The US dollar continued to drift lower yesterday on Trump’s remarks over monetary policy, as well as the improved market sentiment amid fresh trade talks between the US and China. Today, apart from the US-China talks, investors are likely to focus on the Fed minutes as well. The Loonie traded in a roller-coaster manner overnight on NAFTA headlines, ahead of Canada’s retail sales, due out later today.
The dollar continued to slide against most of the other G10 currencies as Trump’s criticism over higher rates in the US and the broader risk appetite amid renewed US-China trade talks continued to pressure the currency. The main gainers against the greenback were NZD, GBP and CHF in that order, while the sole loser was JPY. The US currency traded virtually unchanged against AUD and CAD.
As for the equity market, most major European and US indices ended their sessions in the green, with the exceptions being UK’s FTSE 100. The S&P 500 hit a new all-time high at 2873.23 after seven months but failed to close above its prior record high of 2872.87, posted on the 26th of January. At this point, we would like to note that the cash index fell short of exceeding its record high, which stands at around 2877. Having said all these though, equity futures and Asian indices came under some selling interest overnight after Trump’s former personal lawyer Michael Cohen pleaded guilty on campaign finance violations as well as other chargers. Trump’s campaign chairman Paul Manafort was also found guilty on tax and bank frauds.
Back to the US-China trade talks, yesterday we noted that they were set for the 21st and 22nd of August, but the media we took the information from corrected the dates to 22nd and 23rd. So, the negotiations are expected to begin today.
Apart from the trade front, USD traders are likely pay attention to the minutes of the latest FOMC meeting as well. At that meeting, the Committee decided to keep interest rates unchanged as was widely anticipated, while it made it made a small change to the accompanying statement. Officials noted that economic activity has been rising at a “strong rate”, instead of “solid rate” as was included in the previous statement.
The Committee stood pat but kept the door wide open for two more hikes by the end of the year and we don’t expect the minutes to paint a different picture. That said, investors may dig into the report to see whether there was any discussion over the neutral level of interest rates as well as over upgrading the “accommodative” description of policy. They may also look for the Committee’s view around trade.
Even if these minutes reveal such discussions, we believe that it may not come as a surprise, as it won’t be something new. The minutes of the June meeting revealed that many participants noted that rates could rise above neutral sometime next year, while a number of them noted that it might soon be appropriate to modify the language around the description of monetary policy. With regards to the trade front, officials have already expressed concerns, saying that uncertainty surrounding the matter has intensified and could have a negative effect on business sentiment and investment spending. So, a reiteration, or concerns along those lines, will not come as a surprise either.
USD/CHF tumbled yesterday, falling below the 0.9860 hurdle, which also acted as the lower bound of a sideways range that had been containing most of the price action since the 14th of June. In our view, this has turned the short-term outlook to the downside and thus, we would expect the bears to continue driving the battle lower.
Further declines are likely to bring the 0.9825 zone into play, a support area marked by the low of the 14th of June, which if broken, could set the stage for more bearish extensions, perhaps towards the 0.9785 obstacle, defined by the low of the 7th of June.
Both the RSI and the MACD detect downside momentum. The former lies below its 30 line, while the latter stands below both its zero and trigger lines, pointing south. That said, the RSI shows signs of bottoming within its below-30 territory and thus, we stay cautious that a corrective rebound may be on the cards soon, perhaps after the rate challenges the 0.9825 support.
On the upside, a clear and decisive break above 0.9895 will make us abandon the bearish case. Such a move may signal that the bulls want to keep the pair back within the aforementioned range and perhaps aim for the 0.9925 zone. Another break above that zone could carry upside extensions towards our next key resistance zone of 0.9980.
The Canadian currency, as well as its Mexican counterpart, strengthened overnight following reports that the US and Mexico are ready to announce a breakthrough in NAFTA talks tomorrow. However, a couple of hours after the news, the Canadian government said it has not received any notice on the matter, while Mexico denied the existence of a deal, forcing both currencies to give back the earlier gains.
Today, Loonie traders are likely to keep their gaze locked on any new NAFTA headlines, but they may also pay some attention to Canada’s retail sales for June. Expectations are for headline sales to have slowed notably, to +0.1% mom from +2.0%, while core sales are anticipated to have declined 0.1% mom, after rising 1.4%.
That said, even if this is the case, we don’t expect this data set to alter much expectations for another rate increase by the BoC this year, perhaps in October. Canada’s latest economic data have been more than encouraging. Both headline and core inflation metrics accelerated more than anticipated in July, the unemployment rate for the same month slid to 5.8% from 6.0% in June, while the monthly GDP growth rate for May rose to +0.5% mom from +0.1%. On top of that, even though the report over a Thursday deal between the US and Mexico was denied, the media continue to suggest that the two nations are close to finding common ground, and thus, Canada could join the negotiations soon.
CAD/JPY traded higher during the Asian morning, after it hit support near the 84.35 level. However, the advance was stopped slightly above the 84.75 zone and then the rate retreated somewhat. The pair continues to trade above the upside support line drawn from the low of the 22nd of June and thus, we will stay cautiously positive, at least for the short run.
If the bulls are strong enough to take charge again soon and drive the battle decisively above 84.75, then we may see them aiming for our next resistance of 85.40. Another break above 85.40 could encourage them to continue traveling north and perhaps target the 85.85 territory.
Taking a look at our short-term oscillators, we see that the RSI rebounded from the crossroads of its 50 level and its respective upside support line, while the MACD has just crossed above both its zero and trigger lines. These signs support somewhat the case for CAD/JPY to continue drifting north for a while more.
In order to start examining whether the near-term outlook has turned negative, we would like to see a clear close below the aforementioned upside support line and the 83.85 support level. Something like that could initially aim for the 83.65 level, the break of which could carry extensions towards our next support of 83.15, defined by the inside swing peaks of the 21st and 27th of June.
From the US, besides the Fed minutes, we also get existing home sales for July. Expectations are for sales to have rebounded 0.6% mom after falling 0.6% in June.
As for the energy market, the Energy Information Administration’s (EIA) weekly crude oil inventories are set to be released. The forecast suggests that inventories fell by around 1.5mn barrels in the week ended on the 17th of August, after a 6.8mn barrels increase the previous week.
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