Canadian and US Dollars ended last week as the strongest ones. It now appears that US and China are on track to complete the easier phase 1 trade deal in November. Optimism lifted stocks as well as oil prices, which indirectly helped the Loonie too. Also, recent developments in Canada support the neutral stance of BoC. USD/CAD is sitting close to 1.3 key handle while both Fed and BoC will meet this week. We’d probably see who’s the real stronger one afterwards.
Meanwhile, Sterling ended and dragged down other European majors. Brexit developments were positive as the Commons finally voted to support UK Prime Minister Boris Johnson’s Brexit deal in principle. Yet, MPs couldn’t agree to a fast track path to ratify the deal to meet the October 31 Brexit deadline. EU is said to agree to another Brexit extension, but hold back to the announcement, awaiting UK’s vote on a December election, which Johnson called for. But opposition Labour was clear that they won’t support an election unless no-deal Brexit is clearly ruled out. French President Emmanuel Macron was said to push for a short extension, at most month, to complete Brexit as soon as possible. The developments in the upcoming days remain fluid.
Stocks jumped as US-China close to finalizing trade deal phase 1
US-China trade negotiations appeared to have gone rather well. US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin held a phone call with Chinese Vice Premier Liu He on Friday. After that USTR said in a statement: “They made headway on specific issues and the two sides are close to finalizing some sections of the agreement. Discussions will go on continuously at the deputy level, and the principals will have another call in the near future.” Chinese Ministry of Commerce also said on Saturday that the trade negotiators “agreed to properly resolve their core concerns and confirmed that the technical consultations of some of the text agreement were basically completed.”. It appears the negotiations are on track for completing the text of the phase one trade deal to be signed in Chile in mid-November.
Trade optimism gave US stocks a lift on Friday. S&P 500 could have completed the three wave consolidation from 3027.98 at 2855.94 already. A near record high is on the way. The main test for the near term would be 61.8% projection 2728.81 to 3027.98 from 2855.94 at 3040.82. Firm break there will be a strong sign of pickup in medium term upside momentum. The index should target 100% projection at 3155.11 next. However, rejection by 3040.82 will revive the chance of medium term reversal again.
Futures suggest Fed to cut one more time and done
Dollar was the second strongest one as markets are increasingly convinced that Fed would only deliver one more rate cut, be done with the mid-cycle adjustment. Positive developments on trade negotiations also helped. Currently, fed fund futures suggest 93.5% chance of another -25bps rate cut to 1.50-1.75% on October 30 this week. Meanwhile, they’re also pricing in over 50% chance of federal funds rate staying at 1.50-1.75% or above after March FOMC meeting.
Dollar index was once again supported by 55 week EMA and recovered. A bottom was tentatively formed at 97.14. Focus is now back on 55 day EMA (now at 98.19). Firm break there will reaffirm medium term bullishness. That is, another high above 99.66 should be seen as the up trend from 88.25 extends. Though, break of 97.14 will now put 95.84 support in focus. Break will be a strong sign of medium term bearish reversal.
Recent developments support BoC’s neutral stance for near term
Canadian Dollar ended as the strongest one last week as recent developments, though a bit mixed, were supportive to BoC’s neutral stance. Justin Trudeau’s Liberals held onto power after the elections despite losing majority in the parliament. Political stability is maintained for the near term at least even though Trudeau’s minority government would need to work with other parties on issue-by-issue basis. August retail sales was a miss, but that was overshadowed by BoC’s Business Outlook survey. In particular, opinions on the outlook for sales and investment held up well, which suggested near- trend growth ahead. BoC is widely expected to keep interest rate unchanged at 1.75% this week, with statement focusing on global outlook and trade uncertainty.
WTI bottomed at 50, heading back to 60
WTI crude oil price appeared to have bottomed near term 50 already, and it’s heading back to 60 handle. And that gave the Loonie another mild lift too. The strong close above 55 day EMA suggested s that fall from 63.04 has completed at 50.86 already, against drawing support from 61.8% retracement of 42.05 to 66.49 at 51.38 again. Further rise is now in favor back towards 63.04/66.49 resistance zone. Though, there is no sign of break out from medium term range of 50.43/66.49 yet.
USD/CAD Weekly Outlook
USD/CAD spiral lower last week with diminishing downside momentum, as seen in 4 hour MACD. While further decline might be seen initially this week, we’d expect strong support from 1.3016 to contain downside and bring rebound. ON the upside, break of 1.3122 minor resistance will turn bias back to the upside for 55 day EMA (now at 1.3217). However, decisive break of 1.3016 will carry larger bearish implications and target 1.2781 support next.
In the bigger picture, 38.2% retracement of 1.2061 to 1.3664 at 1.3052 remains intact. Medium term rise from 1.2061 low is in favor to resume sooner or later. Firm break of 61.8% retracement of 1.4689 (2016 high) to 1.2061 at 1.3685 will confirm and target 1.4689 high. However, sustained break of 1.3052 will confirm completion of up trend from 1.2061 (2017 low). Further fall should be seen to 61.8% retracement at 1.2673 next.
In the longer term picture, outlook remains unchanged that price actions from 1.4689 (2016 high) are forming a corrective pattern. As long as 1.2061 support holds. up trend from 0.9406 (2011 low) in in favor to resume through 1.4689 at a later stage.