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Highlights:

• Canada's merchandise trade deficit roughly doubled to $1.1 billion in May from $0.55 billion in April as a jump in imports more than offset higher exports.
• The 1.3% nominal increase in exports was fairly broad-based with 8 of 11 major subsectors posting gains.
• Special factors were also at play with an 11% jump in exports of metal and non-metallic mineral products attributed to a transfer of gold assets within the banking sector. That increase was offset by a price-driven drop in crude oil exports.
• Forestry product export volumes fell 5% in May following imposition of duties on Canadian softwood lumber in late-April.
• Nominal imports were up 2.4% in May with half of the increase coming from aircraft imports.

Our Take:

There is a lot of noise to filter through in today's trade report but we think the message on exports is ultimately positive. Non-energy export volumes, even excluding a transitory jump in gold exports, posted a solid increase in May and are now up relative to a year ago. A price-related decline in oil exports belies what has been a fairly strong increase in energy export volumes year-to-date. That supports the Bank of Canada's view that adjustment to lower oil prices is now largely complete. May's trade data is consistent with our expectation that net exports will add about 1 1/2 percentage points to GDP growth in Q2.

There are reasons to expect an upward trend in Canadian exports will continue. Global trade growth is picking up alongside stronger economic activity and other drivers such as US industrial production and business investment have improved year-to-date. Recent surveys from the Bank of Canada and Export Development Canada showed improving sentiment among exporters as strong orders make up for uncertainty regarding US trade policy. The Bank of Canada's latest view seems to be that, while uncertainty is clouding the outlook, monetary policy decisions can't be held off in the face of concerns that could linger for some time. As such, we don't see the threat of trade policy changes, including upcoming NAFTA renegotiation, preventing the bank from raising the overnight rate next Wednesday.

The CAC index is showing considerable losses in the Thursday session. Currently, the index is currently trading at 5132.50 and is down 0.93% on the day. On the release front, the ECB released its minutes from the June policy meeting. France's 10-year bond yield rose to 0.82% and Eurozone Retail PMI improved to 53.2, up from 52.0. On Friday, the US releases Nonfarm Payrolls, which is expected to improve to 175 thousand.

European stock markets are lower on Thursday, following the release of the ECB minutes. The minutes indicated that policymakers discussed removing its "easing bias" at the June meeting, but ultimately decided not to make a move, since stronger economic conditions had not resulted in higher inflation. ECB chief economist Peter Praet reiterated the bank's stance at a conference in Paris on Thursday. Praet noted that eurozone economic growth is accelerating, but said that the ECB still needs to provide a "steady hand" in order to spur stubbornly low inflation levels.

At the June meeting, the bank removed an easing bias regarding interest rates, effectively closing the door to further rate cuts. However, policymakers may now be wary about any more signals of tightening policy, to avoid another run on the euro, such as last week's "Draghi rally" during the ECB forum. The ECB meets for a policy meeting on July 20, and we could see a bland rate statement, to the effect that the economy is headed in the right direction, but QE will remain in place until inflation levels move higher. However, Draghi has surprised the markets before, so the meeting could prove to be a market-mover.

The dollar shrugged off the release of the Fed's June policy meeting, which failed to shed much light on the Fed's plans. The minutes revealed a divided Fed over the key issues of inflation and the Fed's bloated balance sheet. Some members expressed unease at the Fed's current forecast of rate hikes, given the persistently low levels of inflation. According to the current "dot plot", the Fed expects to raise rates in December, and three times in 2018. There was also division over the timing of reducing the $4.2 trillion balance sheet – some policymakers were in favor of starting in September, while others preferred later in the year. At the June meeting, the Fed stated that it would begin reducing the balance sheet this year, but provided no details. Analysts expect the Fed to start winding down the balance sheet in September, prior to a rate hike in December. The markets are lukewarm about a rate hike in December, with the odds at just 50%, according to the CME Group.

Daily Pivots: (S1) 1.1319; (P) 1.1344 (R1) 1.1375; More.....

EUR/USD rebounds strongly after drawing support from 4 hour 55 EMA. But it's staying in range below 1.1444 and intraday bias remains neutral first. In case of another fall, we'd expect downside to be contained by 1.1291 resistance turned support to bring rally resumption. Break of 1.1444 will extend the rise from 1.0339 low to 1.1615 resistance next. Meanwhile, break of 1.1291 will turn focus back to 1.1118 support.

In the bigger picture, the firm break of 1.1298 resistance further affirm medium term reversal. That is an important bottom was formed at 1.0339 on bullish convergence condition in weekly MACD. Further rise would be seen to 55 month EMA (now at 1.1776). Sustained break there will pave the way to 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516 next. This will now remain the favored case as long as 1.1118 support holds.

