Daily Commentary
 | 22/05/2017

BoC meeting: Still dovish despite progress in economic data?

• Today, all eyes will be on the Bank of Canada rate decision. Expectations are for the Bank to remain on hold once again. The BoC has maintained a concerned tone recently. At the press conference following the January gathering, Governor Poloz unexpectedly said that another rate cut remains on the table, while in the latest policy statement, the Bank hinted that there are still “significant uncertainties” weighing on the outlook for exports. The Bank has previously stressed that the strength of CAD is posing challenges to that outlook. Even though the economic data have improved somewhat since the latest meeting, particularly with regards to economic growth, we doubt that this is enough to lead to a material change in the officials’ dovish rhetoric.

• Thus, our view is that the Bank will probably remain on hold once again, but will likely keep the door wide open for a near-term cut, if needed. By providing dovish hints and essentially talking down the currency, the BoC can ensure that Canada’s exports remain competitive. It is also worth noting that this meeting includes a press conference as well, so even if the statement has a more or less neutral tone, we could still get some concerned comments from Governor Poloz. Such signals could bring CAD under selling interest.

• USD/CAD declined somewhat yesterday, after finding resistance near the 1.3360 (R1) hurdle. Given the price structure on the 4-hour chart, and that on Monday the pair broke below a short-term uptrend line taken from the low of the 16th of February, we think that the short-term bias is flat for now. Any dovish signals from the BoC today could be the trigger for another test near the 1.3360 (R1) barrier, where a clear break could pave the way towards the 1.3400 (R2) territory.

Safe havens rally as geopolitical risks take center stage

• Investors sought the shelter of safe haven assets yesterday, amid rising geopolitical tensions in the Korean Peninsula. Both the yen and gold rallied after North Korea warned the US of a nuclear attack if it is provoked, as a response to the US sending military ships to the region. President Trump replied via tweeter that North Korea is “looking for trouble”, and that if China does not help, then the US will solve the problem alone.

• Should these geopolitical uncertainties remain in the market’s spotlight, or even escalate further in coming days, investors could stay in a risk-averse mood in our view. Safe havens such as the yen and gold could extend their recent gains. In particular, we would expect JPY to strengthen further against EUR, bearing in mind that the first round of the French elections and the “Le Pen risk”, are just around the corner. Meanwhile, stocks and risk-sensitive currencies like the AUD and NZD may continue to underperform, as market participants avoid risky assets.

• EUR/JPY has been printing lower highs and lower lows recently below a short-term downtrend line taken from the 17th of March. The pair plunged after finding resistance near the 117.40 (R2) hurdle, to break below the 116.85 (R1) support-turned-into-resistance level. It continued to decline during the Asian day Wednesday and at the time of writing, the pair looks to be headed for a test near the support zone of 115.70 (S1). If the bears prove strong enough to overcome that barrier, we may see further downside extensions towards the 114.10 (S2) territory.

As for the rest of today’s highlights:

• During the European day, the economic calendar is light. The only noteworthy data we get are UK employment figures for February. The forecast is for the unemployment rate to have held steady, while average weekly earnings are expected to have risen at the same pace as previously. However, earnings excluding bonuses, which the BoE has signaled that it pays a lot of attention to, are expected to have slowed. We think that something like that could confirm the Bank’s concerns that real income growth in the UK is headed for a slowdown, especially as inflation is expected to accelerate further in coming months. As a result, these employment data could curb even further speculation regarding a tightening move by the BoE and thereby, reverse some of the sterling’s latest gains.

USD/CAD

• Support: 1.3310 (S1), 1.3280 (S2), 1.3210 (S3)

• Resistance: 1.3360 (R1), 1.3400 (R2), 1.3430 (R3)

EUR/JPY

• Support: 115.70 (S1), 114.10 (S2), 113.25 (S3)

• Resistance: 116.85 (R1), 117.40 (R2), 118.10 (R3)