PMI rose to 51.9 in February from 51.0 in January, but this is the first rise after six consecutive slides, and in our view, it is far from suggesting that the bloc’s economic activity has turned the corner. So, having all that in mind, investors may will be looking to see whether the Bank will push back its interest-rate forward guidance and whether it will introduce a new round of TLTROs.
As for our view, although officials could alter their forward guidance at this meeting given the market consensus for a hike in 2020, we believe that they may prefer to wait for a while more before they do that. After all the “at least through summer of 2019” notion is an open ended one, which, in our view, means that interest rates could start rising in September the earliest, but also well thereafter. With regards to the TLTROs, bearing in mind that the latest minutes suggested that decisions in this respect shouldn’t be taken “too hastily”, we believe that officials could also wait a bit longer before taking such a step. However, we may get some hints on whether they consider acting in the upcoming months.
As for the euro, strong hints that a new round of TLTROs is looming at one of the upcoming gatherings may weigh on the currency, but not much. Given the chatter around the matter, something like that is unlikely to come as a surprise for market participants. That said, the euro could tumble if that clues are accompanied by a push-back in the interest-rate guidance. On the other hand, for the common currency to gain, at least today, Draghi and co. may need to stick to the January script, making very little changes to their language. The meeting will be also accompanied with new staff macroeconomic projections, where we expect downward revisions in both GDP and inflation forecasts, but we don’t expect this alone to hurt the euro much, as it is something already anticipated by market participants, we believe.
Overall, EUR/GBP is still on a down-move, trading below a short-term downside resistance line taken from the high of January 2nd. But after finding support near the 0.8530 hurdle, from which the pair bounced, EUR/GBP started moving sideways. Because the rate is still below that downside resistance line, we believe that this raises concerns over the pair’s upside potential. That said, before we start looking at lower levels, we would like to see a confirmation break through one of our key support areas, hence why we will stay cautiously-bearish for now.
A drop be low the 0.8575 hurdle may invite more sellers into the game, as the chances for EUR/GBP to travel lower would increase. This is when we will aim for the above-mentioned support area, at 0.8530, which marks the low of February 27th. If the bears continue to dictate the rules, then the rate could move slightly further down, to test the 0.8510 obstacle, which is the high of May 5th, 2017.
Alternatively, because EUR/GBP had distanced itself from the previously-discussed downside resistance line, the pair could have a chance to move towards it, if the rate gets above the 0.8616 barrier, marked by the low of January 25th. This may temporarily attract some bulls to the field and allow them to push the pair higher, towards the 0.8635 obstacle. A break of that level could open the door to the 0.8672 barrier, which acted as good support between February 19th and 24th. Now it could take the role of a resistance zone, which is also not far from the aforementioned downside line.
From the Eurozone, apart from the ECB decision, we also get the final GDP data for Q4, which are expected to confirm the second estimate of +0.2% qoq.
In the US, the Unit Labor Costs index for Q4 is anticipated to have accelerated to +1.6% qoq from +1.2%, while initial jobless claims for the week ended on March 1st are expected to come in at 225k, the same as the week before. This would drive the 4-week moving average down to 226.5k from 229k.
As for tonight, during the Asian morning Friday, Japan’s final GDP for Q4 and China’s trade data for February are coming out. Japan’s GDP is expected to be revised up to +0.4% qoq from +0.3%, while China’s trade surplus is forecast to have declined to USD 26.4bn from USD 39.2bn. Exports are anticipated to have declined 4.8% yoy after rising 9.1% in January, while imports are expected to have fallen again (-1.4% yoy from -1.5%).
Besides ECB President Draghi, who will hold a press conference after the ECB rate decision, we have two more speakers on today’s agenda: Fed Board Governor Lael Brainard and BoC Deputy Governor Lynn Patterson.
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