Dollar is under some pressure in early US session after disappointing job data. On the other hand, Euro surged broadly as market perceived the ECB monetary policy account as a hawkish one. US ADP employment report showed 158k growth in private sector jobs in June, below expectation of 180k. Prior month's figure was revised down to 230k, from 253k. Initial jobless claims rose 4k to 248k in the week ended July 1, versus consensus of 243k. The number, nonetheless, remain historically low and stayed below 300k handle for the 122 straight weeks. Continuing claims rose 11k to 1.96m in the week ended June 24, staying below 2m for 12 straight weeks. Also released in early US session, US trade deficit narrowed to USD -46.5b in May. Canada trade deficit widened to CAD -1.1b in May. Canada building permits rose 8.9% mom in May.

Quick update: Dollar stays soft despite upside surprise in ISM services

FOMC minutes for June meeting released yesterday showed that policy makers were divided over the timing of balance sheet reduction while there was also discussion over the recent inflation weakness."Several participants indicated that the reduction in policy accommodation arising from the commencement of balance sheet normalization was one basis for believing that, if economic conditions evolved broadly as anticipated, the target range for the federal funds rate would follow a less steep path than it otherwise would". Yet, "some other participants suggested that they did not see the balance sheet normalization program as a factor likely to figure heavily in decisions about the target range for the federal funds rate". More in FOMC Members Divided over Balance Sheet Reduction Schedule.

ECB considered dropping pledge of expanding QE

ECB's monetary policy accounts showed that during the meeting on June 7-8, policy makers discussed dropping the pledge to expand its quantitative easing program if necessary as "the economic expansion proceeded and if confidence in the inflation outlook improved further." And, "gradual adjustments in the governing council's communication...would be in line with the evolving risk assessment." But for the moment, "there was broad agreement among members that the current monetary policy stance remained appropriate" given the subdued inflation.

ECB chief economist Peter Praet repeated his urge that the central bank needs "patience and persistence" as "our mission is not yet accomplished." Praet acknowledged broadening economy recovery but underlying inflation remained too low. And he emphasized that "maintaining a steady hand continues to be critical to fostering a durable convergence of inflation toward our monetary policy aim."

Released in Europe today, Eurozone retail PMI rose to 53.2 in June. German factory orders rose 1.0% mom in May. Swiss CPI slowed deeply to 0.2% yoy in June, down from 0.5% yoy.

Australia trade surplus widened

From Australia, trade surplus widened to AUD 2.47b in May, up from AUD 0.09b and beat expectation of AUD 1.11b. That was driven by the 9% growth in exports over the month while imports rose 1%. However, it should be noted that coal exports jumped 62% over the month, for supply was disrupted back in April after Queensland was hit by cyclone in late March. Aussie remains the weakest major currency for the week as markets were dissatisfied that RBA didn't turn hawkish, following other major central banks.

IMF Lagarde: Financial vulnerabilities present an immediate concern

IMF Managing Director Christine Lagarde warned in a blog post that "financial vulnerabilities present an immediate concern." And, "after a long period of favorable financial conditions, including low-interest rates and easier access to credit, corporate leverage in many emerging economies is too high." In Europe, she noted that "bank balance sheets still need repair following the crisis." In China, "a faster-than-projected expansion - if it continues to be fueled by rapid credit and increased spending - would potentially lead to unsustainable public and private debt in the future".

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1319; (P) 1.1344 (R1) 1.1375; More.....

EUR/USD rebounds strongly after drawing support from 4 hour 55 EMA. But it's staying in range below 1.1444 and intraday bias remains neutral first. In case of another fall, we'd expect downside to be contained by 1.1291 resistance turned support to bring rally resumption. Break of 1.1444 will extend the rise from 1.0339 low to 1.1615 resistance next. Meanwhile, break of 1.1291 will turn focus back to 1.1118 support.

In the bigger picture, the firm break of 1.1298 resistance further affirm medium term reversal. That is an important bottom was formed at 1.0339 on bullish convergence condition in weekly MACD. Further rise would be seen to 55 month EMA (now at 1.1776). Sustained break there will pave the way to 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516 next. This will now remain the favored case as long as 1.1118 support holds.

Economic Indicators Update

USD/CHF - 0.9635

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 : -

As the greenback retreated after rising to 0.9688, suggesting consolidation below this level would be seen and pullback to 0.9621 support cannot be ruled out, however, if our view that low has been formed at 0.9552 is correct, downside would be limited to 0.9600 and bring another rebound later, above said resistance would extend the rise from 0.9552 low for retracement of recent decline to 0.9700 but reckon upside would be limited and price should falter below resistance area at 0.9738-43.

