Daily Commentary | Bank of Canada to stand pat and maintain its neutral bias | 18/01/17

18.01.2017, 10am

Daily Commentary • Bank of Canada to stand pat and maintain its neutral bias Today, the key event is likely to be the first Bank of Canada policy decision of the year. The forecast is for the Bank to keep its policy unchanged. Since the BoC’s latest meeting in December, the story in Canada has been surprises in economic data. Even though the nation’s core CPI rate slipped unexpectedly in November, the labor market surprisingly tightened in December, with the labor force participation rate rising notably. Bearing these in mind, and that Governor Poloz indicated in relatively recent comments that it would take an economic shock for the Bank to ease again, we share the view that the BoC is likely to take the sidelines and we expect the Bank to maintain its overall neutral bias. The fact that oil prices have remained elevated following the OPEC consensus supports further the case for no action and an overall neutral tone by the BoC, considering that oil is Canada’s biggest export by far.

• USD/CAD traded lower yesterday after it hit resistance at the crossroad of the short-term downtrend line taken from the peak of the 28th of December and the prior long-term uptrend line drawn from back at the low of the 3rd of May. Then the rate tested again the 1.3030 (S1) support and during the Asian morning Wednesday, it rebounded somewhat. As long as the rate is trading below the aforementioned short-term downtrend line, we would consider the near-term outlook to stay negative. However, we would like to see a decisive break below the psychological zone of 1.3000 (S2) before we assume a trend resumption. As for the bigger picture, the dip below the long-term uptrend line taken from the low of the 5th of May and the subsequent dip below 1.3100 (R1) may have turned the medium-term outlook somewhat negative as well.

• Theresa May pledges to give Parliament a vote on final Brexit deal UK PM Theresa May delivered her keynote speech on “Brexit” yesterday, outlining what her negotiating objectives are moving forward. Most of the key points were already known to market participants following leaks hours before the speech, while “hard Brexit” whispers also dominated news headlines over the weekend. At the event, the PM confirmed much of the “hard Brexit” rhetoric that everyone expected her to deliver, such as the fact that Britain will leave the single market, and that remaining as a member would mean being bound by EU laws.

• As we had outlined on Monday, the reaction in GBP was a “sell the rumor, buy the fact” move. Given that a “hard Brexit” speech was probably priced in following the leaks, the pound surged during and after the speech, perhaps due to short covering. The rebound in the pound may have also been fueled by May’s point that the final Brexit deal will be put to a vote in both houses of Parliament. This does not mean that lawmakers can veto the final deal, but rather that the government has to go back to the negotiating table if they reject it. Focus for GBP traders now turns to the Supreme Court’s decision later this month, on whether Parliament should have a say in triggering Article 50.

• Trump: The strong dollar “is killing us” The US dollar came under renewed selling pressure yesterday, following some comments from US President-elect Trump that “our dollar is too strong”. Trump said that American companies cannot compete with their Chinese counterparts because the US currency is too strong. Perhaps most importantly, the President-elect said the US might need to “get the dollar down” if changes in tax policy drive it even higher, which in our view, brings to the table the possibility of FX intervention. This is something that has not happened since the Clinton administration. However, for now, the forthcoming direction of the currency is likely to be determined by some comments from Fed Chair Yellen today (see below), as well as Trump’s inaugural speech on Friday.

• EUR/USD traded higher yesterday, breaking above the resistance (now turned into support) barrier of 1.0685 (S1). However, the advance was halted by the upside resistance line drawn from the peak of the 5th of January. The price structure on the 4-hour chart still suggests that the short-term outlook remains positive. Nevertheless, based on our short-term oscillators, we see the likelihood of a minor setback for now, before and if the bulls decide to take control again. The RSI hit resistance near its 70 line and turned down, while the MACD, although positive shows signs of topping and it could fall below its trigger line soon. Such a pullback may bring the rate down to the 1.0600 (S2) territory, but if the bulls manage to take advantage of that zone, I would expect them to start hunting for the 1.0800 (R1) territory, at least ahead of Trump’s inauguration.

• As for the rest of today’s highlights: From the UK, we get employment figures for November. The forecast is for the unemployment rate to have ticked up, while average weekly earnings are expected to have accelerated slightly. We share the view for accelerating wages, while we see the risks surrounding the unemployment rate forecast as skewed to the downside, perhaps for an unchanged rate. Our view derives from the UK services PMI for November, which indicated the fastest employment growth since April, as well as further increases in labor costs. A positive surprise in the unemployment rate could extend the pound’s rebound caused by Theresa May’s speech.

• We also get final CPIs for December from both the Eurozone and Germany.

• In the US, Fed Chair Yellen’s speech is likely to attract market attention. The topic will be: “The Goals of Monetary Policy and How We Pursue Them”, so we are likely to get some comments on her view regarding the rate path. Considering that Yellen has been relatively “hawkish” ever since the December FOMC meeting, we would expect her to maintain her overall optimistic tone, something that could support somewhat the dollar. As for the economic data, December’s CPI is due out. The forecast is for both the headline and the core rates to have risen, something supported by the nation’s ISM manufacturing and non-manufacturing PMIs, which both showed that prices accelerated in December. Something like that may help USD to strengthen as well. We also get the nation’s industrial production data for December and the NAHB housing market index for January.

• Besides Chair Yellen, we have two more Fed speakers scheduled for Wednesday: Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari.


EUR/USD

• Support: 1.0685 (S1), 1.0600 (S2), 1.0500 (S3)

• Resistance: 1.0800 (R1), 1.0880 (R2), 1.0950 (R3)


USD/CAD

• Support: 1.3030 (S1), 1.3000 (S2), 1.2900 (S3)

• Resistance: 1.3100 (R1), 1.3165 (R2), 1.3200 (R3)




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