Risk Sentiment Improves, BoC Turns Back Neutral, OPEC+ Gathers in Vienna

Following Monday’s and Tuesday’s slide, equity indices rebounded on Wednesday, after a report said that US and China are close to a “phase one” deal, and after US President Donald Trump said that talks are going “very well”. The Loonie traded higher after the BOC said that the current level of rates is appropriate. As for today, the OPEC+ group meets in Vienna to decide on oil output.

Equities Rebound, GBP and CAD the Main G10 Winners, OPEC+ Meets

The dollar traded lower against all but two of the other G10 currencies on Wednesday and during the Asian morning Thursday. It underperformed the most versus GBP, CAD and SEK, while the currencies against which it didn’t lose any ground were JPY and CHF. Specifically, it was found unchanged against CHF, and slightly lower against JPY.

The weakening of the safe-havens suggests that risk sentiment took an 180-degree turn yesterday. Indeed, major EU and US indices rebounded and closed Wednesday’s session in the green, with the improvement in risk appetite rolling into the Asian session today. What allowed investors to return attention back to risk assets was a Bloomberg report that the US and China are close to a “phase one” deal, and, ironically, comments by US President Donald Trump, who said that talks are going “very well”, just a day after he said that a deal may come after the 2020 Presidential elections.

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It seems that headlines and comments change from negative to positive (and vice versa) within days, and even hours, and thus, we remain reluctant to trust a long-lasting path with regards to investors’ morale. The only thing we can say with some confidence is that the road towards the end of this saga is likely to continue being a bumpy one.

Back to the currencies, the pound was the main gainer, with Cable breaching the psychological zone of 1.3000, and hitting resistance near 1.3120, due to increased expectations that the Conservatives will gain parliamentary majority at next week’s elections, which may open the door for ratifying the Brexit deal agreed by UK PM Boris Johnson and the EU, and thereby end more than three years of political uncertainty. That said, we still cannot talk about a major uptrend. Polls were proven wrong in estimating the support for Brexit back in 2016, and thus we find it hard to fully trust them now. If the elections result in another hung parliament, the risk of a disorderly exit could reemerge.

The second winner in line was the Canadian dollar, which came under buying interest after the BoC kept interest rates unchanged, noting that there is nascent evidence that the global economy is stabilizing and that it is appropriate to maintain the current level of the overnight rate target. “Future interest rate decisions will be guided by the Bank’s continuing assessment of the adverse impact of trade conflicts against the sources of resilience in the Canadian economy — notably consumer spending and housing activity.”, the Bank also said. The message we got from the previous meeting was that officials flirted with the idea of easing. However, it seems that they quickly switched back to neutral, something that woke up CAD-bulls.

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As for today, Loonie traders will join the oil ones in the waiting room for the two-day OPEC+ meeting, which starts in Vienna today. The group has been in agreement to reduce supply by 1.2mn barrels per day until March, and thus, investors will be on the lookout for any changes to the accord. In recent months, Saudi Arabia has not only stuck with its share of cuts, but was also producing less, to compensate for other members that have repeatedly exceeded their respective production caps. According to market chatter, instead of pushing for deeper cuts in order to balance the market, the Kingdom could increase pressure to non-compliant members to come in line with their share of reductions. Russia is also unwilling to support further output cuts, but it would support extending the existing accord.

Thus, it would be interesting to see whether an extension will be decided at this gathering or whether members will prefer to wait until next year, meet before March to evaluate the market outlook and decide then. Media reports suggest that an extension is more likely to be decided now and the most likely length is until June. Thus, anything beyond June, or even deeper cuts, would come as a pleasant surprise for oil traders, while anything less (i.e. postponing the decision) may be a disappointment.

USD/CAD — Technical Outlook

Yesterday, USD/CAD broke its short-term upside support line drawn from the low of October 29th and took a deep dive, falling well below its 200 EMA on the 4-hour chart. Given the steep decline, we believe there might be a chance to see a small correction back up before another leg of selling. We will take a bearish approach, at least for now.

A small retracement up could lift the rate closer to the 1.3235 hurdle, which is the inside swing high of November 18 th. Around there the pair might also test the 200 EMA, which could provide some resistance. If the bulls struggle to push USD/CAD beyond those obstacles, the bears could step in again and drive the rate lower. We will once again aim for the 1.3190 area, a break of which may lead the pair to the 1.3160 level, marked by the low of November 7 th.

Alternatively, a push back up above the 1.3260 barrier, marked by the low of November 27 th, could attract more buyers into the game, potentially leading the pair further north. This is when we will target the 1.3298 obstacle, a break of which could set the stage for a test of the resistance area between the 1.3320 and 1.3327 levels, marked by the highs of December 3 rdand November 20 th.

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WTI Oil — Technical Outlook

After selling off on Friday last week, WTI oil moved back up and once again tested the 58.71 level, which is near the highest point of November. The commodity is also trading above its short-term upside support line taken from the low of October 3 rd. Given that we continue to see the bulls fighting back and pushing the price up, there is a possibility that WTI oil might drift further north. That said, in order to consider higher areas, a break of the above-discussed barrier is required, hence why we will remain cautiously-bullish, at least for now.

As mentioned above, a break of the 58.71 barrier would confirm a forthcoming higher high and more buyers could join in, in order to drag the commodity further north. This is when we will aim for the 59.73 hurdle, which is the high of September 19 th. That area might stall WTI oil, or even force it to retrace slightly lower. But if the commodity stays above the previously-mentioned 58.71 zone, then the buyers could try once again to take advantage of the lower price and lift it higher. If this time the 59.73 barrier fails to withstand the bulls, a break of it may lead the price to the 61.54 level, marked near an intraday swing high of September 16 thand near an intraday swing low of the same day.

On the other hand, if WTI oil moves below the 57.54 hurdle, which is marked near the lows of November 22 ndand 27 th, this could spook the bulls from the field temporarily and the bears might drag the commodity slightly lower for a deeper correction. This is when we will aim for the next support area between the 56.72 and 56.63 levels, a break of which might set the stage for a further slide, potentially bringing WTI oil to the 55.67 zone, marked by the low of December 2 nd. Around there the “black gold” could also test the aforementioned upside line, which may provide additional support.

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As for the Rest of Today’s Events

During the European morning, Eurozone’s final GDP for Q3 is anticipated to confirm that the Euro area economy grew +0.2% qoq, as it did in Q2. Later in the day, the US and Canadian trade data for October are coming out. The US deficit is expected to have narrowed somewhat, to USD 49.00bn from USD 52.50bn, while the Canadian deficit is forecast to have widened to CAD 1.34bn from CAD 0.98bn. The US initial jobless claims for last week and factory orders for October are also coming out.


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Originally published at https://www.jfdbank.com on December 5, 2019.

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