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Highlights:

• Canadian GDP rose an impressive 0.6% in May following a 0.2% gain in April.
• Market expectations had been for a much more moderate 0.2% increase with the upward surprise mainly concentrated in the mining sector soaring 4.6% in the month.
• Today's report is indicative of no slowing in Q2 from the Q1 annualized increase of 3.7%.

Our Take:

Canadian GDP jumped a much stronger than expected 0.6% in May marking the 7th consecutive month of increases. The upward surprise was mainly concentrated in the mining sector as it soared 4.6% in the month. There was an expected return of an oil sands upgrader after a temporary shutdown starting in March but the strength went well beyond this factor and occurred despite oil prices remaining moderately weaker than expected. A year ago this sector was hammered by the Alberta wildfires and widespread shutdowns of oil sands production facilities. Eliminating the upward impact of the mining sector GDP growth would still have increased a solid 0.2% despite a one-week construction strike in Quebec that subtracted about 0.1 percentage point from overall monthly growth. Thus today's report is indicative of solid growth persisting in the Canadian economy through the second quarter.

With today's report the annual year-over-year increase in GDP has jumped to 4.6% in May from 3.3% in April and an annual increase in 2016 of only 1 1/2% . In large part this rebound reflects a strong upward trend in mining output with today's report continuing this pattern of strong support. Additionally the manufacturing sector has been steadily, albeit more slowly, improving. Today's report showed that the annual increase in manufacturing activity jumped to an impressive 5.2%, teeing up for the second quarter to build on Q1's 2.1% rise. This improvement in part is due to increasing demand for manufactured goods from the energy sector but also likely reflects rising external demand with U.S. industrial production starting to trend higher. Our forecast assumes that these supportive factors will likely be sustained through the forecast allowing manufacturing to continue to provide support to overall growth in the economy.

• The wave of selling across the tech stocks has reached Europe. The Euro Stoxx 50 index currently hovers around intraday losses of -0.9%. The US stock indexes opened on the same negative sentiment with especially the highly tech-weighted Nasdaq underperforming (-0.36%).
• The first estimate of the American GDP for the second quarter was, with 2.6% Q/Q, lower than the expected 2.7% but significantly higher than the downwardly revised 1.2% in the first quarter. Both consumption (+2.8% Q/Q) and investments (+ 2.0%) contributed strongly. Today's numbers confirm that the Q1 slowdown was temporary.
• The price data were subdued in the US. The GDP price index declined from 2.0% Q/Q in Q1 to 1.0% in Q2. The consensus had expected a higher reading (1.3%). The same goes for the Employment Cost Index which was 0.5% in Q2, down from a 0.8% number in Q1 and a 0.6% consensus. The core PCE was the only number above expectations (0.9% Q/Q compared to the expected 0.7%).
• GDP readings for Q2 in France, Austria and Spain were all better than expected or they at least matched expectations. In Spain, GDP rose from 0.8% to 0.9% Q/Q and from 3.0% to 3.1% Y/Y (consensus 0.9% M/M and 3.0% Y/Y). France saw its GDP stabilise Q/Q at 0.5% while the Y/Y figure increased from 1.1% to 1.8%, more than the forecasted 1.6%.
• The German CPI surprised to the upside in July with a 0.4% M/M and a 1.5% Y/Y rise (consensus 0.3% M/M and 1.4% Y/Y). In France, the CPI declined an expected 0.4% M/M but stabilised Y/Y at 0.8%. The Spanish CPI declined from a positive 0.1% M/M to a negative 1.2% M/M (consensus -1.3%) but rose from 1.6% Y/Y to 1.7% Y/Y (consensus 1.6%).
• Sentiment among UK households dropped this month to match the weakest reading since just after the Brexit vote, led by a sharp drop in confidence in the economy. The Gfk consumer confidence reading of -12 in July is down two points compared to June and lower than the expected -11.
• The European Commission's monthly measure of economic confidence nudged up 0.1 points to 111.2 in July – its best level since before the financial crisis hit in 2007. The gauge was driven higher by a bump in confidence in Germany and the Netherlands, but fell back in Italy, France and Spain.

Rates

Core bonds show two faces

Global core bond showed two faces. During the European morning session, the Bund (and US Treasuries) were hard hit by an avalanche of strong activity data and higher than-expected German and Spanish inflation (for July). The Bund fell from about 162.20 to 161.40. Regarding the eco data, French and Spanish Q2 GDP were strong, as was the EC euro area economic sentiment (highest since June 2007). German inflation exceeded expectations and stabilized (HICP) instead of declining. The German curve bear steepened (0.5 to 3.2 bps higher). Intra-EMU 10-yr yield spreads versus Germany were little changed.

