Risk aversion was tempered yesterday by a report saying that the US and China may be looking towards another round of trade talks. Major EU and US indices still closed in negative territory, but Asian bourses traded mixed today. In the FX world, the Canadian dollar came under buying interest after BoC Governor Poloz said that monetary conditions are “about right”.
The dollar traded higher against most of the other G10 currencies on Thursday and during the Asian morning Friday. It gained the most against CHF, JPY and EUR in that order, while it underperformed only versus SEK and CAD. The greenback traded virtually unchanged against NOK.
The weakening of the safe havens CHF and JPY suggests that market sentiment improved yesterday. However, if we take a look at the equity markets, we see that major EU and US indices closed in negative territory, perhaps still feeling the heat of the reports suggesting that a “phase one” US-China deal could slide into next year, as well as the conflict over the US’s decision to pass a bill in support of Hong Kong protests. However, the downbeat morale was tempered by a WSJ report that the two nations may be looking towards another round of negotiations, and headlines suggesting that the US could delay tariffs on Chinses goods scheduled on December 15th, even if a trade deal is not reached by then. Asian bourses traded mixed today with Japan’s Nikkei 225 gaining 0.32%, but China’s Shanghai Composite losing 0.63%.
As for our view, we believe that a lot of optimism has been already priced in, at least in the equity world, and this is evident by the up-until-Monday rally. This is probably why yesterday’s somewhat favorable headlines where not enough to push stock indices into the positive territory. We believe that, for now, negative headlines are likely to have more impact than positive ones, something that may force equity indices to correct lower. Even if they don’t, and rebound again, we would still stay reluctant to trust a long-lasting uptrend, as history showed that things could easily fall apart at any time. We repeat that we would like to see handshakes and signatures before getting more confident on that front.
From around mid-October, NZD/JPY is trading inside a range, roughly between the 69.00 and 70.00 levels. After yesterday’s failed attempt to test the upper bound of that range, the pair drifted back down again. From the very short-term perspective and given that the yen is still somewhat attractive for investors, given the slight risk-off mood in the markets, we may see the rate moving towards the lower side of that range. Thus, although we will hold a neutral stance with regards to the short-term picture, for now, we would aim lower within the range.
If NZD/JPY moves lower and breaks the 69.48 hurdle, this could send the rate a bit lower, to test the 69.28 zone, which is yesterday’s low. Initially, the pair could stall there for a bit, or even correct slightly higher. That said, if the bulls struggle to push the rate above the 69.48 area, the bears could be happy to jump behind the steering wheel and drive NZD/JPY down again. If so, this could potentially bring the pair below the 69.28 obstacle and target the lower bound of the aforementioned range, at 69.00.
In order to consider the upside, we will wait for a clear break above the upper side of the range, at 70.00. Such a move might attract more buyers into the game and the rate could accelerate to the 70.44 hurdle, a break of which could send the pair further north, possibly aiming for the 70.79 level. That level was previously seen as a strong support, tested on June 26th. Now it may play the role of a good resistance.
Back to the currencies, the Canadian dollar came under buying interest after BoC Governor said that monetary conditions are “about right”. The Canadian economy is in a good place overall and we are still quite simulative where we are today, the Governor added. The message we got from the latest BoC meeting, as well as by Poloz's conference then was that officials have started flirting with the idea of easing. Therefore, Poloz’s remarks yesterday woke up CAD-bulls and prompted participants to take some cut bets off the table. Ahead of Governor’s comments, according to Canada’s OIS (Overnight Index Swaps) there was a 25% chance for a rate reduction at the December meeting, while now there is only 11%. The market is fully pricing in a quarter-point cut to be delivered in September next year.
As for today, CAD-traders are likely to turn their attention to Canada’s retail sales for September. Headline sales are forecast to have declined 0.1% mom, the same pace as in August, while the core rate is expected to have rebounded to +0.1% from -0.2%. Overall, the forecasts point to a neutral report which is unlikely to alter much expectations around the BoC’s future course of action. For market participants to reduce their cut bets even more, a strong positive surprise may be needed.
Overall, EUR/CAD is still trading inside a short-term rising channel pattern drawn from the beginning of October. But after hitting the upper bound yesterday, the pair reversed back down sharply. Given that the Canadian dollar has picked up some buying interest, there is a chance we may see EUR/CAD going for a larger correction down, because let’s not forget that it is still within an uptrend overall. But in order to get comfortable with further declines, a drop below this morning’s low, at 1.4680, would be needed. Until then, we will stay cautiously-bearish.
If eventually we see a drop below that hurdle, at 1.4680, this may open the door for a further move down, potentially targeting the 1.4645 zone, which is marked near the low of October 31st and the high of November 5th. If the slide doesn’t end there, a break of that zone could send the rate to the 1.4611 level, marked by the low of November 19th.
Alternatively, if we see a strong push through the 1.1407 barrier, marked by the high of November 1st, this could attract a few more bulls in the field and the pair could end up revisiting the 1.4733 obstacle, a break of which might clear the path to the 1.4755 level. That level marks the high of November 21st. Slightly above that is the upper bound of the aforementioned channel, which could provide some additional resistance for EUR/CAD.
During the European morning, we get the preliminary PMIs from several European nations and the Eurozone as a whole. The bloc’s manufacturing index is expected to have risen somewhat, but to have remained within the contractionary territory. Specifically, it is expected to have risen to 46.4 from 45.9. The services print is forecast to have increased to 52.5 from 52.2. This would drive the composite PMI up to 50.9 from 50.6. Although rising PMIs could help somewhat the euro, we believe that traders of the common currency could pay more attention to a speech by the new ECB President, Christine Lagarde, as they may be eager to get information with regards to her view around monetary policy.
We get preliminary PMIs from the UK and the US as well. No forecast is available for the UK prints, while in the US, the manufacturing index is forecast to have inched up to 51.5 from 51.3, and the services one to have risen to 51.0 from 50.6. The composite PMI is expected to have increased to 51.9 from 50.9. We also get the final UoM consumer sentiment index for November, which is expected to be revised up to 95.7 from 95.5.
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