Investors’ Appetite Improves, CAD Traders Await Key Data

Major global equity indices rebounded yesterday, after House Speaker Pelosi said that a stimulus deal could be reached by the end of this week, and after US President Trump noted that he is willing to accept a larger bill. In the FX world, the Loonie was among the main gainers, with its traders awaiting the Canadian CPIs and retail sales data, due out later today.

Equities Rebound on Stimulus Optimism

The US dollar traded lower against all the other G10 currencies on Tuesday and during the Asian morning Wednesday. It underperformed the most versus SEK, NOK, CAD, and EUR in that order, while it lost the least ground versus JPY and GBP.

The weakening of the US dollar and the yen, combined with the strengthening of the oil-related CAD and NOK, suggests that investors’ morale received a boost at some point during the day. Indeed, even though major EU indices closed their trading sessions mixed, the US ones ended in positive waters, with the relatively sanguine appetite rolling into the Asian session today. The only exception was China’s Shanghai Composite, which is currently down 0.47%.

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What encouraged some investors to increase their risk exposure may have been optimistic headlines surrounding a potential coronavirus-aid bill in the US. Yesterday, House Speaker Nancy Pelosi said that she hoped an agreement could be reached by the end of this week, while US President Donald Trump noted that he is willing to accept a large bill, despite opposition from his own Republican Party. Negotiations are set to continue today according to Pelosi, and anything suggesting that Democrats and Republicans are leaning towards a deal may help further the broader market sentiment. Equities are likely to gain some more, and safe havens to stay under selling interest.

Having said all that though, we stick to our guns that we will take things day by day. Remember that recently, we’ve been repeatedly noting that even if equities rebound, we are reluctant to trust a long-lasting recovery. And this is because the coronavirus continues to spread at a fast pace, something that could result in stricter lockdowns and weigh further on the global economy. What’s more, with the US election drawing closer, investors may refrain from engaging in large trading positions. Even yesterday, the rebound in equities was a modest one, with major global indices gaining less than 1%. We believe that market participants will maintain a cautious stance until the election day.

FTSE 100 — Technical Outlook

The FSTE 100 index is still trading below a medium-term downside resistance line taken from the high of June 9 th. However, from around the beginning of September, the price is struggling to move below one of its key support areas, at 5766, which marks the lows of September 4 thand 25 th. For now, we will take a neutral stance, as we believe the price may continue moving between that downside line and that support area.

If the index rises above the high of October 19 th, at 5961, it may end up pushing further towards the aforementioned downside line, which if stays intact, could force the price to slide again. If so, FTSE 100 might drift back below the 5961 zone and target the current low of this week, at 5845, a break of which could clear the path to the previously-discussed 5766 level.

On the other hand, if the price does break the previously-discussed downside line and travels above the highest point of September, at 6125, that would confirm a forthcoming higher high, potentially setting the path for a move further north. We will then aim for the next potential resistance area between the 6297 and 6323 levels, marked by the highs of August 12 thand July 15 threspectively. The index might stall there temporarily, however, if the buying continues, the next potential resistance area, which we could examine, may be at 6513, marked by the highest point of June.

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Canada CPIs and Retails Sales on Today’s Agenda

Back to the currencies, the Canadian dollar was among the main G10 winners, with its traders awaiting the nation’s CPIs for September and retail sales for August, both due out later today. With regards to the CPIs, the headline rate is expected to have risen to +0.4% yoy from +0.1%, but no forecast is available for the core one, which stood at +0.8% yoy in August. Retail sales are also expected to have accelerated, in both headline and core terms.

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At its prior gathering, the BoC kept interest rates unchanged at +0.25%, repeating that they will stay there until the 2% inflation target is sustainably achieved. They also reiterated the view that they will continue with their QE program until the economic recovery is well underway, and that they stand ready to adjust their programs if market conditions change. They said that both the global and Canadian economies are evolving broadly in line with the scenario outlined in July, but added that the bounce-back in activity in the third quarter looks to be faster than anticipated in July. With all that in mind, and also taking into account that the employment report for September beat estimates, accelerating CPIs and retail sales may allow BoC policymakers to continue sitting comfortably on the sidelines for a while more. Something like that could prove positive for the Canadian dollar.

USD/CAD — Technical Outlook

USD/CAD continues to trade below a short-term tentative downside resistance line taken from the high of September 30 th. This morning, the pair had already broken its key support area, at 1.3100, which was previously the lowest point of October. With this move, the rate has confirmed a lower low, which may attract a few more sellers into the game. For now, we will take a bearish approach.

A further rate-slide could send USD/CAD to the 1.3044 hurdle, marked by the low of September 4 th, which might provide initial support. The pair could even rebound somewhat, but if it struggles to get back above the 1.3100 zone, another slide may be possible. If so, a drift back to the 1.3044 obstacle and then its break might open the door for a push to the 1.2994 level, marked by the lowest point of September.

Alternatively, if the pair climbs higher and ends up breaking the previously-mentioned downside line, that could spook the bulls from the field temporarily, especially if the rate pops above the 1.3203 barrier, marked by yesterday’s high. USD/CAD may then drift to the 1.3259 hurdle, a break of which could set the stage for a push to the 1.3314 area, which is an intraday swing low of October 7 th. Slightly above it sits another potential resistance level, at 1.3340, marked by the current highest point of October.

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As for the Rest of Today’s Events

During the early European morning, we already got the UK CPIs for September. Both the headline and core rates rose to +0.5% yoy and +1.3% yoy from +0.2% and +0.9%, in line with market’s forecasts. In our view, combined with Deputy Governor Dave Ramsden’s recent remarks that he and his colleagues are not about to use negative interest rates immediately, accelerating inflation may allow BoE officials to stay sidelined at their next gathering.

Later in the day, apart from the Canadian data, we also have the EIA (Energy Information Administration) report on crude oil inventories for last week. Expectations are for a 1.021mn barrels slide after a 3.818mn fall the week before. That said, bearing in mind that, yesterday, the API (American Petroleum Institute) reported a 0.584mn inventory build, we would consider the risks surrounding the EIA forecast as tilted to the upside.

We also have six speakers on today’s agenda: ECB President Christine Lagarde, ECB Vice President Luis de Guindos, ECB Chief Economist Philip Lane, BoE Deputy Governor Dave Ramsden, Fed Board Governor Lael Brainard, and Cleveland Fed President Loretta Mester.

Disclaimer:

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Originally published at https://www.jfdbank.com on October 21, 2020.

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