The US dollar opened with a positive gap on Monday against most of its counterparts and continued to trade higher during the Asian morning in the aftermath of the meeting between US President Trump and Japanese Prime Minister Abe over the weekend. The positive reaction in the greenback may have been due to the absence of any discussion on the issues of currency manipulation or trade policy by the two leaders. What’s more, market participants may have been concerned of President Trump taking this opportunity to jawbone the dollar again. With that risk finally out of the way, investors likely breathed a sigh of relief, and may have assumed new long positions in USD.
USD/JPY was one of the currency pairs that opened with a gap up and continued to rally until it hit resistance slightly above the 114.00 (R1) barrier. Then the pair retreated somewhat, but we still believe that the short-term outlook may have turned positive following the completion of a short-term double bottom on Thursday. Considering the recent signals from Trump that he will announce a "phenomenal" plan on tax reform within the coming weeks, we maintain the view that speculation regarding fiscal stimulus could keep the greenback broadly supported in coming days, absent any verbal interventions from the government. As such, we expect the bulls to regain control soon and push the rate up for another test near 114.00 (R1). A clear break above that obstacle could see scope for extensions towards our next resistance of 114.80 (R2). The next major market moving event for USD will probably be tomorrow, when Fed Chair Yellen testifies before Congress.
As for the bigger outlook of USD/JPY, the recent recovery confirms our view that the slide started early January was just a corrective phase which could be over. However, we prefer to wait for a decisive break above 115.50 (R3) before we assume the resumption of the prevailing medium-term uptrend.
CAD lifted by remarkable employment data
The Canadian dollar came under renewed buying interest on Friday, following the release of the nation’s jobs data for January. All the indicators beat their forecasts significantly, with the unemployment rate declining instead of staying unchanged as expected, and the labor force participation rate rising. This means that the number of unemployed people fell, even as the total number of people available to work rose, a strong indication that the slack in Canada’s labor market is quickly diminishing. In our view, these data lower notably the likelihood for the Bank of Canada to take any action in the foreseeable future, something that may keep the Canadian dollar supported for a while. USD/CAD tumbled to break below the support (now turned into resistance) barrier of 1.3110 (R1), but hit support slightly above 1.3050 (S1) and rebounded to test the 1.3110 (R1) zone as a resistance. We believe that sellers may take advantage of that level and drive the battle lower for another test near 1.3050 (S1). If they prove strong enough to overcome that obstacle, we may see a test near the psychological zone of 1.3000 (S2). This view is amplified by the fact that oil prices remain relatively high and that the recent sentiment in the energy market appears somewhat bullish. The latest IEA report on Friday showed that OPEC members have reached a record 90% compliance with their agreed output cuts, which suggests that oil prices could remain elevated in coming weeks. However, considering our view for both a stronger USD and a stronger CAD, we would avoid USD/CAD as a proxy for any further CAD gains. The technical picture agrees with that view as the pair seems to be trading within a falling wedge formation on the daily chart, something that may keep any further declines limited near the lower bound of the pattern. Instead, EUR/CAD may be a better pair to exploit more strength in the Canadian dollar, especially given the political risks facing the Eurozone, which have started to weigh on the common currency.
During the European day, the economic calendar is very light. The only noteworthy indicator we get is Sweden’s unemployment rate for January, though no forecast is available yet.
With regards to the speakers, US President Trump will meet Canada’s Prime Minister Trudeau. Any comments on trade policy, especially on the future of NAFTA, could cause some volatility in both USD and CAD.
As for the rest of the week:
On Tuesday, during the Asian morning, we get China’s CPI and PPI data for January. In the US, the main event will be Fed Chair Yellen’s semi-annual testimony on monetary policy before the Senate Banking Committee of Congress. She will present the same testimony before the House of Representatives on Wednesday. Although the testimony will be the same on both occasions, we expect market participants to pay extra attention to the Q&A sessions. In particular they may be on the lookout for any fresh hints regarding her view on the economy, and whether she is likely to vote in favor of a rate hike in the upcoming policy meetings. From the UK, we get inflation data for January.
On Wednesday, market participants are likely to turn their gaze to Sweden, where the Riksbank will announce its policy decision. The last time the officials met, they extended the duration of their QE program and maintained a rather sanguine tone in the meeting statement, indicating that the outlook for economic activity in Sweden and abroad has improved somewhat. Considering that since that gathering the nation’s CPI and CPIF rates for December both surged to reach highs last seen in 2011 and 2012 respectively, we see a very low likelihood for the Bank to take action. In the UK, employment data for December are due out. As we already noted, in the US, Fed Chair Yellen will testify before lawmakers again, this time before the House Committee on Financial Services. With regards to the US economic indicators, we get inflation and retail sales data, all for January.
On Thursday, the economic agenda is relatively empty, with no major events and only second-tier indicators due to be released.
On Friday, we get UK retail sales data Sweden’s CPI data, both for January.