Market Sentiment Softens, BoC Decides on Mon. Policy

Equities pulled back yesterday and today in Asia, perhaps as investors turned cautious ahead of tomorrow’s ECB meetings, for which there is some speculation that officials will scale back their monthly PEPP purchases. As for today, we have another central bank deciding on monetary policy today, ahead of the ECB, and this is the BoC. With Canadian data coming on the soft side, it will be interesting to see whether policymakers will delay their future tapering plans.

Investors Turn Cautious Ahead of Tomorrow’s ECB Meeting

The US dollar traded higher against all the other major currencies on Tuesday and during the Asian session Wednesday. It gained the most versus CAD, CHF, and AUD in that order, while it eked out the least gains versus EUR, and NZD.

The strengthening of the US dollar and the weakening of the risk-linked Loonie and Aussie suggest that markets may have traded in a risk-off fashion yesterday and today in Asia. However, the weakening of the franc and the fact that the Kiwi lost the least ground point otherwise. Thus, in order to get a clearer picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, major EU and US indices traded in the red, with the only exceptions being Spain’s IBEX 35 and Wall Street’s Nasdaq, which gained somewhat. The soft appetite rolled over into the Asian session today as well. Although Japan’s Nikkei kept drifting north following PM Suga’s decision on Friday to step down, China’s Shanghai Composite, Hong Kong’s Hang Seng, and South Korea’s KOSPI all slid.

With no clear catalyst behind the pullback, we guess that investors may have adopted a cautious stance as we get closer to the ECB meeting, scheduled for tomorrow. With the economic recovery gathering pace in the Eurozone and inflation accelerating to a rate not seen in the past decade in August, some officials believe that they should consider gradually scaling back their programs, especially the PEPP (Pandemic Emergency Purchase Program). Thus, it will be interesting to see whether we will get a tapering decision this week or not. They may not rush into any final decision at this gathering, as they may prefer to wait for a while more to see what happens with the pandemic and its new mutation after the summer. But, even if they do decide to scale back the pace of monthly PEPP purchases at this gathering, they may compensate by making more purchases through other schemes.

EUR/JPY — Technical Outlook

EUR/JPY has been slowly grinding higher since Monday, staying above the upside support line drawn from the low of August 20th. As long as the rate continues to trade above that line, we will maintain a positive stance.

Currently, the rate is approaching the 130.73 level, marked by Friday’s high, the break of which would confirm a forthcoming higher high and may initially target the peak of July 13th, at 131.10, the break of which could carry larger bullish implications, perhaps paving the way towards the 131.85 zone, marked by the high of July 6th.

On the downside, the move that could change the short-term outlook to a negative one may be a dip below 130.24. This will not only confirm the break below the upside line, but also a forthcoming lower low. The bears may get encouraged to dive towards the 129.60 barrier, which is the low of August 31st, the break of which could extend the decline towards the low of August 26th, at 129.15.

Will the BoC Hint a Tapering Delay?

As for today, ahead of the ECB, another central bank is scheduled to decide on monetary policy, and this is the BoC. Last time, Canadian policymakers appeared less hawkish than expected, saying that they continue to see the output gap closing in H2 2022, which suggests that their expectations over when they may start raising interest rates have not come forth. What’s more, both the headline and core Canadian inflation rates for July declined, the employment report for the month fell short of its own forecasts, and GDP data for Q2 revealed a contraction. All this added credence to the Bank’s view and raises questions as to whether officials will appear more dovish today.

As for our view, we don’t expect any policy changes or bolt statements at this gathering, as, on September 20th, the nation’s federal elections are planned. What’s more, this will be one of the Bank’s smaller meetings, without any updated economic projections, neither a press conference by the Bank’s Governor. Such a gathering will take place in October, with market participants expecting to see whether the Bank will announce another tapering step. However, with the data coming on the soft side, this may not be the case and we may get clues on that at today’s gathering.

The Canadian dollar was in a recovery mode from August 20th until yesterday, mainly driven by the weakening US dollar and the recovery in oil prices. However, with oil prices correcting lower in the end of last week, and the US dollar rebounding yesterday, the supportive factors may be off the table for a while, and this was evident by the fact that the Loonie was found as the main loser among the majors today. Thus, clues that the Bank may delay additional tapering in October could encourage some more Loonie selling.

NZD/CAD — Technical Outlook

NZD/CAD edged north after hitting the upside support line drawn from the low of August 23rd, and then, it emerged above the 0.8970 zone, thereby confirming a forthcoming higher high. In our view, this paints a positive picture, at least with regards to the near-term outlook.

At the time of writing, the rate looks to be heading towards the round figure of 0.9000, where a break could set the stage for advances towards the peak of April 20th, at 0.9060. If the bulls are not willing to stop there either, then we could see extensions towards the 0.9110 zone, defined as a resistance by the high of March 11th.

Now, in case we instead see a dip below 0.8920, we will start examining a bearish reversal as such a move would confirm a forthcoming lower low on the 4-hour chart. The pair may then fall towards the 0.8870 or 0.8855 barriers, marked by the low of September 1st and the inside swing high of August 27th respectively, where another break could open the gates for declines towards the low of August 30th, at 0.8805.

As for the Rest of Today’s Events

The only major data point on the economic agenda is the API (American Petroleum Institute) report on crude oil inventories for last week, but as it is always the case, no forecast is available.

We do however have several speakers, including New York Fed President John Williams and ECB Supervisory Board member Elizabeth McCaul. We will also get to hear from BoE Governor Andrew Bailey, who is scheduled to testify on the latest quarterly Inflation Report.

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