The US Treasury followed the Bund lower in sympathy, but limited the losses. During the US session, US Treasuries erased losses on the US economic data, before reverting again a bit lower. US Q2 GDP was near expectations at 2.6%. Q1 GDP was revised marginally lower (see headlines for details). The GDP price indicator, however, slowed sharply to 1% Q/Qa from 2% Q/Qq in Q1 and fell short to expectations (1.3% Q/Qa). Core PCE deflator slowed to 0.9% Q/Qa from 1.8% Q/Qa, beating consensus (0.7%) though. Markets are very sensitive for inflation indicators. After soft CPI inflation, the slowing of the deflators shouldn't have been a major surprise. However, the soft Employment Cost Index might have been of greater impact on US Treasuries. Wages rose a sluggish 0.5% Q/Q, underlining that the tight labour market isn't (yet?) triggering wage increases. Without higher wages, the Fed's hope on fulfilling its target may remain elusive. That also questions the Fed's gradual tightening campaign. So, US Treasuries erased the losses (bunds barely regained ground), before some selling re-occurred. At the time of writing, US yields are nearly unchanged compared to yesterday's closing levels.

Currencies

Dollar continues to struggle on soft US price data

The euro initially gained a few ticks on good EMU data today and a declining interest rate differential with the dollar. Euro strength was replaced by USD softness later in the session. US Q2 GDP growth was in line with expectations, but the price data (cost employment indices) were again soft. EUR/USD trades in the 1.1725 area. USD/JPY struggles not to fall below 111.

The decline in equities/rise in volatility in the US spilled over to Asian markets. Losses ranged from roughly 0.5% to about 2%. Japanese household spending was strong and the jobless rate (2.8%) matched the multi-year lows. Japanese inflation held at low levels, close to the 0% mark. There was again little direct impact on the yen. USD/JPY held up quite well given the pick-up in volatility. EUR/USD didn't show a clear trend and trades in the 1.1680 area.

European data (French and Spanish GDP, EC confidence data and German inflation) were mostly strong (or at least better than expected). There was no one-on-one relation between the data and EUR/USD. Short-term interest rate differentials were little changed. LT European yields rose throughout the session and differentials narrowed in favour of the euro. EUR/USD returned gradually north of 1.17. USD/JPY hovered in a tight range mostly in the 111 area (even as equities remained in the defensive). So, the intraday rise of EUR/USD was at least partially due to euro strength.

EUR/USD rose further ahead of the publication of the US Q1 GDP. However, looking at other USD cross rates, this was more USD softness. US Q2 GDP was very close to expectations (2.6% Q/Qa). The price data in the report were mixed, but a low employment cost index was another indication of slow wage growth. US yields and the dollar declined. EUR/USD reacted most. EUR/USD spiked to the mid 1.17 area, but trades again in the 1.1730/35 area. The test of the 1.1714/35 barrier continues. The loss of USD/JPY was more modest. The pair tries not to fall below 111.00. The conclusion from the previous days hasn't changed: sentiment on the dollar will probably remain fragile unless there comes good news from prices and even more from US wages.

Sterling rebound stalls as global uncertainty weighs

GFK consumer confidence was marginally softer than expected overnight. There were no other important eco data in the UK today. Of late, the UK currency tried to regain ground against the euro. EUR/GBP slipped temporary below 0.89. However, the move had no strong legs. The rise in overall volatility yesterday and this morning weighted on sterling. Good EMU data, rising EMU yields and a rebound in EUR/USD, pushed EUR/GBP higher. There were also some, albeit second tier, headlines confirming stubborn hurdles in the Brexit negotiations (UK exit bill, Irish border…). The 0.8995 correction top looms again on the horizon. EUR/GBP trades currently in the 0.8970 area. Cable trades near 1.3080.

Daily Pivots: (S1) 1.1624; (P) 1.1700 (R1) 1.1751; More...

With 1.1612 minor support intact, intraday bias in EUR/USD remains on the upside. Current medium term rally is expected to target 1.2 handle next. Nonetheless, considering bearish divergence condition in 4 hour MACD, break of 1.1612 will indicate short term topping and bring lengthier consolidation first.

In the bigger picture, an important bottom was formed at 1.0339 on bullish convergence condition in weekly MACD. Sustained break of 55 month EMA (now at 1.1760) will pave the way to key fibonacci level at 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. While rise from 1.0339 is strong, there is no confirmation that it's developing into a long term up trend yet. Hence, we'll be cautious on strong resistance from 1.2516 to limit upside. But for now, medium term outlook will remain bullish as long as 1.1295 support holds, in case of pull back.

