Markets traded in a risk-off fashion yesterday, perhaps due to headlines that the US and China struggled this week to overcome some differences, or it could be just cautiousness ahead of the outcome of this round of talks. The New Zealand dollar tumbled overnight after RBNZ’s Deputy Governor said that the Bank’s plans to increase capital requirements for banks could result in a cut to the OCR. As for today, apart from the US-China negotiations, investors may also pay attention to Canada’s retail sales data.
The dollar traded higher against all but two of the other G10 currencies on Thursday. It gained the most against the NZD, AUD and SEK in that order, while the currencies that managed to resist its strength were the safe-havens JPY and CHF.
The strengthening of the safe havens and the weakening of the commodity-linked currencies suggests a risk-averse trading environment as we enter the last day of the US-China trade talks in Washington. Indeed, most EU bourses closed in the negative territory, with the exceptions ending their session fractionally positive or virtually unchanged. All three of the US indices closed negative as well, while today in Asia, Japan’s Nikkei 225 closed 0.18% down, though China's Shanghai Composite was 1.91% up.
The subdued market sentiment may have been owed to headlines that the world’s two largest economies struggled this week to overcome differences in order to address Washington’s demands for changes in the Chinese economy, or it could just be reluctance from investors to add to their risk exposure before the final outcome of this round of talks is known. Another factor still weighing on investors’ morale may have been concerns over a potential escalation between the US and the EU with regards to auto tariffs.
According to the White House, US President Trump will meet with China’s Vice Premier Liu He today. With Trump recently noting that he could extend the March 1st deadline if enough progress is made, market participants will be sitting on the edge of their seats for headlines over whether the US President was left satisfied from this round of talks. If so, risk assets, like equities are likely to regain some upside momentum, but the question is how much of the good news is already priced in. Investors already cheered last week’s progress. Thus, although another round of positive remarks may turn around sentiment, we doubt that the magnitude will be the same as last week. We believe that final signatures are needed before we see a sustained rally in risk assets, something we see unlikely for now. We stick to our guns that something like that is likely to happen at a Trump-Xi Jinping meeting.
The S&P 500 closed yesterday slightly in the red and looking at its cash index on the 4-hour chart, the US index is balancing around its 21 EMA, waiting for the next catalyst, which could trigger either a strong buying or selling activity. The S&P 500 found a bit of support near the 2764 hurdle, from which it rebounded. Or oscillators suggest that there is a negative divergence, which may result in the index sliding lower. But for now, we will stay neutral and wait for a confirmation break before we get comfortable with either of the sides.
A drop below the recently-found support, at 2764, could invite the bears back into action and the S&P 500 could slide further. This is when we will target the 2740 obstacle, marked by the high of February 5th, a break of which might take the index a bit lower, to test the 2729 support zone. This zone held the price from moving lower on February 14th and 15th.
On the upside, as mentioned above, in order to examine higher levels again, we would like to see the S&P 500 pushing back above the 2782 hurdle. This could encourage the buyers to drag the price towards this week’s high, near the 2797 barrier, which if broken could lift the index to its next potential area of resistance, at 2813, marked by the high of December 3rd.
Now back to the other currencies, although weighed on by the broader risk-off trading activity, Kiwi and Aussie were driven by other stories as well. The New Zealand dollar tumbled overnight after RBNZ’s Deputy Governor Geoff Bascand said that the central bank is planning to increase capital requirements for banks over time, which could raise borrowing costs and lead to tighter financial conditions. Something like that may be countered by cutting the RBNZ’s benchmark rate, he added. The Aussie, which, during the early European morning yesterday, felt the heat of reports that China’s northern Dalian port banned coal imports from Australia indefinitely, tried to recover at some point during the day, but failed to enter the positive territory against its US counterpart. The Australian currency rebounded somewhat aided by headlines that the ban does not point to tensions between the two nations, as well as by RBA Governor Lowe’s remarks that this unlikely to have a dramatic effect on the Australian economy.
