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USD/CAD has dipped lower on Thursday, easing the losses seen on Wednesday. Currently, the pair is trading at 1.3495, down 0.18% on the day. On the release front, Canada’s current account deficit narrowed to C$17.3 billion, lower than the forecast of C$18.1 billion. In the U.S., Preliminary GDP came in at 3.1%, matching the forecast. Unemployment claims rose to 215 thousand, just shy of the estimate of 216 thousand. Friday will be busy on both sides the border, so traders should be prepared for some movement from USD/CAD. Canada releases its monthly GDP report, while the U.S. releases inflation and consumer spending data.

As expected, the Bank of Canada maintained the benchmark rate at 1.75% on Wednesday. The rate has been pegged at this level since October, and rate-setters have sounded neutral as which way the next move might go. However, the rate statement was positive in tone, which has raised speculation that the bank could raise rates later in the year. Bank members reiterated their view that the economic slowdown which was felt in early 2019 was temporary. At the same time, members acknowledged the vulnerability of the economy to global developments, stating that global trade risks were “heightening uncertainty” over the country’s economic outlook.

Which way is the Canadian dollar headed? There are factors which could support a move in either direction. The labor market has improved, and created a record number of jobs in April. Consumer spending, a key driver of economic growth, also remains strong. On the negative side, trade tensions between the U.S. and China have soared, which has hurt risk appetite towards minor currencies like the Canadian dollar. As well, oil prices have fallen, which has weighed on the Canadian currency.

US trade deficit widened slightly to USD 72.1B in April, up from USD 71.9B. Looking at the details, pretty much all category of of both exports and imports contracted. Overall exports dropped -4.2% to USD 134.6B. Imports dropped -2.7% to USD 206.7B.

Full table here.

US initial jobless claims rose 3k to 215k in the week ending May 25, slightly above expectation of 214k. Four-week moving average of initial claims dropped -3.75k to 216.75k.

Continuing claims dropped -26k to 1.657M in the week ending May 18. Four-week moving average of continuing claims dropped -3.5k to 1.673M.

Full release here.

US Q1 GDP growth was revised down to 3.1% annualized, from first estimate of 3.2%, matched expectations. GDP price index was revised down to 0.8% down from 0.9% and missed expectation of 0.9%.

Looking at the details, there were positive contributions from PCE, private inventory investment, exports, state and local government spending, and non-residential fixed investment. Imports also decreased. There was negative contribution from residential fixed investment.

The acceleration in GDP growth reflected an upturn in state and local government spending, accelerations in private inventory investment and in exports, and a smaller decrease in residential investment. These were partly offset by decelerations in PCE and nonresidential fixed investment, and a downturn in federal government spending.

Full release here.

Selloff in risk markets halted today but trading has been rather subdued. Following general recovery in European stocks and yields, except Italy, Yen and Swiss Franc trade mildly lower. As usual, Dollar move in tandem with the two when trade war is the main theme. Canadian Dollar is the strongest one for today, following rebound in oil prices. Euro follows as second strongest so far.

The hard line rhetorics from China are getting a bit boring as they just repeated what have been said. Bloomberg reported that China has halted the goodwill soy bean purchases from US already but that's hardly a surprise. China has been claiming that impact of trade war is manageable. But figures speak louder than words. We'll finally see how sentiments turned with PMIs to be released in next Asian session.

In Europe, currently:

• FTSE is up 0.40%.
• DAX is up 0.26%.
• CAC is up 0.30%.
• German 10-year yield is up 0.0062 at -0.169.

Earlier in Asia:

• Nikkei dropped -0.29%.
• Hong Kong HSI dropped -0.44%.
• China Shanghai SSE dropped -0.31% to 2905.81, holding on to 2900 handle.
• Singapore Strait Times dropped -0.64%.
• Japan 10-year JGB yield rose 0.0114 to -0.081.