Daily Pivots: (S1) 1.3023; (P) 1.3091; (R1) 1.3131; More...

No change in GBP/USD's outlook. Price actions from 1.1946 is seen as a corrective pattern. Considering bearish divergence condition in 4 hour MACD, we'd stay cautious on strong resistance from 61.8% projection of 1.2108 to 1.3047 from 1.2588 at 1.3168 to limit upside. Break of 1.2932 support will be the first sign of reversal and will turn bias to the downside to target 1.2588 key support next. Though, sustained break of 1.3168 will bring further rise towards 1.3444 before completing the correction.

In the bigger picture, overall, price actions from 1.1946 medium term low are seen as a corrective pattern that is still in progress. While further upside is expected, overall outlook remains bearish as long as 1.3444 key resistance holds. Larger down trend from 1.7190 is expected to resume later after the correction completes. And break of 1.2588 will indicate that such down trend is resuming.

Daily Pivots: (S1) 0.9538; (P) 0.9600; (R1) 0.9709; More...

Intraday bias in USD/CHF remains on the upside for the moment. The pair should have bottomed at 0.9437 after defending 0.9443 key support level. This is also supported by bullish convergence condition in daily MACD. Further rise should be seen to 38.2% retracement of 1.0342 to 0.9437 at 0.9783 first. Break will target channel resistance (now at 0.9912). On the downside, below 0.9633 minor support will turn intraday bias neutral and bring consolidations first.

In the bigger picture, current development argues that USD/CHF has successfully defended 0.9443 key support level. And long term range trading in 0.9443/1.0342 is extending with another rising level. At this point, there is no sign of an up trend yet. Hence, while further rise is expected in USD/CHF, we'll start to be cautious on loss of momentum above 61.8% retracement of 1.0342 to 0.9437 at 0.9996.

Daily Pivots: (S1) 110.79; (P) 111.25; (R1) 111.72; More...

USD/JPY is still bounded in consolidation above 110.61 temporary low and intraday bias remains neutral. As long as 112.41 resistance holds, further decline is expected. Break of 110.61 will target 108.81. Break there will resume whole correction from 118.65 and target 61.8% retracement of 98.97 to 118.65 at 106.48. Nonetheless, break of 112.41 will dampen this bearish view and turn focus back to 114.49 resistance instead.

In the bigger picture, the corrective structure of the fall from 118.65 suggests that rise from 98.97 is not completed yet. Break of 118.65 will target a test on 125.85 high. At this point, it's uncertain whether rise from 98.97 is resuming the long term up trend from 75.56, or it's a leg in the consolidation from 125.85. Hence, we'll be cautious on topping as it approaches 125.85. If fall from 118.65 extends lower, down side should be contained by 61.8% retracement of 98.97 to 118.65 at 106.48 and bring rebound.

Dollar is set to end the week as the second weakest currency as slightly better than expected growth data provides little support. Q2 GDP grew 2.6% annualized, up from prior 1.4% and versus consensus of 2.5%. However, GDP price index slowed to 1.0%, down from 1.9% and below expectation of 1.3%. Employment cost index rose 0.5% in Q2, also below expectation of 0.6%. Subdued inflation will affirm the case for Fed to starting shrinking the balance in September first, and leave another rate hike to December. This will give Fed more time to assess inflation and growth outlook before raising interest rates. Also from US session, Canada GDP rose 0.6% mom in May, much stronger than expectation of 0.2% mom.

Skinny Obamacare repeal bill collapsed

Political uncertainty is also another factor that weighs on the Dollar. After a months-effort by Senate Republicans, another attempt at repealing Obamacare collapsed. The "skinny" version of the Obama repeal bill was voted down by John McCain and two more Republicans. Senate Majority Leader, Mitch McConnell said that "this is clearly a disappointing moment" and "it's time to move on." US President Donald Trump is now expected to move on to his expansive fiscal policies. However, the lack of political leadership aside, the failure of border tax and Obamacare repeal now raised questions on whether Trump could balance the books for tax reforms and infrastructure spending.

Eurozone data positive

Euro continues it's march higher against Swiss Franc while staying in range against Dollar and Yen. Economic data from Eurozone are generally positive. German CPI rose 0.4% mom 1.7% yoy in July, picked up from prior 0.2% mom and 1.6%. That also beat expectation of 0.2% mom, 1.5% yoy. French GDP grew 0.5% qoq in Q2, in line with consensus. Eurozone business climate dropped to 1.05 in July. Economic confidence rose to 111.2, industrial confidence was unchanged at 4.5, services confidence rose to 14.1, consumer confidence dropped to -1.7. Also from Europe, Swiss KOF leading indicator rose to 105.5 in July.

