Market Sentiment Stays Soft, BoC Decides on Mon. Policy
Risk appetite remained soft on Tuesday and during the Asian session Wednesday, perhaps as investors remained cautious ahead of tomorrow’s inflation data from the US. Today though, the main event on the agenda may be the BoC monetary policy decision. We don’t expect any change in policy this time around, but any signals that more tapering may be in the works for the months to come are likely to prove supportive for the Canadian dollar.
BOC MEETS AHEAD OF TOMORROW’S ECB AND US CPIS
The US dollar traded higher or unchanged against all but one of its major counterparts on Tuesday and during the Asian session Wednesday. It gained the most versus NZD, CAD, and AUD in that order, while it underperformed only against CHF. The greenback was found virtually unchanged against EUR and GBP.
The relative strength of both the safe havens US dollar and Swiss franc, combined with the weakening in the commodity-linked Aussie, Kiwi, and Loonie, suggests that market sentiment remained weak yesterday and today in Asia. Indeed, turning our gaze to the equity world, we see that most major EU indices closed in the red, with the only exceptions being France’s CAC 40, and the UK FTSE 100, which gained 0.11% and 0.25% respectively. Later in the US, the Dow slid, the S&P 500 was unchanged, and Nasdaq added 0.31%. As for today in Asia, appetite remained soft, with only China’s Shanghai Composite trading in positive waters.
With no clear catalyst once again, it seems that investors preferred to stay cautious ahead of tomorrow’s inflation data from the US. As we already noted on Monday and yesterday, expectations are for both the headline and core rates to rise again, further above the Fed’s objective of 2%, which could add to the perception that the surging inflationary pressures may not be due to transitory factors. Something like that could increase speculation that the Fed may have to start scaling back its monetary policy support sooner than previously thought, and perhaps result in further retreat in equities and other risk-linked assets. At the same time, the US dollar and other safe havens may come under buying interest.
Today, the main event on the agenda may be the BoC interest rate decision. At its latest meeting, this Bank kept its benchmark interest rate unchanged at +0.25%, but decided to scale back its QE purchases. Since then, both the headline and core CPI rates for the month of April surged, and although the GDP slowed in the first quarter of the year, the expansion accelerated notably in March. However, on Friday, the employment report for May showed that the unemployment rate ticked up to 8.2% from 8.1%, and that the economy has lost 68.0k more jobs after losing 207.1k in April. Thus, although the spike in the CPIs and the decent GDP data may dismiss questions as to whether the Bank has acted correctly in scaling back its bond purchases at the last gathering, the soft employment report is unlikely to lead to more tapering at this meeting. That said, an upbeat tone in the statement, hinting that further tapering may be in the works for the months to come may be enough to support the Loonie in the short run.
IBEX 35 — TECHNICAL OUTLOOK
Despite drifting a bit lower from the end of May and trading below a short-term downside resistance line taken from the high of May 27th, IBEX 35, at the same time, remains above a short-term tentative upside line drawn from the low of April 21st. Due to the fact that the price is currently sitting between the two trendlines, we will take a neutral stance and wait for a break of one of those lines, before examining the next directional move.
If the aforementioned downside line gets violated and the index drifts confidently above the 9172 barrier, marked by yesterday’s intraday swing high, that could invite more buyers into the game. IBEX 35 might then drift to the 9252 barrier, which is the highest point of May, where a temporary hold-up may occur. If the buyers are still active, they could drag the price further north, potentially targeting the 9331 level, marked by the lowest point of January 2020.
On the other hand, if the previously discussed upside line breaks, this could temporarily spook new buyers from the arena. The index might drop to the current lowest point of June, at 9037, where it could stall for a while. However, if the bears continue to apply pressure, IBEX 35 may bypass the 9037 hurdle, this way confirming a forthcoming lower low and targeting the next potential support area between the 8946 and 8973 levels. The 8973 zone marks the low of May 19th and the 8946 hurdle marks the lows of May 11th and 12th.
USD/CAD — TECHNICAL OUTLOOK
Although USD/CAD has shown intension to move higher from the start of this month, while balancing above a short-term tentative upside line taken from the low of June 1st, the pair is still running below a short-term downside resistance line taken from the high of May 7th. Given that the rate is currently stuck in between the two trendlines, we will take a neutral stance and wait for a violation of one of them, before examining the next short-term directional move.
If USD/CAD drifts lower, breaks the aforementioned upside line and falls below the 1.2070 hurdle, marked by the low of June 8th, this might attract more sellers into the game, possibly resulting in further declines. USD/CAD could then drift to the 1.2057 obstacle, a break of which might open the door for a test of the 1.2025 zone, marked by the low of June 2nd. If the selling doesn’t stop there, the rate may end up sliding to the current lowest point of June, at 1.2006.
Alternatively, if the previously mentioned downside line breaks and the rate climbs above the current highest point of June, at 12133, that may invite more buyers into the arena, as a forthcoming higher high would be confirmed. USD/CAD could then travel to the 1.2179 obstacle, a break of which may clear the way to the 1.2202 level, marked by the high of May 13th.
AS FOR THE REST OF TODAY’S EVENTS
Apart from the BoC monetary policy decision, the only other item on the financial agenda worth mentioning is the EIA (Energy Information Administration) report on crude oil inventories for last week. The forecast points to a 2.036mn barrels slide following a 5.080mn barrels fall the week before, something which is supported by the API (American Petroleum Institute) report, which revealed a 2.108mn barrels decline during the same week.
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