Markets Switch to Risk-off Ahead of G7 Summit
The dollar traded mixed against the other G10 currencies on Thursday. It gained against the commodity currencies, AUD, CAD and NZD, while it underperformed against the safe havens. The greenback ended the day virtually unchanged against EUR, GBP, NOK and SEK.
The pattern suggests a shift to risk-off. Perhaps investors have started to price in the uncertainty surrounding the two-day G7 summit in Canada, which starts today, where trade developments are likely to take the front seat.
Rhetoric began to escalate ahead of the summit, when French President Macron tweeted that the US President may not mind being isolated, but neither the other nations mind signing a 6-country agreement. Overnight, US President Trump used his own Twitter account to fire back: “Please tell Prime Minister Trudeau and President Macron that they are charging the U.S. massive tariffs and create non-monetary barriers”. In another tweet, he attacked Canada’s PM Trudeau, saying that he is being “so ignorant”.
In our view, all the rhetoric may have been interpreted by the markets as an omen for a clash at the summit, where other leaders are likely to pressure the US President to lift tariffs. With the only major release on the economic agenda being Canada’s employment report (see below), we expect most of the market attention to fall to comments or statements coming from the G7 gathering. As for the currency market, we will closely monitor the currency pairs which consist of a commodity currency and a safe haven, like AUD/JPY, CAD/JPY, AUD/CHF etc. In case of escalating tensions at the summit, we expect these “risk gauges” to tumble notably.
AUD/JPY – Technical Outlook
From around mid-March and up until now, AUD/JPY has been trading within a slightly rising channel, but with violent ups and downs, something that reveals traders’ indecision to establish a clear trending path.
After hitting the upper bound of the aforementioned channel yesterday, the pair has started to tumble, so we will stick to the downside scenario for the time being. AUD/JPY is currently testing the 83.10 mark, which is acting as a good level of support. A break below that mark could trigger further selling and the pair could end up testing the 82.80 area. If that area is not able to withhold the rate from dropping lower, then this could become a real feast for the bears, whose main target in the longer-term could be the lower bound of the channel.
It looks like that the RSI and the MACD are also in favour of the downside scenario. The RSI is below 50 and pointing lower. The MACD is also on a downslope, targeting its 0 mark, and the bars are way below the trigger line. All this could be interpreted as strong sign of weakness.
On the upside, a move back above the 83.38 level and then a test of the 83.77 zone, could be seen as a sign that the bulls are not yet ready to give up without a fight. A break of the 83.77 to the upside could interest more bulls to join in and drive the pair towards the 84.25 initially, and then maybe even to test the upper bound of the previously mentioned channel.
Will Canada’s Jobs Data Strengthen the Case for a July BoC Hike?
Besides the G7 summit, CAD-traders are likely to also focus on Canada’s employment report for May, due out later in the day. Expectations are for the unemployment rate to have held steady at its four-decade low of 5.8% for the fourth consecutive month, while the net change in employment is expected to show that the economy added 17.5k jobs during the month after losing 1.1k in April. Overall, the forecasts suggest that we are likely to get a decent report, which could further strengthen the case for a July BoC rate hike.
At its latest policy meeting, the Bank laid the ground for such an action and hinted at faster rate increases thereafter. However, immediately the following day, the GDP data showed that the Canadian economy slowed on a qoq annualized basis in Q1, while the US decided to end a two-month exemption and impose steel and aluminum tariffs on imports from Canada (Mexico and the EU as well), with the nation hitting back. What’s more, on Tuesday, Larry Kudlow, the White House’s top economic advisor, said that Trump is seriously considering holding separate bilateral trade talks with Canada and Mexico, which, combined with yesterday’s rhetoric and the uncertainty surrounding the G7 summit, raises concerns over the future of NAFTA.
Thus, although a decent employment report could be encouraging news for BoC policymakers, the developments over the trade landscape make us skeptical with regards to the BoC’s future plans. Even if officials decide to push the hiking button in July, without any signs of ease in the global trade arena, they may decide to delay any forthcoming rate increases.
USD/CAD – Technical Outlook
Looking at the bigger picture, USD/CAD continues to trade within the long-term rising channel, taken from the 8th of September last year. On a smaller scale, the pair is above the upwards moving trendline, drawn from the 17th of April. Thus, all this creates an idea that USD/CAD could try and continue pushing higher over a longer period of time. That said, the 1.3050 barrier continues breaking dreams of possible rallies and keeps forcing the pair to close below it.
Until the aforementioned trendline is broken, we shall stay with the upside scenario. During the early European morning, the pair emerged above the round figure of 1.3000, something that may have opened the way for another test near the 1.3050 area. If this area is not able to withhold the rate from accelerating, then the pair could travel all the way up to the 1.3125 zone, marked by the peak of the 19th of March.
Currently, our oscillators also support the upside idea. The RSI is above 50 and is pointing higher. The MACD is above both its 0 and trigger lines, and also seems to be aiming for a move higher.
Alternatively, a move back down towards the 1.2935 area and eventually a break below it, could open the path to the next key level of support at 1.2895. Slightly below that lies the previously mentioned upwards moving trendline, which could act as the next key area of support. Certainly, if USD/CAD starts breaking it, then this could spook the bulls, who could start abandoning the pair. This could be the time for the bears to shine, who could drive USD/CAD to the 1.2855 mark or even the 1.2825 level.
As for the Rest of Today’s Events
Besides Canada’s jobs data, we get the nation’s housing starts for May and the US Baker Hughes oil rig count.
Tonight, during the Asian morning, we get China’s CPI and PPI data for May. Expectations are for the CPI rate to have risen to +1.9% yoy from 1.8% in April, while the PPI rate is forecast to have ticked up to 3.5% yoy from 3.4%.
As for the speakers, apart from any comments and speeches at the G7 summit, we will get to hear from the ECB Executive Board member Yves Mersch and the EU Chief Brexit negotiator Michel Barnier.
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