Mon, May 29, 2023 @ 04:24 GMT
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Investors Turn Their Attention to Canada

The main event of the day is Canada’s CPI for January. The headline rate is expected to have ticked up to +1.6% yoy from +1.5% yoy the previous month, while no forecast is available yet for the core rate. The nation’s Markit manufacturing PMI for the month showed that as a result of higher input costs, manufacturers raised their prices at one of the fastest paces since early 2014. Therefore, we see the case for both rates to have risen. Nevertheless, considering January’s yoy change in oil prices, we see strong possibility for the headline rate to have increased by more than the core, something that has already become evident in the CPI prints of many advanced economies. Coming on top of the remarkably strong employment data for the month, another improvement in the CPI rates is likely to be a welcome development for the BoC, which at its latest policy meeting signaled that a rate cut is still on the table should downside risks materialize. Accelerating CPIs could diminish somewhat the likelihood for the Bank to introduce any further easing, at least in the near term, and could prove positive for the Canadian dollar.

USD/CAD traded lower yesterday as the disappointment of Wednesday’s Fed minutes kept the greenback pressured throughout most of the day. The pair fell below the support (now turned into resistance) barrier of 1.3120 (R1) to hit support at 1.3080 (S1). Rising Canada’s CPI rates could prove the catalyst for a dip below that level, something that could initially aim for our next support of 1.3050 (S2). Another break below that territory is likely to target the psychological zone of 1.3000 (S3). With regards to the bigger picture, on the daily chart, we see that USD/CAD remains below the prior long-term uptrend line drawn from the low of the 3rd of May 2016. As such, we consider the medium-term outlook to be cautiously negative, which enhances the case for the pair to drift lower in the near future.

RBA Governor Lowe reiterates that the Bank is likely to stay on hold

Overnight, RBA Governor Philip Lowe testified before the House of Representatives Standing Committee on Economics. His comments reflected his Wednesday speech and as a result, the reaction in the Aussie was muted. The Governor noted that further easing would mean more borrowing and consequently, higher house prices. Too much household borrowing today can create problems tomorrow, he added. With regards to the exchange rate of the Australian dollar, he said that he would like the currency to be lower, but it’s hard to say that it is overvalued. The fact that the Bank is most likely to keep its fingers off the easing trigger in the coming months, combined with the surge in iron ore prices, and the not so harsh comments on the Aussie’s level, are the main reasons we expect the Australian currency to remain supported. We recall that one of our favorite proxies for further AUD appreciation is EUR/AUD, due to Eurozone’s political risks.

EUR/AUD traded higher yesterday after it hit support at 1.3655 (S1) to stop near the 1.3725 (R1) resistance. Having in mind that a new poll on the French election yesterday showed that both Macron and Fillon got a pickup following Bayrou’s withdrawal, we see the likelihood for the euro to continue its relief bounce. A break above the 1.3725 (R1) resistance is possible to result a move above the upper bound of the downside channel that has been containing the price action since the 30th of January, and perhaps aim for 1.3780 (R2) level next. However, even if the pair continues to trade higher in the days to come, we would treat such a recovery as providing renewed selling opportunities. The uncertainty surrounding the monetary union has nothing but diminished and as we head into the ballots, we expect the common currency to come under renewed selling interest. The broader outlook of EUR/AUD is also in line with our view that any further recovery is very unlikely to lead to a strong bull run. On the 10th of February, the pair broke below the downside support line drawn from the 10th of March 2016, which is a sign of acceleration in the longer-term downtrend. Therefore, we expect the bears to take the reins again at some point in the near future and aim for another test near the 1.3600 (S2) territory.

As for the rest of today’s events

During the European day, we get France’s and Sweden’s consumer confidence indices, both for February. The French index is expected to have remained unchanged, while the Swedish one is expected to have declined marginally. In any case, neither of these indicators is usually a major market mover.

In the US, new home sales are expected to have rebounded in January, which appears normal to us following December’s plunge. Despite a potential rebound, we remain somewhat pessimistic with regards to the future performance of the housing sector. Mortgage rates have spiked following Trump’s election and as a consequence, banks have tightened restrictions on mortgage lending. We believe that affording a house may get more difficult in 2017 and could discourage potential buyers to even try applying for a mortgage. We also get the nation’s final U of M consumer sentiment index for February.

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