The ECB decided to slow down its PEPP purchases yesterday as was widely expected, but President Lagarde noted that this is not a tapering move and that even when PEPP is over, they have all the other tools available, hinting that they could increase purchases of other schemes. As for today, the highlight is likely to be the Canadian employment report for August, where decent number could increase the chances for further tapering by the BoC in October.
ECB Proves Not a Major Market Mover, CAD Traders Await Jobs Report
The US dollar traded lower against all the other major currencies on Thursday and during the Asian session Friday. It lost the most ground versus GBP, CAD, NZD, and AUD in that order, while it lost the least against EUR.
The weakening of the US dollar and the strengthening of the commodity-linked currencies suggest that markets traded in a risk-on fashion yesterday and today in Asia. However, looking at the performance of the equity world, we see a rather mixed picture. EU indies traded mixed, with the FTSE 100 losing the most ground as British airline easyJet tumbled 10.2% after it rejected a takeover approach from Wizz Air. Wall Street also traded in the red, perhaps after Fed Board Governor Michele Bowman joined the growing number of policymakers supporting that they should start scaling back QE purchases later this year. That said, with no clear catalyst, market sentiment improved during the Asian session today, with Hong Kong’s Hang Seng recording the largest gains.
Yesterday, the main economic event may have been the ECB interest rate decision, but the market reaction was not proportional to the significance of the meeting. In any case, the Bank indeed announced a “moderately lower pace” of PEPP purchases for the following quarter but refrained from revealing an exact number. At the press conference following the decision, President Lagarde made it clear that this was not a tapering move, rather than a “re-calibrating”, adding that the day when PEPP is over, the job is not finished, and that when the time comes, they have all the other tools available. In our view, this is a hint that when the PEPP is over, conditional upon the economic outlook, they could compensate by buying more through other schemes, like the Asset Purchase Program (APP) the current pace of which stands at EUR 20bn a month. In other words, it appeared to be a technical move rather than a clear tapering and that’s why euro-traders may have refrained from increasing their long positions much.
As for today, the highlight may be Canada’s employment report for August. The unemployment rate is expected to have slid to 7.3% from 7.5%, while the net change in employment is forecast to show an acceleration to 100.0k from 94.0k. Yesterday, BoC Governor Tiff Macklem said that he and his colleagues are moving closer to a time when continuing to add stimulus through QE won’t be necessary, remarks suggesting that he is willing to proceed with further tapering at the October gathering. Therefore, despite the previous soft data, a decent employment report may add to bets over an October action and could support the Loonie.
EUR/USD — Technical Outlook
EUR/USD has been trading in a consolidative manner lately, between the 1.1805 support and the resistance of 1.1834. That said, in the bigger picture, it remains below the prior upside support line drawn from the low of August 20th, and thus, we would consider the near-term outlook to be cautiously negative.
A clear dip below 1.1793, marked by the low of September 1st, would confirm a forthcoming lower low and may pave the way towards the 1.1742 territory, slightly above the low of August 27th. If the bears are not willing to stop there, then we could see extensions towards the 1.1705 zone, marked by the inside swing high of August 20th.
The outlook may turn positive again if we see a strong rebound and a break above the 1.1908 level, marked as a resistance by the highs of September 3rd and July 30th. This will confirm a forthcoming higher high and may see scope for extensions towards the 1.1940 territory, the break of which could open the path towards the high of June 25th, at 1.1975.
AUD/CAD — Technical Outlook
AUD/CAD traded lower yesterday, after it hit resistance once again at the 0.9375 level marked by Wednesday’s high. At the time of writing, the rate is testing the upside support line drawn from the low of August 24th, and although this keeps the short-term outlook relatively positive, we prefer to adopt a neutral stance ahead of the Canadian employment report, scheduled to be released later today.
As we already noted, expectations are for a strong report, which could result in a stronger CAD, and thereby cause the break of the aforementioned upside line. A dip below the low of September 7th could confirm a short-term bearish reversal and may see scope for declines towards the 0.9240 or 0.9230 levels. If neither barrier is able to stop the slide, then we could see extensions towards the low of August 30th, at 0.9180.
On the upside, we would like to see a clear break above 0.9375 before we start examining whether the bulls have gained full control again. This will confirm a forthcoming higher high and may target the high of July 19th, at 0.9418. Another break, above 0.9418, could extend the advance towards the 0.9450 level, marked by the inside swing low of May 7th.
As for the Rest of Today’s Events
During the early European morning, we already got the UK monthly GDP, as well as the industrial and manufacturing production rates, all for July. GDP slowed to +0.1% mom from +1.0%, and although IP rebounded 1.2% mom from -0.7%, manufacturing production stagnated after growing only 0.2% mom in June.
Later in the day, we have the US PPIs for August with both the headline and core yoy rates expected to climb even higher.
As for the speakers, we will get to hear again from ECB President Christine Lagarde, and from the ECB Executive Board member Frank Elderson. We will look for any extra clues as to whether the ECB plans to indeed end its PEPP program in March, and whether it could indeed add more stimulus through other schemes.
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