Markets pare recent losses but remain vulnerable

Markets are taking a breather on Thursday, with US futures paring recent declines although traders remain very concerned about recent trade war developments.

The recent declines we’ve seen in equity markets will no doubt be a concern for investors, worried about the prospects for the global economy when tensions between the world’s two largest economies are becoming heightened. The latest reports relating to Chinese threats on rare earth minerals represent another potential escalation in the crisis and highlight how technical the threats will now become as we move on from tariffs alone.

The Trump administration must be concerned about the toll this is taking on the markets. The sell-off we’ve seen this month may not be too extreme – just shy of 6% at the close yesterday – but as we saw in the fourth quarter of last year, it could get much worse.

The impact recent events are having on the yield curve both highlights the risks investors associate with events and further feed into the doom loop as investors become increasingly wary about the risk of a recession.

Notes/Observations

• Ascension Day holiday in numerous European countries keep participation at a low
• Spain May CPI data missed expectations with its annual pace at 18 month low
• Italy reply to EU said to see that any budget adjustment would jeopardize its recovery
• PBOC Officials downplay concerns on financial risks and CNY currency (Yuan) at a Beijing Forum
• Focus turns to key data releases in coming 24 hours (US 2nd reading of GDP on Thursday; German May CPI on Friday)

Asia:

• BOJ's Sakurai stated that he believed that no additional easing was necessary at this time. Would continue to carefully watch yield moves (Note: JGB at lowest level since 2016)
• Japan Econ Min Motegi: trade talks with US have got off to good start
• China PBOC adviser Liu Shijin: No problem for China to keep 2019 GDP above 6.2%

Europe/Mideast:

• UK Chancellor of the Exchequer Hammond (Fin Min) said to have warned against Conservative leader candidates pitching tax cuts and deregulation

Americas:

• Pentagon said to have released report on rare earth minerals to Congress amid effort to cut reliance on China
• US Commerce Dept enacted anti-dumping duties on certain China products including beer kegs and mattresses; the margins range from 38.56 to 1,731.75%
• Canada PM Trudeau: draft ratification legislation for USMCA trade pact has been formally presented to Parliament (as expected)

Energy:

• Weekly API Oil Inventories: Crude: -5.3M v +2.4M prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 +0.35% at 371.82, FTSE +0.24% at 7,202.60, DAX +0.50% at 11,896.48, CAC-40 +0.47% at 5,246.75, IBEX-35 +0.79% at 9,151.85, FTSE MIB +0.37% at 20,074.50, SMI n/c, S&P 500 Futures +0.31%]
• Market Focal Points/Key Themes: European Indices rebound after sharp losses yesterday, following higher US futures in a quieter day as certain European nations observe ascension day. On the corporate front shares of Axel Springer rises sharply on talks with the Springer family and KKR of a possible going private transaction. On the earnings front, FirstGroup gains following a rise in profits and the commencement of the process to sell Greyhound and Firstbus with Daily Mail Trust rising after beating H1 forecasts. Meanwhile De La Rue declines over 20% following earnings and the stepping down of its CEO, with Johnson Matthey another notable decliner on earnings. Looking ahead notable earners include Tech Data along side retailers including Express, Dollar General, Dollar Tree, J.Jill, Movado and Burlington Stores among others.

Equities

• Consumer discretionary: FirstGroup [FGP.UK] +5% (earnings; strategy update), Daily Mail [DMGT.UK] +9% (earnings), Campari [CPR.IT] -2% (analyst action)
• Energy: Tullow Oil [TLW.UK] +3% (analyst action)
• Technology: Axel Springer [SPR.DE] +20.5% (confirms possible investment), De La Rue [DLAR.UK] -26% (earnings and profit warning; CEO to step down), Aptitude Software Group [APTD.UK] +11% (divestment)
• Materials: Johnson Matthey [JMAT.UK] -1.5% (earnings)

