Markets continued to trade in a risk-on mode yesterday, helped by news that the US and China are willing to return to the negotiating table and discuss trade. As for today, CAD traders are likely to lock their gaze on Canada’s CPIs for July.
The dollar traded higher or unchanged against all but one of the other G10 currencies. It gained against NOK, CHF, CAD and SEK and JPY in that order, while it remained virtually unchanged against EUR, GBP and AUD. The sole gainer was NZD.
Although the greenback gained against some of its peers and underperformed only against NZD, the pattern suggests that following the news during the Asian morning Thursday that the US and China are willing to resume trade talks, market sentiment remained positive throughout the whole day. Both the safe havens CHF and JPY traded on the back foot against the greenback. With regards to the risk currencies, the Kiwi gained, while the Aussie managed to resist the dollar’s strength and stayed unchanged. The exception was the Loonie, which slightly underperformed (See below).
The risk-on mode is much more evident if we take a look at the equity markets. Major European and US indices were a sea of green yesterday, something that rolled over into the Asian session Friday. The only exception is China’s Shanghai Composite index, which slid around 1.30%.
Gold rebounded from near 1160 to hit resistance near 1180, confirming once again that it has lost its safe-haven status. Recent rounds of uncertainty suggest that market participants prefer to look for safety in the greenback. Perhaps they believe that the US economy has more chances than other economies to withstand a trade war. Therefore, when the dollar strengthens due to safe haven flows, the dollar-denominated yellow metal becomes more expensive for those holding other currencies and thereby demand may be declining. The opposite may be true as well.
Back to the US-China talks, yesterday, the two governments said that they will hold lower-level trade talks, while the Wall Street Journal reported that the talks will take place on the 21st and 22nd of August. Although this appears to be a positive development if we judge by the market reactions, market chatter suggests that some are worried that the talks may not bear fruit, given they involve lower-level officials and that the gap between the two nations is still big. If indeed the talks do not lead to a breakthrough, market sentiment could quickly take a 180-degree spin, with investors abandoning riskier assets in favor of safe havens. This could be the case, especially if we take into account that the talks are planned just before the 23rd of the month, when tariffs on USD 16bn products targeted by each country go into effect.
Gold experienced heavy selling this week, where at one point, it managed to drop around $53 dollars in price. During the early Thursday morning, Gold found good support at the 1160 level, from which it quickly moved back to upside, but still closed the day in the red. Overall, the precious metal is running a 6th straight week of losses. Certainly, there is a possibility to see further rebound this week, but will it be enough to recover the week’s losses?
Overall, we are still bearish given that Gold is trading below its short-term downside resistance line, taken from the peak of the 9th of July. The yellow metal is currently quite distant from that line, so there is a chance for Gold to make a move back up again in order to regain a bit of lost grounds. A good confirmation of a possible retracement could be a break and a close above the 1180 zone, which acted as strong support on the 27th of January as well as good resistance yesterday. A further move higher could open the way towards the 1191 or even the 1205 levels, which recently acted as good support levels. This is where the precious metal could meet the aforementioned short-term downtrend line.
That said, if that line gets broken then we will abandon the bearish case, at least in the short run. Such a break could initially pave the way towards 1218, the break of which could carry more upside extensions, perhaps towards 1235. However, even if we get a short-term trend reversal, the precious metal will still be trading below its medium-term downside resistance line drawn from the peak of the 11th of April. Thus, we would consider a possible short-term uptrend as a corrective phase of the longer-term downtrend.
The Canadian dollar continued to underperform the US currency even after the US Trade Representative Robert Lighthizer said yesterday he hopes there will be a breakthrough in NAFTA talks in the following days. Perhaps the absence of a decent rebound in oil prices after Wednesday’s slide kept the Loonie somewhat pressured.
As for today, CAD-traders are likely to turn their attention to Canada’s CPI data for July. Expectations have changed and now suggest that both the headline and core rates remained unchanged at +2.5% yoy and +1.3% yoy respectively. At its latest meeting, the Bank of Canada decided to raise interest rates to +1.50% from +1.25% as was expected, while in the accompanying statement officials maintain their hawkish stance, noting that they will continue to take a gradual approach on interest rates, guided by incoming data.
Since then, data have been encouraging. Headline inflation accelerated to 2.5% yoy in June from +2.2% in May, while May’s monthly growth rate jumped to +0.5% mom from +0.1%. The unemployment rate fell to 5.8% in July, while the net change in employment showed that the economy gained more jobs than it did in June.
Thus, having all these in mind, we believe that decent inflation prints, even unchanged yearly rates, are unlikely to alter market expectations with regards to another BoC rate increase by the end of the year. We believe that a remarkable slowdown is needed for investors to push back their hike expectations. On the other hand, an upside surprise has the potential to strengthen further the hike case and thereby help the Canadian dollar recover some of its latest losses.
That said, besides expectations around the BoC’s future plans, a lot of the Loonie’s faith may also depend on developments surrounding NAFTA. If indeed talks between the US and Mexico bear fruit in the following days, then Canada will be invited to the negotiating table, something that could prompt more market participants to buy the Canadian currency.
Even though USD/CAD managed to move higher this week, still it is getting held by a short-term downside resistance line, taken from the low of the 27th of June. At the same time, the pair continues to trade above the medium-term upside support line, taken from the low of the 2nd of February. For now, until USD/CAD breaks one of these lines, we will stay cautious and observe the price action.
If the short-term downside resistance line breaks, then we could see a test of the 1.3190 level, which is just slightly above that possible breaking area. This could be a good opportunity for more bulls to start jumping in and driving USD/CAD higher. The potential resistance zone to keep an eye on could be at the 1.3290 hurdle, marked by the high of the 20th of July. If that level doesn’t hold, then we could see a move towards the 1.3385 barrier, which was the highest point of June.
That said, if the aforementioned short-term downside resistance line continues to hold, then USD/CAD could move down to test the 1.3115 obstacle, which was yesterday’s low, a break of which could send the pair towards the next potential area of support at 1.3050, marked by the lows of the 14th and the 15th of August. This down move could be short-lived, as slightly below lies the abovementioned medium-term upside line, which could hold the rate from dropping lower.
For us to start examining lower levels, we would need to see a break and a close below that upside line. USD/CAD could then make a move down to test the 1.2965 barrier, which was the low of the 7th of August. If this level breaks, this could open the way to the 1.2895 zone, which acted as strong support on the 6th of June.
During the European morning, we get Eurozone’s current account balance for June, as well as the bloc’s final inflation figures for July. The bloc’s current account surplus is expected to have declined somewhat, while, as usually is the case, the final CPI prints are expected to confirm their preliminary estimates.
From the US, we have the preliminary UoM consumer sentiment index for August, which is expected to have risen to 98.1 from 97.9. The preliminary UoM 1- and 5-year inflation expectations for the month are also due to be released.
On the political front, Brexit talks continue today, with EU Chief Negotiator Barnier likely to hold a news conference.
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