Risk Appetite Eases, BoC Decides on Monetary Policy

Major EU and US indices continued trading in the green yesterday, but Asian bourses traded mixed today, as the reported numbers of new infected cases and deaths worldwide revealed an acceleration again. As for today, apart from headlines surrounding the virus saga, investors may also pay attention to the BoC monetary policy decision. Tonight, the most important release may be Australia’s employment report for March.

Risk Appetite Eases as Virus Accelerates Again

The dollar traded mixed against the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained against NZD, NOK, AUD and CAD in that order, while it underperformed versus JPY, CHF, GBP, and EUR. The greenback was found virtually unchanged against SEK.

The weakening of the risk-linked Aussie and Kiwi, as well as the slide in the oil-related CAD and NOK, combined with the strengthening of the safe havens yen and franc, suggest that risk appetite eased at some point. Indeed, although major EU and US indices closed in green territory, Asian bourses were mixed, with both Japan’s Nikkei 225 and China’s Shanghai Composite sliding 0.55% and 0.43% respectively.

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Euro Stoxx 50 -Technical Outlook

The Euro Stoxx 50 index is still slowly grinding higher and recovering some of its losses made between mid-February and mid-March. Now the price is seen balancing above a short-term tentative upside support line taken from the low of March 18 th. As long as the index remains above that upside line, we will stay somewhat positive and aim for slightly higher areas.

After breaking one of its key resistance barriers, at 2859, the Euro Stoxx 50 moved a bit higher, but this morning we are seeing a small decline again. That said, if the index remains above, either the 2859 zone, or the aforementioned upside line, we will stay somewhat positive, at least for the near term. If the bulls decide to take advantage of the lower price, it may rise all the way to the 3090 barrier, marked by the high of March 10 th. Slightly above it lies another possible resistance zone, at 3193, which is the low of March 6 th.

On the other hand, if the previously-mentioned upside line breaks and the price slides below the 2791 hurdle, which is the low of April 8 th, this may open the door for further declines. The index might then travel to the 2622 obstacle, a break of which could set the stage for a move to the 2396 level, marked by the low of March 23 rd.

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Will the BoC Expand its QE Purchases?

Apart from headlines surrounding the coronavirus saga, today, market participants may also pay attention to the BoC monetary policy decision. On March 27 th, the Bank decided to slash interest rates to 0.25% and to launch a QE program in order to safeguard its economy from the effects of the coronavirus’s spreading. The Governing Council highlighted its readiness to take further action to support the economy and the financial system, but noted that the policy rate is now to its effective lower bound.

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On the other hand, if they decide to hold off from acting due to the latest slowdown in the pandemic, the Loonie may strengthen. Such a scenario is not off the books, as officials may prefer to wait and see whether the virus spreading will slow more, and whether the already adopted measures have been having the desired effects on the Canadian economy.

USD/CAD — Technical Outlook

USD/CAD continues to trend lower, while trading below a short-term tentative downside resistance line taken from the high of March 19 th. This week, the pair found some decent support near the 1.3855 hurdle, which continues to hold the rate from moving lower. In order to continue with the downside scenario, we need to see a break of that hurdle first, hence why we will take a cautiously-bearish approach for now.

A drop below the previously-discussed obstacle, at 1.3855, would confirm a forthcoming lower low and more sellers may join in and drive the pair in the southern direction, where the next possible support area might be seen around the 1.3681 zone. That zone marks the low of March 11 thand if it holds, USD/CAD might rebound back up a bit. However, if the bulls can’t lift the rate back above the 1.3855 barrier, this may result in another round of selling, potentially sending the pair below the 1.3681 obstacle and targeting the 1.3517 level, marked by the low of March 9 th.

Alternatively, if the pair makes a strong move higher and breaks the aforementioned upside line, together with the 1.3990 barrier, marked near the current high of this week, this might signal a change in the short-term trend. USD/CAD could then drift to the 1.4080 obstacle, a break of which may clear the path to the 1.4261 area, which is the high of April 6 th.

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As for the Rest of Today’s Events

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From the US, we get retail sales, industrial production, both for March, and the New York Empire state manufacturing index for April. Both the headline and core sales are expected to have tumbled 7.0% mom and 4.0% mom, after sliding 0.5% and 0.4% respectively. Those will be the biggest declines since we can find data from, but bearing in mind that investors already know that the US economy was hit hard due to the virus in March, big slides are unlikely to disappoint. The same applies to the industrial production, which is also expected to have slid notably.

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As for tonight, during the Asian morning Thursday, we get Australia’s employment report for March. The unemployment rate is forecast to have risen to 5.5% from 5.1%, while the net change in employment is expected to show a 40.0k slide in jobs, after the economy added 26.7k in February.

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After saying that interest rates have reached their effective lower bound at the prior meeting, the aforementioned points suggest that there is very little chance of expanding their QE program. On the contrary, they could soon scale it back if the spreading of the coronavirus continues to level off. It would be interesting though to see whether a disappointing jobs report — with the unemployment rate rising further above the 4.5% threshold which the RBA expects to start generating inflationary pressures — will force them to change their minds and start considering a QE expansion.

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Originally published at https://www.jfdbank.com on April 15, 2020.

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