Risk appetite eased yesterday, with global stock indices giving back some of their recent gains as investors may have turned cautious ahead of today’s Fed minutes as well as the Jackson Hole annual economic symposium, which begins tomorrow. In the FX sphere, the pound was the main gainer, coming under buying interest after German Chancellor Angela Merkel said that the EU would think “practical solutions” on the Irish backstop.
The dollar traded lower against most of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It underperformed the most against GBP, CHF and JPY in that order, while it eked out some gains versus NZD and NOK. The greenback was found virtually unchanged against SEK.
The slight strength of the safe-havens CHF and JPY suggests that the latest improvement in risk appetite due to global stimulus hopes came to a halt yesterday. Indeed, major EU and US indices traded in the red yesterday, with the subdued sentiment rolling into the Asian morning today. Although China’s Shanghai Composite ended its session virtually unchanged, Japan’s Nikkei 225 slid 0.28%.
Yesterday, we said that as we get closer to the Jackson Hole annual economic symposium, we would take a cautious approach with regards to further gains in equity indices. It appears that investors decided to turn cautious as well, liquidating some of their recent long positions as they may prefer to wait for updated hints and clues with regards to monetary policy. Another development that may have weighted slightly, at least on the EU markets, may have been Italy’s PM Conte’s resignation. Italy’s FTSE MIB slid 1.1% and the euro remained indifferent, a market reaction suggesting that the outcome may have been mostly priced in. President Mattarella will hold consultations with other parties today and tomorrow to see whether a new government could be formed. Otherwise, he will have to dissolve parliament and call for elections.
Today, market participants may decide to pay some attention to the minutes of the latest FOMC meeting, where the Committee cut rates by 25bps. At the press conference following the decision, Chair Powell said that this was not the beginning of a long series of cuts, rather a mid-cycle adjustment in policy. Market participants may want to get more insights on the Fed’s decision, but whatever the dollar’s reaction is, if there is at all, we would expect it to be short-lived and limited. Bearing in mind that just the day after the meeting, Trump threatened China with fresh tariffs, leading to a new round of tensions between the world’s two largest economies, we would treat the minutes as outdated. We prefer to pay more attention to Powell’s speech at Jackson Hole on Friday. Following the latest developments in the US-China saga, but also last week’s better-than-expected inflation data for July, we are eager to find out whether Powell’s view on monetary policy has changed or not.
USD/CAD continues to form higher lows, while trading above a short-term upside support line taken from the low of July 18th. But we can see that the pair is struggling to overcome its key resistance barrier at 1.3345. We need to see a clear break through that barrier before we could get comfortable with further upside.
If the rate accelerates and pushes above the 1.3345 barrier, this could open the path to some higher areas. We will then examine a possible test of the 1.3393 hurdle, which is the inside swing low of June 17th. The pair might stall there for a bit, or even correct back down somewhat. But as long as it stays above the 1.3345 zone, we will stay bullish at least in the short run. If the buyers are able to lift the rate back up again and bypass the 1.3393 resistance area, this might open the door to the 1.3432 level, marked by the high of June 18th.
Alternatively, we will start considering the downside, at least in the short run, only if we see a break of the aforementioned upside support line and a rate-drop below the 1.3250 hurdle, which is near Monday’s low. This way, the pair may travel all the way to the 1.3210 obstacle, marked by the low of August 14th. If the selling doesn’t stop there, a further slide below that obstacle may open the door to the 1.3185 level, which held USD/CAD from falling on August 1st, 5th and 13th.
The pound was found as the main G10 gainer this morning and responsible for that was Germany’s Chancellor Angela Merkel. Yesterday, during the European afternoon, Merkel said that the EU would think “practical solutions” on the Irish backstop, raising some hopes that the EU and the UK could eventually work things out in order to avoid a disorderly exit on October 31st. However, she also noted that the Withdrawal Agreement would not be re-opened and that she was referring to the political declaration of the EU-UK future relationship.
As for our view, despite Merkel’s remarks on the backstop, we don’t see anything suggesting a decent fundamental change on the Brexit sequel. UK PM Boris Johnson has been repeatedly calling for the backstop to be removed from the accord in order to sit on the negotiating table, while the EU stays adamant that the agreement is not negotiable. We don’t believe that any changes in the political declaration would be enough for the UK PM, who remains willing to take the UK out of the EU by October 31st, with or without a deal. He will meet with Merkel today afternoon in Berlin, but if she reiterates the same view, we don’t expect the meeting to be a game changer. Johnson will travel to Paris tomorrow for talks with President Macron ahead of the G7 summit this weekend.
As it stands now, we think that the default option remains a no-deal Brexit and thus, we would treat the pound’s recent recovery as a corrective move of its longer-term downtrend. As long as both sides hold on to their red lines, we will stay bearish on GBP. We believe that Cable could soon turn down again and perhaps get back close to the psychological 1.2000 barrier, especially if Fed Chief Powell does not sound as dovish as the market wants on Friday.
After last week’s rebound from around the 1.1674 zone, GBP/CHF is trying to recover some of its losses by slowly pushing to the upside again. This may be somewhat of a good sign for the bulls, but let’s not forget that the pair is still trading below a medium-term tentative downside resistance line taken from the highest point of May. If the rate makes its way towards that line but fails to break above it, we will class that move higher as a temporary correction before another leg of selling. This is why for now, we will take a cautiously-bearish approach.
As mentioned above, a small push higher and a break of the 1.1935 barrier, which marks yesterday’s high, could send the pair towards the aforementioned downside line for a quick test. If the bulls are not able to bring the rate above that line, the bears could take advantage of the higher rate and jump back into the action. This may force GBP/CHF to slide back below the 1.1935 barrier, a break of which may clear the path to the 1.1818 obstacle, marked by yesterday’s low. At first, we could see the rate stalling around there, but if the bears are still feeling quite comfortable, they might easily push the pair towards the 1.1728 area, which is the low of August 15th.
On the other hand, if the above-discussed downside line breaks and in addition to that the pair travels above both, the 1.2018 barrier and the 200 EMA on the 4-hour chart, this could attract even more buyers into the game and we could see GBP/CHF moving towards the 1.2126 zone, which is the high of July 31st. The pair could receive a hold-up around there, but if the buying is still strong, a break of that zone could lead the rate to the 1.2224 hurdle, marked by the low of July 23rd.
Apart from the Fed minutes, in the US, we also have the existing home sales for July and the EIA (Energy Information Administration) weekly report on crude oil inventories. Existing home sales are expected to have rebounded 2.5% mom after sliding 1.7% in June, while the EIA report is forecast to show a 1.889mn barrels slide, after a 1.580mn increase the week before. That said, bearing in mind that the API report revealed a 3.500mn inventory build, we see the risks surrounding the EIA forecast as tilted to the upside.
From Canada, we get inflation data for July. The headline CPI rate is expected to have declined to +1.7% yoy from +2.0%, while no forecast is currently available for the core rate. Both the trimmed and median rates are also forecast to have slid somewhat. At their latest meeting, BoC policymakers kept interest rates unchanged and noted that the degree of accommodation provided by the current rate remains appropriate, staying among the very few major central banks that have not turned their eyes to the cut button, although they appeared concerned with regards to the US-China trade conflict.
However, the last employment report disappointed, with the unemployment rate rising to 5.7% in July from 5.5% in June, and the employment change pointing to a 24.2k job loss. So, combined with that, a slide in the headline inflation rate below the midpoint of the BoC’s target range, combined with declining trimmed and median rates, could raise speculation that Canadian policymakers will follow the footsteps of other major central banks and start considering the idea of lower interest rates.
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