Yesterday’s draft agreement over Brexit took the show, which led the British pound shoot up against all of its major counterparts. Today, Canada is set to deliver its inflation figures, which means we will be watching the Canadian dollar very closely today.
The big news came out of Brussels yesterday, as UK and the EU managed to get closer towards reaching a Brexit deal. Of course, the important thing to add here is that, for now, this is still in a draft form, which could still be amended. Nevertheless, it was difficult not to notice the smile and the good mood of the British Prime minister Theresa May, who appeared in front of the press stating that progress has been made. Certainly, the pound-traders took the announcement in a very positive way, by pushing GBP higher against all of its major counterparts.
Some key bullet points to take from the draft agreement:
· EU and UK to see a free-trade area and deep regulatory cooperation
· EU and UK state determination to replace backstop
· EU to recognise UK’s independent trade policy
· Transition period can be extended for up to one or two years
Some could say that finally the negotiations got on the right track. But the draft has to be approved by other EU leaders before their summit on Sunday, so the negotiations once again could start seeing obstacles on its way.
Of course, let’s agree that while there are positive developments in the whole Brexit process, yesterday’s draft agreement still does not clear up the issues with the borders, especially the ones with Northern Ireland and Gibraltar. In regards to the second, Theresa May has a task now to come up with the solution, together with its Spanish counterpart, before the Sunday’s summit, otherwise yesterday’s joy could only last until then. In terms of the Northern Irish dispute, that is also still up in the air, as there is still no clarity around that matter.
Sceptics continue ringing the alarm bell, as the tensions inside the house remain. The British Parliament still has to approve the deal and looking at how the British politician views are divided, reaching a consensus could be a big job for Theresa May. Especially that there are talks among British politicians over May’s competency in dealing with Brexit.
As we said before, despite yesterday’s progress in the Brexit negotiations, still, big issues remain. Yesterday’s outcome could just a breath of fresh air before plunging back into the deep waters of dispute.
Today we get preliminary PMIs for November from several European nations and the Eurozone as a whole. Expectations are for the bloc’s manufacturing and services indices to have declined to 51.9 and 53.5, from 52.0 and 53.7 respectively, something that is likely to drag the composite PMI down for the fourth consecutive month. Specifically, the composite index is forecast to have declined to 53.0 from 53.1. Coming on top of the preliminary GDP data for Q3, which showed that the Euro area economy slowed to +0.2% qoq from +0.4%, another slide in the composite PMI could increase concerns that the loss in economic momentum dragged into the last quarter of the year as well. This was also acknowledged by ECB President Draghi last week. However, Draghi repeated once again that the overall risks to the growth outlook remain broadly balanced, suggesting that the ECB is unlikely to alter is policy plans any time soon.
We get preliminary Markit PMIs from the US as well. The manufacturing index is expected to have remained unchanged, while the services index is expected to have increase somewhat. This is likely to drive the composite PMI slightly higher. However, we repeat that the market tends to pay more attention to the ISM indices, due out on the 3rd and 5th of December.
Later in the day, Canada’s CPIs for October are due to be released. Expectations are for Canada’s headline inflation rate to have remained unchanged at +2.2% yoy, while no forecast is currently available for the core rate. At its latest gathering, the BoC raised interest rates by 25bps and removed the part saying that officials will “take a gradual approach” with regards to future rate increases. Instead, they simply noted that “In determining the appropriate pace of rate increases, Governing Council will continue to take into account how the economy is adjusting to higher interest rates”. In our view, the removal of the “gradual approach” means that interest rates can now rise faster than previously anticipated if data suggest so. Thus, an upside surprise in the inflation prints may allow investors to increase bets that the next rate increase could come at the Bank’s 1st gathering for 2019. Canada’s retail sales for September are also scheduled to be released.
Yesterday, the British pound got a real good boost against all of its major counterparts, with no exception of the Swiss Franc. GBP/CHF has slightly retraced back down, but this could be seen as a small correction before the pair might rush back up again. That said, the Brexit tensions still remain, hence why will stay a bit more on the cautiously-bullish side.
A good strong break above the 1.2815 barrier could open the door towards higher resistance areas. The first big important one to watch may be the 1.2870 hurdle, marked by the high of the 19th of November. If the hurdle is not able to withhold the rate down, a break above 1.2870 might lead GBP/CHF to test the 1.2925 zone, or even the 1.2950 obstacle, which was near the high of the 16th of November.
Alternatively, a drop below the 1.2785 area could put the bulls on the edge and make them worry again. A further decline and a break below the 1.2750 hurdle could force the buyers to abandon the pair in favour of the sellers. GBP/CHF could then travel to test of the 1.2700 level, marked by this week’s low, or even touch the tentative short-term upside support line, drawn from the low of the 5th of September. This is where the rate could stall temporarily.
It looks like the Canadian dollar is picking up the pace again. AUD/CAD started ranging between the 0.9555 and 0.9655 levels, but currently sits very close to the lower bound of that range. Our oscillators are suggesting that there could be a bit of more weakness to come, nevertheless, we will remain cautious and wait for a confirmation break first.
A break below the lower side of the aforementioned range, could invite more bears to drag AUD/CAD a little bit lower, at least in the short-run. That break might clear the path towards the 0.9520 support area, marked near the low of the 14th of November. If that area is no match for the bears, a further slide may take the pair to test the 0.9490 obstacle, or even the 0.9475 hurdle, which was the low of the 7th of November.
Alternatively, a move back up above the 0.9600 resistance zone, marked by yesterday’s high, could raise even more interest in the bull bloc. We may see AUD/CAD traveling higher to test the upper bound of the previously-mentioned range, a break of which might open the horizon of higher levels that were last tested in the beginning of August. On of them could be the 0.9705 resistance barrier, marked by the high of the 8th of August.
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