In view of this, would not chase this rise here and we are looking to buy dollar on pullback as 0.9600 should limit downside and bring another rise later. Below 0.9565-70 would abort and signal intra-day top is formed, risk retest of 0.9552 first.

GBP/USD - 1.2950

Original strategy :

Buy at 1.2865, Target: 1.3000, Stop: 1.2830

Position : - 

Target :  -

Stop : -

New strategy  :

Buy at 1.2865, Target: 1.3000, Stop: 1.2830

Position : -

Target :  -

Stop : -

Although the British pound has recovered after falling to 1.2893, reckon upside would be limited to 1.2980-85 and near term downside risk remains for the corrective fall from 1.3030 (last week’s high) to bring retracement of recent upmove to 1.2880-85 (38.2% Fibonacci retracement of 1.2640-1.3030), however, downside should be limited to 1.2865-70 and bring another upmove later, above 1.2980-85 would signal low is formed, bring rebound to 1.3000 but break of said resistance at 1.3030 is needed to signal recent upmove has resumed and extend further gain towards recent high 1.3048. 

In view of this, we are looking to buy cable again on further corrective fall as previous resistance at 1.2861 should turn into support and contain downside, bring another rise. Below 1.2830-35 (50% Fibonacci retracement of 1.2640-1.3030) would abort and signal top is formed, bring further fall towards support at 1.2794.

Bank of Canada will have a meeting on July 12 to decide the interest rate. USDCAD has declined due to recent comments made by top Bank of Canada officials which seem to suggest that interest rates could be raised soon. The market in fact is pricing in an 82 percent chance of a rate hike next week. In a CNBC interview last week, Bank of Canada Governor Stephen Poloz said that the two interest rate cuts by Bank of Canada in 2015 have done their jobs in shielding Canadian economy from the steep fall in the price of oil. He also added that the central bank needs to consider its options as excess capacity in the economy is used up.

Mr. Poloz reiterated his hawkish stance in a recent interview with German newspaper Handelsblatt. He said that monetary policymakers must "anticipate where the economy will be 18 or 24 months from now". He also said inflation in Canada should be well into an uptrend by the first half of 2018. Thus normalization must begin before the price growth hits its target.

The Canadian dollar strengthened against the U.S dollar on Tuesday after his comments. The loonie touched its strongest intraday level in nine months at 1.2908. The strength in loonie is not only based on rate hike expectation alone. Recent economic data also shows Canada's economy grew for sixth consecutive month in April. Meanwhile, business sentiment suggest companies feel more optimistic. Prices of oil, one of Canada's major exports, also started to recover. This further adds support for the Canadian dollar.

Data from CFTC (U.S Commodity Futures Trading Commission) shows a record pace of short covering in the Canadian dollar for a fifth straight week. The June 27 COT (Commitment of Traders) report below shows non commercial's net short positions in Canadian dollar dropped to 49,495 contracts from 82,881 a week earlier. With the net short position remains elevated at 50K, CAD remains vulnerable to short squeeze and position adjustment.

USDCAD Long Term Analysis

Daily USDCAD chart above shows pair declined sharply after reaching the peak on January 20, 2016. Pair declined from 1.4693 to 1.2461 (approximately 2200 pips) within a span of less than 4 months. The decline finally bottomed on May 3, 2016. The pair then took 1 year time from May 3, 2016 to May 5, 2017 to correct the decline in overlapping fashion, characteristic of a correction. This correction looks to be forming a bearish flag and recently pair has broken below the channel which may suggest that the correction is complete on May 5, 2017. A break below May 3, 2016 low (1.2461) will give the final confirmation that pair has started the next leg lower.

USDCAD 4 hour Elliott Wave Sequence Chart

USDCAD 4 Hour chart above shows a 5 swing bearish sequence from May 4, 2017 high. Please note that this is not the same as 5 waves impulse, but rather the number of swing count. The 5 swing sequence suggests that while the sixth swing bounce fails below swing #4 high at 1.3328, more downside can be seen in the pair.

USD/JPY - 113.26

New strategy  :

Stand aside

Position :  -

Target :  -

Stop : -

Although the greenback resumed recent rise and rose to as high as 113.69 yesterday, lack of follow through buying and the subsequent retreat suggest consolidation below this level would be seen and weakness to 112.80-85 (38.2% Fibonacci retracement of 111.46-113.69) is likely, however, break of support at 112.74 is needed to signal top has been formed there, bring retracement of recent rise to 112.40-45, then 112.20 but reckon 111.95-00 would hold from here.