Japan national CPI core unchanged at 0.4% yoy

A bunch of economic data is released from Japan today. National CPI core was unchanged at 0.4% yoy in June. Tokyo CPI core rose to 0.2% yoy in July, up from 0.0% yoy and beat expectation of 0.1% yoy. Unemployment rate dropped to 2.8% in June versus expectation of 3.0%. Household spending rose 2.3% yoy, retail sales rose 2.1% yoy. Core inflation remained well below BoJ's 2% target. Indeed, the central bank has lowered inflation forecast for the current fiscal year to 1.1% and pushed back the timing for hitting the target by a year. And the summary of opinions of the July meeting also showed that one member is concerned that repeated delays would hurt BoJ's credibility. Based on current outlook, there is little chance for BoJ to follow other major global central banks to start exiting from stimulus.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 110.79; (P) 111.25; (R1) 111.72; More...

USD/JPY is still bounded in consolidation above 110.61 temporary low and intraday bias remains neutral. As long as 112.41 resistance holds, further decline is expected. Break of 110.61 will target 108.81. Break there will resume whole correction from 118.65 and target 61.8% retracement of 98.97 to 118.65 at 106.48. Nonetheless, break of 112.41 will dampen this bearish view and turn focus back to 114.49 resistance instead.

In the bigger picture, the corrective structure of the fall from 118.65 suggests that rise from 98.97 is not completed yet. Break of 118.65 will target a test on 125.85 high. At this point, it's uncertain whether rise from 98.97 is resuming the long term up trend from 75.56, or it's a leg in the consolidation from 125.85. Hence, we'll be cautious on topping as it approaches 125.85. If fall from 118.65 extends lower, down side should be contained by 61.8% retracement of 98.97 to 118.65 at 106.48 and bring rebound.

Economic Indicators Update

July has certainly been a painful trading month for the Greenback, with today's second quarter economic growth figures from the US offering little support to the beleaguered currency. The US economy expanded by 2.6% in the second quarter of 2017 on the back of strong consumer spending which was a solid pick up from the soft first quarter growth reading of 1.2%. Although US GDP printed in line with expectations, price action suggests that concerns over stubbornly low inflation in the US, as well as political risk, continue to weigh heavily on the Dollar.

With the Greenback falling into the category of currency's that have become increasingly sensitive to monetary policy speculations, and market expectations for a 25 basis point rate hike in December standing at 46.6%, further downside may be on the cards. Dollar bullish investors are clearly lacking the inspiration to support prices and may turn towards next week's NFP report for further insight into the health of the US economy and labor force.

From a technical standpoint, the Dollar Index is bearish on the daily timeframe as there have been consistently lower lows and lower highs. Prices are trading below the daily 20 SMA, while the MACD has crossed to the downside. A breakdown below 93.40 should encourage a further selloff towards 93.00.

USD/CHF - 0.9689

Original strategy :

Buy at 0.9600, Target: 0.9700, Stop: 0.9565

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.9600, Target: 0.9700, Stop: 0.9565

Position : -

Target :  -

Stop : -

Although the greenback slipped to 0.9490 earlier today, renewed buying interest emerged and dollar has rallied above indicated resistance at 0.9622-35, confirming recent decline has ended at 0.9438, hence upside bias is seen for the move from there to extend gain to 0.9730, however, break there is needed to retain bullishness and encourage for headway to 0.9750-60 first.
 
In view of this, would not chase this rise here and would be prudent to buy dollar on pullback as previous resistance at 0.9596 should turn into support and contain dollar’s downside. Below 0.9570 would defer and risk test of the upper Kumo (now at 0.9551) but price should stay well above support at 0.9490, bring another rise later. 

GBP/USD - 1.3077

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Despite yesterday’s marginal rise to 1.3159, the subsequent sharp retreat suggests top has possibly been formed there and downside risk has increased for retracement of recent upmove to 1.3035-40, however, only break of support at 1.2999 would confirm recent upmove has ended, bring further fall to 1.2980 and later towards 1.2955-60.

In view of this, would be prudent to stand aside in the meantime. Above 1.3120 would bring recovery to 1.3140 but only break of said resistance at 1.3159 would revive bullishness and signal recent upmove has resumed for headway to 1.3185-90 and then 1.3210-20.