Speakers

• BOE's Ramsden: Would want to wait and see before changing policy if a no-deal after Brexit was the outcome; such a scenario would have large negative effects. Reiterated MPC view that interest rates could go either way (higher or lower) in the event of a no-deal outcome. He was a bit more pessimistic on growth compared to recent BOE projections but would expect GDP growth to pick up if Brexit did go smoothly and thus would require further monetary tightening to maintain monetary stability,
• Italy response to EU letter on debt clarification will tell EU that any budget tightening would be a mistake
• Italy League leader Salvini said to have discussed economy, EU and grpwth measures with PM Conti and Fin Min Tria
• UK Chancellor of the Exchequer Hammond (Fin Min): Would be a threat to the union if we left EU with no deal. Stressed that any solution must protect businesses. Reiterated that Govt had made preparations for a no-deal outcome. Stated that those candidates for conservative party leadership should be fiscally responsible
• Russia Foreign Ministry said to urge Iran not to leave the nuclear pact
• China Commerce Ministry (MOFCOM) Spokesman Gao Feng reiterated govt stance that tariffs would not solve trade imbalances; US consumers wuld pay the price of such tactics. China would not accept a trade deal that hurts its pride or sovereignty. China is firmly against any US bullying tactics and will retaliate. US must address its concerns in order to reach any agreement
• PBoC Monetary Policy Dept Head Sun Guofeng: China's monetary policy was appropriate this year; to fine-tune policy with economic conditions. China's economy stable despite global uncertainties.

Currencies/Fixed Income

• The dollar index futures traded higher yesterday as comments appear to be positive between the US and Japan on a trade agreement over tariffs.
• EUR/USD The Euro continues its grind lower towards 1.11 as tensions between the EU and Italy continued. The Bund futures are now trading back below the 1.68 handle where yields were near record lows. We also saw BTP futures trading higher today with volatility slowing down after the 2 point sell off seen on Monday.
• GBP/USD The cable also trades lower continuing its slow grind lower as it approaches the 1.26 handle. With nothing new being said, just usual comments about Brexit and no figures, the Cable could finish higher today with the 1.26 handle creating support

Economic Data

• (ES) Spain May Preliminary CPI M/M: 0.2% v 0.4%e; Y/Y: 0.8% v 1.1%e (annual pace at a 18-month low)
• (ES) Spain May Preliminary CPI EU Harmonized M/M: 0.2% v 0.3%e; Y/Y: 0.9% v 1.1%e
• (ES) Spain Apr Advance Retail Sales Y/Y: 1.1% v 2.0%e; Retail Sales Y/Y: 2.0% v 0.2% prior
• (HU) Hungary Mar Average Gross Wages Y/Y: 11.6%e v 12.1% prior

