Daily Commentary
 | 22/08/2017

Euro catches another bid amid thin markets

• The euro came under renewed buying interest yesterday, particularly versus the US dollar. Even though there was no clear fundamental trigger behind the move, market chatter suggests that euro bulls may be setting up for a potential policy message by Draghi on Friday, despite what recent media reports familiar with “ECB sources” have stated. The thin-liquidity trading environment in August may have exacerbated the euro’s gains.

• With regards to Draghi, we are skeptical as to whether he will directly address the timing of a QE exit. If he does, he may do so in a way that avoids fueling a renewed rally in the euro. Remember, the minutes of the ECB’s July meeting showed that although the Governing Council can tolerate the euro’s recent strength, policymakers would be concerned if the currency continued to gain. Considering that the euro is already trading higher than it was back then against both the USD and GBP, we doubt the ECB chief will risk triggering another round of speculative appreciation.

• As for the immediate future, today we will hear from ECB Vice President Vitor Constancio while tomorrow, Draghi will step up to the rostrum ahead of his Jackson Hole speech. Even though any policy-related comments from Constancio could impact the common currency, especially amid thin liquidity conditions, we think that the likelihood of any such remarks is relatively low, as he may prefer to leave any major policy signals to the ECB President.

• EUR/USD traded higher yesterday, after it hit support at 1.1730 (S1). Nevertheless, the advance was stopped once again by the 1.1830 (R1) resistance hurdle and then, the rate retreated somewhat. Although we don’t expect Draghi to push the button for additional gains in the euro, given that the pair continues to trade above the medium-term uptrend line taken from the low of the 17th of April, we consider the outlook to still be positive. Further improvement in Euro area’s economic data in coming weeks may ease some of the Bank’s concerns with regards to a stronger euro and thereby, allow more room for some future appreciation. If the bulls prove strong enough to overcome the 1.1830 (R1) resistance, we expect them to aim for our next obstacle of 1.1900 (R2), marked by the peaks of the 2nd, 3rd and 4th of August.

Today’s highlights:

• During the European morning, Germany will release its ZEW survey for August. The forecast is for both the current conditions and the expectations indices to have declined somewhat, which would signal slightly reduced morale among German financial experts. Even though a drop in these indices could weigh a bit on the euro and the German DAX, considering that the current conditions index is still expected to remain near all-time high levels, we doubt that any downside reactions will be major.

• In Canada, retail sales for June are due out and expectations are for a slowdown in monthly terms, something that could hurt the Loonie somewhat, at least at the release. Having said that, considering the positive sentiment currently surrounding the currency, amid elevated expectations for another BoC rate hike this year, any negative reaction may remain relatively short-lived.

• CAD/JPY rebounded after it found support near the crossroads of the 86.30 (S1) level and the upside support line drawn from back at the low of the 7th of June. Having in mind that the rate is also trading above the prior short-term downtrend line taken from the peak of the 28th of July, we consider the near-term picture to be somewhat positive. Even if Canada’s retail sales indeed slow today, any setback may remain limited near the aforementioned crossroads. We expect the bulls to take the reins again soon and aim for another test near the resistance of 87.35 (R1). A decisive break above that level is possible to open the way for our next hurdle of 88.00 (R2).

• In the US, the Richmond Fed manufacturing index for August is due out but no forecast is available.

• Besides ECB Vice President Vitor Constancio, we have no other speakers on the agenda.

EUR/USD

• Support: 1.1730 (S1), 1.1660 (S2), 1.1590 (S3)

• Resistance: 1.1830 (R1), 1.1900 (R2), 1.1980 (R3)

CAD/JPY

• Support: 86.30 (S1), 85.45 (S2), 84.50 (S3)

• Resistance: 87.35 (R1), 88.00 (R2), 88.65 (R3)