The Canadian dollar was the big winner among the G10 currencies yesterday as Canada and the US managed to secure a deal on NAFTA. The euro continued to trade on the back foot on concerns over the Italian budget, while the pound spiked up following reports that the UK government is ready to compromise on the Irish border issue.
The US dollar traded higher or unchanged against the other G10 currencies on Monday. It gained versus SEK, CHF and EUR, while it underperformed against CAD and AUD. The greenback traded virtually unchanged against GBP, JPY, NZD and NOK.
Although it gained overall against the US currency, the Australian dollar reacted very little to the RBA decision overnight. The Bank kept interest rates unchanged at +1.50% as was widely expected, while it made no significant changes to the accompanying decision, in order to warrant a shift in the Bank's future plans. According to its latest Statement on Monetary Policy, the Bank is expected to raise interest rates around the end of next year.
The main gainer was the Canadian dollar, which continued its surge following late-Sunday headlines that Canada and the US have reached common ground over NAFTA. The deal opens the way for a trilateral accord between the two nations and Mexico to be signed by late November, which will be renamed to USMCA (United States - Mexico - Canada Agreement).
Even though not clear by the performance of the currency market, the broader market sentiment was also lifted by the news, something evident by the performance of the equity markets. Most European indices ended their session in the green, with the exceptions being UK’s FTSE 100 and Italy’s FTSE MIB, which remained under pressure due to concerns over the Italian budget. In the US, both the Dow Jones and the S&P 500 closed positive, while Nasdaq ended fractionally down.
Back to the Loonie, with the uncertainty surrounding NAFTA now out of the way, we expect CAD-traders to turn their attention back to economic data and BoC’s future plans. Recent economic releases have been encouraging overall, keeping the door wide open for a BoC rate increase at the Bank’s upcoming gathering, scheduled for the 24th of October. What’s more, the fact that Canada eventually agreed on trade with the US may have raised bets that the pace of future hikes could pick up more than previously expected, something that could keep the Canadian currency supported for a while more.
After the Canadian dollar started picking up strength in the second half of last week, we saw a heavy slide south in USD/CAD, where buyers kept getting crushed even going into this Monday. Yesterday, the bears managed to overcome the key support zone of 1.2885, a move that confirmed a forthcoming lower low, and turned the near-term outlook to more bearish. However, at the moment, we are seeing a bit of consolidation on the 4-hour chart that could potentially lead to a bit of retracement to the upside, before entering the second leg of selling.
The pair is currently stuck between the 1.2785 and 1.2830 levels. If USD/CAD breaks through the 1.2830 zone, we could still class this as a correction, as the upside could be limited due to a good potential resistance area near the 1.2885 zone, marked by the lows of the 20th of September and the 28th of October. If that area continues to hold, the bears could see this as a good opportunity and push USD/CAD back down towards the recent lows. A break below the 1.2785 hurdle could confirm the case for the pair to continue traveling lower towards the next support zone at the 1.2740 barrier, which held the rate from falling lower throughout the whole month of May. If that doesn’t stop the bears, a further drop to the 1.2675 level, marked by the high of the 19th of April, could become a reality.
The RSI is below 50 but has bounced off from its 20 area and is currently pointing higher. The MACD, although still negative, shows signs of bottoming and that it could cross above its trigger line soon. Both indicators are somewhat supporting the idea of an upside correction before the next negative leg.
If the aforementioned resistance area at 1.2885 would not hold, this could set the stage for even a larger correction to the upside. A good confirmation of a further upside move could be a close above the 1.2910 obstacle, which was the low of the 24th of September. This could invite more bulls to the table and open the path towards the 1.2975 level, marked near the high of the 25th of September. If the rate acceleration continues, USD/CAD could easily make its way higher towards the 1.3015 hurdle, or even test the short-term downside resistance line taken from the peak of the 6th of September.
The euro traded lower against most of its G10 peers yesterday. It gained only against SEK, while it traded virtually unchanged against CHF. The main gainers were CAD, AUD and GBP in that order.
Concerns over Italy’s budget continued to weigh on the common currency. Yesterday, the European Economic Commissioner Pierre Moscovici said that Italy’s plans were deviating from EU rules and that the Commission needs to assess how the deviation can be corrected. Italy’s Deputy PM Luigi Di Maio responded by saying that EU officials are “creating terrorism on the markets” with their comments over the budget. What’s more, the Italian newspaper “La Repubblica” reported that the EU Commission was set to reject Italy’s plans and open a procedure against its public accounts in February.
Italy is set to submit a draft proposal to the European Commission by the middle of the month, and the big question remains whether EU officials will accept or reject it, and what will Rome’s reaction be if the proposal gets rejected. On top of that, there is a big risk for rating agencies to downgrade the nation’s debt. In our view, all this uncertainty could keep Italian assets and the euro under selling interest, at least in the short run.
The pound ended the day higher against the euro, but virtually unchanged against its US counterpart. The British currency spiked yesterday following a report that PM Theresa May was ready to compromise on the Irish border matter in order to get closer to a Brexit deal with the EU. However, sterling was quick to give back those gains to end the day virtually unchanged against its US counterpart.
Focus for pound traders remains on the Conservative Party Conference, which concludes tomorrow. Ex Foreign Secretary Boris Johnson is scheduled to speak today, while PM Theresa May will address the conference tomorrow.
The euro continues to underperform against the British pound. This is clearly shown on the EUR/GBP chart, where the pair managed to wipe out all the gains it made during the strong bullish move that we saw on the 21st of September. Also, yesterday, EUR/GBP closed below the medium-term upside support line drawn from the low of 17th of April. Certainly, this does add a negative spin on the near-term outlook, but to consider further declines, the pair has to break a key support zone, which will be discussed below. For now, we remain cautiously bearish and wait for a confirmation break.
As mentioned above, for us to get comfortable with the downside, we would need to see a close below the 0.8855 area, which acted as good support for EUR/GBP on the 20th of September and the 2nd of August. This way, the pair could start forming lower lows and pull itself down to test the 0.8820 support zone, marked by the low of the 16th of July. If that doesn’t stop the fall, it could clear up the path towards the 0.8800 hurdle, which held the rate from falling lower on the 4th of July.
For us to start examining the upside again, at least in the near-term, we would need to see EUR/GBP getting back above the aforementioned upside support line and closing above the 0.8915 level, marked by the high of the 1st of October. The move could attract more bulls, who in their case, could lift the pair towards the 0.8945 resistance zone, a break of which could set the stage for a test of the 0.8975 area, marked by the high of the 25th of September.
Besides the UK Conservative Party Conference, the economic agenda appears relatively light today. The only release worth mentioning is the UK construction PMI for September, which is expected to have declined to 52.5 from 52.9. On Monday, the manufacturing index rose to 53.8 from 53.0, beating expectations of a slide to 52.6, but the pound remained indifferent at the time of the release. We believe that investors are likely to focus more on the services PMI, due out on Wednesday, in order to get a clearer picture on how the economy may have performed during the last month of Q3, as the service sector accounts for around 80% of the UK GDP.
As for the speakers, Fed Chair Jerome Powell is scheduled to step up to the rostrum. However, given that we’ve heard from him at the press conference following last week’s FOMC decision, we don’t expect any significant new information with regards to the Fed’s future policy plans.
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