Fixed Income Issuance

• Awaiting Italian auction results

Looking Ahead

• (IT) Italy Debt Agency (Tesoro) to sell €4.25-5.25B in 5-year, 7-year and 10-year BTP bonds
• 05:00 (IT) Italy Debt Agency (Tesoro) to sell €500-750M in Jan 2025 CCTeu (Floating rate Note)
• (MX) Mexico Apr YTD Budget Balance (MXN): No est v -24.5B prior
• 05:30 (ZA) South Africa Apr PPI M/M: 0.8%e v 1.3% prior; Y/Y: 5.9%e v 6.2% prior
• 05:30 (HU) Hungary Debt Agency (AKK) to sell 12-month bills
• 06:00 (PT) Portugal Apr Industrial Production M/M: No est v -1.3% prior; Y/Y: No est v -7.6% prior
• 06:00 (PT) Portugal Apr Retail Sales M/M: No est v 1.2% prior; Y/Y: No est v 4.2% prior
• 06:00 (CA) Canada May CFIB Business Barometer: No est v 56.7 prior
• 06:45 (US) Daily Libor Fixing
• 07:00 (BR) Brazil May FGV Inflation IGPM M/M: 0.6%e v 0.9% prior; Y/Y: 7.8%e v 8.6% prior
• 08:00 (BR) Brazil Q1 GDP Q/Q: -0.2%e v +0.1% prior; Y/Y: 0.5%e v 1.1% prior; GDP 4 quarters Accumulated: 0.9%e v 1.1% prior
• 08:00 (ZA) South Africa Apr Budget Balance (ZAR): No est v -20.3B prior
• 08:00 (PL) Poland Central Bank (NBP) May Minutes
• 08:00 (UK) Baltic Dry Bulk Index
• 08:30 (US) Q1 Preliminary GDP Annualized Q/Q: 3.0%e v 3.2% advance; Personal Consumption: 1.2%e v 1.2% prior
• 08:30 (US) Q1 Preliminary GDP Price Index: 0.9%e v 0.9% prior; Core PCE Q/Q: 1.3%e v 1.3% prior
• 08:30 (US) Initial Jobless Claims: 214Ke v 211 K prior; Continuing Claims: 1.66Me v 1.676M prior
• 08:30 (US) Apr Advance Goods Trade Balance: -$72.7Be v -$71.4B prior
• 08:30 (US) Apr Preliminary Wholesale Inventories M/M: +0.1%e v -0.1% prior; Retail Inventories M/M: +0.2%e v -0.3% prior
• 08:30 (CA) Canada Q1 Current Account Balance: -$18.1Be v -$15.5B prior
• 08:30 (US) Weekly USDA Net Export Sales
• 09:00 (RU) Russia Gold and Forex Reserve w/e May 24th: No est v $494.1B prior
• 10:00 (US) Apr Pending Home Sales M/M: 0.5%e v 3.8% prior; Y/Y: +0.1%e v -3.2% prior
• 10:00 (MX) Mexico Central Bank (Banxico) May Minutes
• 10:30 (US) Weekly EIA Natural Gas Inventories
• 11:00 (US) Weekly DOE Crude Oil Inventories
• 11:00 (IT) Italy Fin Min Tria
• 11:30 (US) Treasury to sell 4-Week and 8-Week Bills
• 12:00 (US) Fed's Clarida (moderate, voter) speaks to the Economic Club of New York
• 14:15 (CA) Bank of Canada (BOC) Senior Dep Gov Wilkins

The GBP/CHF currency pair has been trading down since the beginning of May when the pair reversed south from the upper boundary of the long-term descending channel at 1.3350.

Currently, the exchange rate is trying to surpass the support level—the Fibonacci 23.60% retracement at 1.2686. Given that the rate is pressured by the 55-, 100– and 200-hour SMAs, it is likely, that some downside potential could prevail in the market, and the pair could target the lower channel line located circa 1.2150.

However, if the given support level holds, it is likely, that the rate could reverse north and reach the Fibonacci 50.00% retracement at 1.3091.

The Canadian Dollar has been depreciating against the Swiss Franc after the exchange rate reversed south from the upper boundary of the long-term descending channel at 0.7620.

Given that the currency pair is pressured by the 55-, 100– and 200-hour SMAs, it is expected, that bears could prevail in the market. Note, that the pair has to surpass the Fibonacci 23.60% retracement at 0.7408.

If the given support level holds, it is likely, that the rate could reverse north and reach the Fibonacci 38.20% retracement at 0.7501.

The euro currency has failed to rally against the US dollar during the European trading session, further cementing the pairs bearish short-term outlook. Further intraday weakness for the EURUSD should be expected while price trades under the important 1.1130 level. Overall, weaker than expected inflation data from the US economy later today may be needed to boost the euro.

The EURUSD pair is heavily bearish while trading below the 1.1130 level, key technical support remains at the 1.1110 and 1.1080 levels.

If the EURUSD pair holds above the 1.1130 level, key technical resistance is found at the 1.1165 and 1.1182 levels.