In view of this, would not chase this rise here and would be prudent to stand aside for now. Above said resistance at 113.69 would signal recent upmove is still in progress and may extend further gain to 114.00 but loss of momentum should prevent sharp move beyond 114.25-30.

Financial markets offered a muted response towards June's hawkish FOMC meeting minutes, with the Dollar rally easing as investors re-evaluated the mixed messages that policy makers dished out. It was interesting how the minutes illustrated a visible divide between officials over the timings of the balance sheet reduction, with an increasing split on the outlook for inflation compounding to the confusion. While Fed hawks felt that the economy could handle higher interest rates and that this period of low inflation in the States was 'transitory', doves expressed concerns over the recent softness in inflation continuing. There were also discussions over the uncertainty regarding the possible implementation and changes to fiscal and other government policies.

All in all, Dollar bullish investors who were seeking some form of inspiration and further clarity from June's FOMC meeting minutes, were left empty handed and this was reflected in price action. Will the Federal Reserve have the ability to reduce their balance sheet and increase interest rates this year? Time will tell as such may depend on whether economic data from the States stabilizes, with this period of softness proving to be 'transitory'.

Speaking of economic data, investors may direct their attention to the influx of releases from the States today, which could support or deflate rate hike expectations. The ADP Non-Farm payroll will be the first course, followed by unemployment claims and topped up with the ISM Non-Manufacturing PMI report. In this period, where markets need more conviction over the Federal Reserve moving forward, with raising US interest rates and unwinding its balance sheet, economic data is likely to be closely scrutinized.

From a technical standpoint, the Dollar Index remains under pressure on the daily charts. A breakdown below 96.00 may encourage a further depreciation lower towards 95.50.

ECB meeting minutes in focus

The main risk event for the Euro during Thursday's trading session, will be the release of June's ECB meeting minutes which investors may deeply analyze for any discussions of a possible QE exit strategy. Although the Euro could find itself pressured if the minutes strike a dovish tone and emphasize the tepid inflation levels, the downside could be limited as markets digest this as old news.

It should be kept in mind that there has been a multitude of comments from various ECB members since June's meeting, with the recent upbeat remarks on the Eurozone economy from Draghi last week supporting the Euro. The EURUSD remains bullish on the daily charts as there have been consistently higher highs and higher lows. The formation of a new higher low above 1.1300 may open a path back towards 1.1450.

Gold in a tight spot

Gold prices appreciated during Wednesday's trading session, after June's hawkish FOMC meeting minutes failed to support the Greenback and even created a sense of confusion. The mixed thoughts on inflation and the divide over the timings of the balance sheet reductions raised questions on the central bank's ability to move forward with actually raising rates. Heightening tensions surrounding North Korea have also supported the flight to safety, with Gold trading around $1225 at the time of writing. While uncertainty in the longer term has the ability to ensure the yellow metal remains buoyant, bulls are fighting against the tide in the short term. Gold remains vulnerable to further downside as long as prices remain below $1240. Weakness below $1220 may open a path towards $1214.

Commodity spotlight – WTI Crude

WTI Crude edged higher during early trading on Thursday, after API data showed an unexpected decline in US crude inventories which encouraged investors to profit-take. With the unyielding oversupply dynamics weighing heavily on the minds of investors and it becoming clearer that OPEC no longer has the overwhelming say over the industry, oversupply will continue to be the name of the game when it comes to oil. This also means that the valiant efforts being made by OPEC to regain market share, are at threat of being offset from producers outside of their agreement pact. Investors may direct their attention towards the pending weekly oil inventory report from the EIA, which could pressure WTI further if there is a build.

EUR/USD - 1.1381

Original strategy  :

Buy at 1.1290, Target: 1.1390, Stop: 1.1255

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.1355, Target: 1.1455, Stop: 1.1320

Position : -

Target :  -

Stop : -

Current rebound suggests low has been formed at 1.1312 yesterday and consolidation with upside bias is seen for gain to 1.1400-10, however, break there is needed to signal the pullback from 1.1446 (last week’s high) has ended and bring subsequent retest of this level, break there would confirm recent upmove has resumed for headway to 1.1475-80 but price should falter below 1.1500.

In view of this, we are looking to buy euro on dips but one should exit on subsequent rally. Below 1.1325-30 would abort and signal an intra-day top is formed, risk test of said support at 1.1312, then 1.1292 (previous support as well as 50% Fibonacci retracement of 1.1139-1.1446).