Global equity indices traded in the green yesterday as easing tension in Hong Kong, diminishing political worries in Italy, and British MP’s approval of a bill to delay Brexit have encouraged investors to increase their risk exposure. They got an extra reason to do so overnight, following reports that the US and China will hold the next round of trade talks in early October. The pound continued to rally on reduced concerns over a no-deal Brexit, while the Loonie gained as the BoC maintained its neutral stance.
The dollar traded lower against all but one of the other G10 currencies on Wednesday and during the Asian morning Thursday. It underperformed the most against GBP, NOK CAD and SEK in that order, while it managed to eke out some gains only against JPY.
Although not crystal clear by the performance in the FX sphere, the weakening of the safe-haven yen suggests that risk appetite was sanguine yesterday. Indeed, European equities traded in the green after Hong Kong leader Carrie Lam announced that she will withdraw the extradition bill that triggered months of protests, as well as after Italian Prime Minister Giuseppe Conte announced his new cabinet, thereby avoiding the risk of an early election. The positive investor morale rolled into the US session as well and even got an extra boost today during the Asian session after China’s Commerce Ministry reported that a new round of negotiations with the US will be held in early October. A minister-level meeting will take place in Washington, while lower-level teams will start preparations from this month.
As for our view, we believe that anything suggesting that the world’s two largest economies are willing to return to the negotiating table and try to find common ground, may continue being a supportive factor for risk assets. That said, hopes that a deal is getting closer have been dashed many times in the past and thus, unless we see handshakes and signatures, we are reluctant to trust a long-lasting trend. We cannot rule out things falling apart again just after the new round of talks is over.
Back to the currencies, the pound continued trading in a rally mode yesterday, outperforming all of its major counterparts. It’s been another bright day for GBP-bulls, who decided to extend Tuesday’s rally after Labour Leader Jeremy Corbyn said that, although he still wants a general election, he will not support one until the threat of a no-deal Brexit has been taken off the table. Indeed, after passing a bill that would force the government to request a new Brexit delay, at least until January 31st, lawmakers rejected Johnson's motion for general elections just two weeks ahead of the current exit deadline.
All this have made GBP traders a bit more optimistic that a disorderly divorce can be averted, but our view remains the same as yesterday: A no-deal Brexit on October 31st is not off the table yet. First, we need to see whether the bill will get a legislative form, meaning it has to pass the House of Lords as well. This could happen tomorrow or on Monday. Then, focus will turn on whether we will get new elections and whether this will result a new government. All these could continue adding fuel to the pound, but let’s not forget that for a new delay to take flesh, the EU has to agree as well. For that to have any chances of happening, the UK would have to present a viable and convincing plan on how it intends to act during the requested period.
EUR/GBP continues to drift lower, while trading below a short-term tentative downside resistance line taken from the high of August 12th. Yesterday, we saw the rate falling all the way to the psychological 0.9000 area, which keeps on holding the pair from moving lower. Given this week’s strong decline, there could be a small correction back up a bit, but as long as EUR/GBP stays below the tentative downside line, we remain bearish, at least in the short run.
The current rebound from 0.9000 might lift the rate a bit more up, where it may test the 0.9051 barrier, marked by an intraday swing high of September 4th. If the pair gets a hold-up around there, we might see another attempt by the bears to take control. If they succeed in doing that, EUR/GBP could slide again, possibly all the way back to the psychological 0.9000 obstacle, a break of which may open the door for a test of the 0.8969 zone. That zone marks the high of July 24th.
On the other hand, in order to examine higher levels again, at least in the short run, we will wait for a clear break of the aforementioned downside line and a rate-push above the 0.9110 area, marked near the highs of August 26th and September 2nd. This is when the pair may attract more buying-attention and could get lifted to the 0.9148 hurdle, or even to the 0.9162 zone, marked by the high of August 21st. If the buying doesn’t end there, the next potential resistance level might be seen around 0.9184, which is the high of August 20th.
We also had a BoC monetary policy decision yesterday. As it was widely anticipated, the Bank decided to keep interest rates unchanged at 1.75%. In the statement accompanying the decision, officials noted that the US-China trade conflict has escalated, weighing more heavily on global economic momentum than the Bank has projected in July. They also said that some of the strength in Canadian growth for Q2 is expected to be temporary, and that the stronger-than-expected CPI for July was also largely due to temporary factors. Nevertheless, they maintained their neutral stance with regard to interest rates, reiterating that the current degree of monetary policy stimulus remains appropriate.