Moving to the euro, it also underperformed against the dollar, but not much. The currency was perhaps helped somewhat by Eurozone’s overall better-than-expected PMIs for January. The manufacturing index entered the contraction territory for the first time since July 2013, but the services index rose, driving the composite PMI up to 51.4 from 51.0. This was the first rise in the composite index after six consecutive slides, but apparently, it is far from suggesting a rebound in the bloc’s economic activity, especially with the manufacturing print below 50. Combined with the ECB minutes, which showed that market rate expectations are in-line with the Bank’s forward guidance, this allows investors to keep well on the table their bets with regards to no action by the ECB this year.
The pound was also found slightly lower against the greenback. Sterling slid during the European morning following reports that the UK government is unlikely to secure any changes from the EU before next week’s parliamentary debate, pouring cold water on hopes raised by UK finance minister Hammond, who said that a “meaningful vote” could take place as early as next week. That said, the currency recovered some of those losses after a new report citing EU diplomats noted that the UK and the EU are moving towards “a parallel declaration” on the Irish backstop. Any official text on this is unlikely to come ahead of the 28th of February, which supports the notion of no meaningful vote next week. As PM May promised, with no new deal on the table, UK lawmakers will probably have the opportunity to vote on proposed amendments on February 27th. Approving amendments that require the government to request an Article 50 extension could ease concerns over a disorderly Brexit, and thereby the pound could gain.
The New Zealand dollar got hit during today’s Asian trading session, where the currency depreciated against all its major counterparts. Looking at the 4-hour chart of NZD/CAD, we can see that it shifted strongly to the downside and is running the week heavily in the negative territory. NZD/CAD started off the week near the 0.9120 level, but from there the rate kept sliding lower, with small corrections higher along the way. We also note that NZD/CAD is stuck within a wide range between the 0.8910 and 0.9120 obstacles, which we will monitor closely. From the short-term perspective, the pair may continue sliding further, at least towards the lower bound of the aforementioned range, but overall, we will remain neutral and wait for NZD/CAD to break one of the above-mentioned key levels, before a clear directional move could be established.
NZD/CAD may travel a bit lower to test the 0.8940 hurdle, marked by the low of February 8th, which may provide some initial support. The pair might bounce back, but if it fails to drive above the 0.8985 obstacle, this may result in another leg of selling, which could force the rate to fall below the 0.8940 hurdle. Such a move could bring the pair towards the lower bound of the previously-mentioned range, at 0.8910.
Alternatively, if NZD/CAD travels back above the 0.9010 barrier, this might help the bulls to feel more confident and lift the rate to the 0.9035 obstacle, a break of which could invite even more buyers into the game. Then, we might see the pair pushing towards the 0.9065 level, which is the inside swing high of February 20th and also marks the high of February 6th.
During the European morning, we get the final CPIs for January from the Eurozone. As usual, the final rates are expected to confirm the initial estimates, namely that the headline CPI slowed to +1.4% yoy from +1.6%, and that the core rate ticked up to +1.1% yoy.
From Canada, we have retail sales for December. Headline sales are anticipated to have stagnated after falling 0.9% mom in November, while core sales are forecast to have fallen again, but at a somewhat slower pace (-0.5% mom from -0.6%). When they last met, BoC policymakers kept the door open for further rate increased and noted that growth has been running close to its potential rate. However, latest GDP data showed that economic activity contracted in November, dragging the yoy rate down to +1.7% from +2.2%. What’s more, although inflation for December came in higher than anticipated, and January’s employment data were decent overall, manufacturing sales slumped for the second consecutive month. Yesterday, BoC Governor Poloz repeated that the Bank’s plan is for rates to move up towards neutral over time, but he also noted that the timing is “highly uncertain”. Thus, another weak retail sales report may prompt market participants to push further back their expectations with regards to the next BoC hike and thereby, hurt the Loonie.
As for the speakers, we have eight on the agenda: ECB President Mario Draghi, Fed Vice Chair Richard Clarida, Atlanta Fed President Raphael Bostic, New York Fed President John Williams, St. Louis Fed President James Bullard, Philadelphia Fed President Patrick Harker, and Fed Board Governor Randal Quarles.
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