Risk sentiment was hurt today during the Asian session as China threatened the US with retaliation after the US Senate passed a bill in support of Hong Kong protests. As for today, investors are likely to turn their gaze to the minutes of the latest FOMC meeting. The Loonie was the main loser among the G10 currencies, perhaps driven by the tumble in oil prices. Today, its traders could pay attention to Canada’s inflation data for October.
US-China Concerns Increase, FOMC Minutes in Focus
The dollar traded mixed on Tuesday and during the Asian morning Wednesday. It gained against CAD, NOK, GBP and SEK, while it underperformed versus NZD, AUD and JPY. The greenback traded virtually unchanged against EUR and CHF.
Although not so clear by the performance in the FX world, risk sentiment took another hit today during the Asian session and the driver was once again headlines surrounding the US and China relationship. The prospect for a “phase one” trade deal dimmed further after the US Senate passed a bill in support of Hong Kong protests and China threatened with retaliation, urging the US to stop interfering in Hong Kong affairs. Although EU and US indices traded mixed, the majority of Asian bourses closed in red territory. Both Japan’s Nikkei 225 and China’s Shanghai Composite index slid 0.62% and 0.78% respectively.
We still hold the view that headlines surrounding the US-China saga will be the main driver for risk sentiment, but today, investors may pay attention to the minutes of the latest FOMC gathering. At that meeting, the Fed decided to cut interest rates by 25bps as was widely anticipated, but signaled that it is planning to stay sidelined, unless things fall out of orbit. That said, the dollar traded lower back then, perhaps as, at the press conference, Fed Chair Powell said that a significant inflation rise is needed before they start considering hiking again, and/or due to investors’ disbelief on the Committee’s decision to end rate cuts. Thus, market participants may scan the minutes for hints as to how many members are in support of halting cuts and whether other officials are sharing Powell’s view that any hikes will take a long time before they are brought on the table. According to the Fed funds futures, participants are pricing in another 25bps reduction to be delivered in June next year and a dovish flavor in the minutes could prompt them to bring that timing forth.
USD/JPY — Technical Outlook
After topping near the 109.49 level on November 7th, USD/JPY started drifting lower and is now trading below a short-term tentative downside resistance line drawn from the high of November 8th. At the time of writing, the pair is balancing around its 200 EMA on the 4-hour chart. For now, as long as the rate stays below the above-discussed downside line, it has a decent chance to drift further down, hence why we will remain somewhat bearish, at least for now.
A small push lower could test the 108.25 hurdle, which may provide some good support as it did on November 14th, from which the pair may bounce slightly higher. That said, as we said above, if the rate stays below the aforementioned downside line, we will target the downside once again. If this time the 108.25 zone surrenders to bears and breaks, this could lead USD/JPY towards another possible support area, at 107.88, marked by the low of November 1st.
Alternatively, if the previously-mentioned downside line breaks and the rate climbs above 109.07, which is the high of November 18th, this may spook the bears from the field for a while. This is when we could target the 109.29 obstacle, a break of which may set the stage for a test of the 109.49 level, marked by the high of November 7th.
Loonie Slides Ahead of Canada’s Inflation Data
The main loser was the Canadian dollar, which may have come under pressure due to the slide in oil prices. Both Brent and WTI tumbled 2.71% and 3.00% respectively following reports that Russia is unlikely to agree to deeper output cuts at the OPEC+ meeting scheduled for next month, but said it could agree on extending the existing curbs. What have added more fuel to the slide may have been the aforementioned US-China headlines, as well as the rise in crude oil inventories reported by the American Petroleum Institute.
As for today, CAD-traders are likely to lock their gaze on Canada’s inflation data for October. Both the headline and core CPI rates are expected to have remained unchanged at +1.9% yoy, just a tick below the midpoint of the BoC’s target range of 1–3%. When they last met, Canadian policymakers decided to keep their overnight rate at +1.75%, but the statement accompanying the decision had a more dovish flavor than previously, suggesting that officials have started flirting with the idea of easing. Indeed, at the conference following the decision, BoC Governor Poloz said that they considered whether the downside risks were significant enough for an insurance cut, but they decided that they were not worth the risks. He added that the situation will require monitoring.
Thus, with the Bank also expecting inflation to track close to 2% over the projection horizon, a disappointment in the CPIs may increase the chances for a cut by this Bank in the not-too-distant future. According to Canada’s OIS (Overnight Index Swaps), investors believe that a 25bps cut may be delivered in July next year.
AUD/CAD — Technical Outlook
AUD/CAD had an explosive move higher yesterday, which lead towards levels seen in the first half of last week. After rebounding from its short-term upside support line taken from the low of October 2nd, the pair moved in the direction of its other short-term line, this time a downside and a tentative one, which is drawn from the high of October 31st. Given the sharp uprise that we saw yesterday, there is a possibility to see some correction and then another push higher. Thus, we will take a cautiously-bullish stance, at least in the short run.
We can see that the pair is already retracing slightly lower, which could lead it to the 0.9035 zone, marked by the low of November 12th. That area may provide some decent support, from which AUD/CAD could rebound and push back up. This is when we will once again aim for yesterday’s high, at 0.9066, which if broken might open the door for a move to the 0.9083 level, or even to the aforementioned downside line. This is where the rate could stall for a bit, until the bulls and the bears decide who takes control from there onwards.
On the other hand, if the rate falls below the 0.9022 hurdle, which is the inside swing high of November 15th, this might temporarily spook the buyers and allow the sellers to dictate the rules for a bit. The pair may end up sliding below the 200 EMA on the 4-hour chart and could drift towards the 0.8998 obstacle, a break of which might push AUD/CAD further down to test the previously-mentioned upside line, which may provide some support.
As for the Rest of Today’s Events
Apart from the FOMC minutes and Canada’s inflation data, we also get the EIA (Energy Information Administration) weekly report on crude oil inventories, which is expected to show a 1.543mn barrels increase, after a 2.219mn built the week before. Having said that though, bearing in mind that yesterday, the API report showed a 5.954mn increase, we see the risks surrounding the forecast as tilted to the upside.
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Originally published at https://www.jfdbank.com on November 20, 2019.