The Canadian dollar rallied at the time of the release, perhaps as heading into the meeting there was some speculation that the escalating US-China tensions will prompt policymakers to lean to the dovish side. Remember that yesterday morning, the probability for a BoC cut by year end was standing at 73%. Following the meeting that percentage fell to 68%. Moving ahead, the fact that the BoC remained among the very few major central banks that have not turned their eyes to the cut button yet, combined with the latest optimism surrounding the new round of trade talks between the US and China, may continue benefiting the Loonie, at least for a while more, especially against currencies the central banks of which are expected to ease, or continue easing, in the months to come.
USD/CAD took a strong hit yesterday, after the BoC appeared less dovish than expected. This helped boost the Canadian dollar against most of its major counterparts. From the technical side, we can see that USD/CAD has broken below, not only the lower side of the range, at 1.3250, but also fell below the 1.3225 hurdle, which is the low of August 27th. Given the strong selling we saw yesterday, there is a possibility of seeing some more downside, at least in the short run. This idea is also supported by our oscillators, the RSI and the MACD. The RSI is currently below 50 and the MACD is pointing lower, while sitting below zero and its trigger line. This is why for now, we will stay somewhat bearish.
Given that the rate is already below the 1.3225 hurdle, this creates and opportunity for the bears to push the pair further south, possibly aiming for the 1.3185 zone, marked by the low of August 13th. USD/CAD may get a hold-up around there, or even correct back up from that area. That said, if the pair struggles to get back above the 1.3225 barrier, the sellers could take advantage of the higher rate and bring it back down again. Such a move might force USD/CAD to fall below the 1.3185 area and if so, the next possible support level could be around 1.3144, marked by an intraday swing high of July 31st.
Alternatively, if the pair travels back above the 1.3250 area, this would place the rate back inside the range, which would make us neutral again. There could be a possibility to see a slight move higher within that range, especially if USD/CAD climbs above the 200 EMA on the 4-hour chart. We will then examine the possibility of seeing a test of the 1.3276 obstacle, a break of which could send the pair to the 1.3312 level, marked by the inside swing low of September 2nd.
Today, we have another central bank deciding on monetary policy: The Riksbank. At its latest meeting, in early July, the world’s oldest central bank decided to keep interest rates unchanged at -0.25%, and maintained the view that the repo rate “will be increased again towards the end of the year or at the beginning of next year.”
Latest CPI data showed that both the CPI and CPIF rates slowed less than expected. That said, we prefer to focus more on the core CPIF rate, which pulled back to +1.7% yoy from +1.9%. What’s more, GDP for Q2 slowed to +1.4% yoy from +2.1%, which is below the Bank’s latest projection for the year. Therefore, the aforementioned softness in data, combined with the fact that the ECB officially opened the door for a stimulus package to be introduced at its next meeting, may prompt Swedish policymakers to appear more dovish than in July, perhaps by pushing back their forward guidance and taking off the table the “end of the year” part.
In the US, we get the ADP employment report for August. Expectations are for the private sector to have gained 148k jobs, slightly less than July’s 156k. This could raise speculation that the NFP print, due out on Friday, may also come in slightly below its July number of 164k. That said, we repeat once again that, even though the ADP is the only major gauge we have for the non-farm payrolls, the correlation between the two time-series at the time of the release (no revisions are considered) has been low in recent years. Taking into account data from January 2011, that correlation now stands at 0.45%. The final Markit services and composite PMIs for August, the ISM non-manufacturing index for the month, and the initial jobless claims for the week ended on August 30th are also coming out.
With regards to the energy market, we have the EIA (Energy Information Administration) weekly report on crude oil inventories. Expectations are for a 0.484mn barrels increase after a 2.063mn slide the week before. Yesterday, the API report revealed a 0.401mn inventory build, supporting the case for the EIA to publish a similar print.
As for the speakers, we have two on today’s agenda: ECB Vice President Luis de Guindos and BoE MPC member Silvana Tenreyro.
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