Equity indices were a sea of red yesterday and during the Asian morning today, as the tech sell-off ignited last week, continued on the first trading day of the US markets for this week. Oil prices also continued to collapse, as the rising Covid cases may have hurt expectations over an improvement in demand for fuels. As for today, the main event on the agenda may be the BoC monetary policy decision. That said, we don’t expect policymakers to proceed with any changes.
Equites and Oil Prices Keep Tumbling
The US dollar traded higher against the majority of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained the most versus NOK, GBP, CAD, NZD and AUD, while it underperformed slightly only against JPY. The greenback was found virtually unchanged against CHF.
The strengthening of the safe-havens US dollar, yen, and Swiss franc, combined with the weakening of the risk- and oil-linked currencies, suggests that markets traded in a risk-off fashion yesterday. Indeed, major EU and US indices were a sea of red, with the negative sentiment rolling into the Asian session today. The index that lost the least was the UK FTSE 100, but this may have been due to further weakness in the pound, after the UK told the EU that it is ramping up preparations to leave the bloc without any accord. The Nasdaq was the biggest loser, plunging 4.11% as investors picked up from where they stopped last week, and kept selling tech-related stocks. Tesla Inc. tumbled 18.3%, its worst day in nearly six months, after the company was excluded from a group of firms added to the S&P 500.
As for our view, it has not changed much. There is no apparent trigger for the tech selloff ignited last week, and thus, we are reluctant to call for a trend reversal in major equity indices. We just believe that the correction may continue for a while longer than we initially thought, and that’s because several major indices, like the Dow, the S&P and Nasdaq, fell below important upside support lines. With the Fed and other major central banks, staying willing to do whatever it takes to support the global economy, we see decent chances for equities to rebound again at some point in the not-too-distant future.
Oil prices also continued to collapse, with Brent falling below USD 40 a barrel for the first time since June. That’s why NOK and CAD were among the main losers in the G10 sphere. Let’s not forget that both the Canadian and Norwegian economies are heavily depended on oil exports. The reason behind the tumble in oil prices may have been the rising Covid cases in several countries, including India, Great Britain, Spain and several states of the US. At this point, it is worth mentioning that the infection rate of increase seems to have not come under control, with the number of new daily cases hitting a fresh record on Friday. This is weighing on demand for fuels, and thereby, on hopes for a global economic recovery. That said, as we already noted, we don’t expect another major crash in energy and stock prices. This may just be a warning for major central banks and governments to introduce more stimulus.
DJIA — Technical Outlook
The Dow Jones Industrial Average index sold off heavily yesterday, ending up breaking a medium-term tentative downside resistance line drawn from the low of April 2 nd. The price found support near the 27197 hurdle, from which it corrected slightly higher. That said, it still remains below that downside line and if it continues trading below it, there is a chance of seeing a bit more downside. However, in order to get a bit more comfortable with lower areas, we would like to wait for a push below the 27197 zone first.
If, eventually, the price does fall below the 27197 hurdle, marked by yesterday’s low of the DJIA cash index, that may spark interest in the eyes of more bears, potentially opening the door for further declines. The index might then drift to the 26701 obstacle, a break of which could set the stage for a slide to the psychological 26000 level. That level marks the low of July 30 th.
Alternatively, if DJIA rises back above the aforementioned upside line and climbs above the 28421 barrier, marked by yesterday’s high of the cash index, that could bring the bullish case back on the table. Some bulls might see it as a good opportunity to jump in. The price may accelerate towards the 29195 obstacle, marked by last week’s high, a break of which might clear the path towards the 29584 level. That level is the all-time high on Dow’s cash index.
BoC Set to Remain Sidelined
As for today, the main event on the calendar is the BoC interest rate decision. At its last meeting, the BoC decided to keep interest rates unchanged at +0.25% and noted that they will stay there until the 2% inflation target is sustainably achieved. Officials also added that they will continue with their QE program until the economic recovery is well underway, and that they stand ready to adjust their programs if market conditions change.
Since then, inflation data for July showed that the headline CPI rate tumbled to +0.1% yoy from +0.7%, and that the core rate slid to +0.7% yoy from +1.1%. That said, the latest GDP data showed that the Canadian economy performed better than expected in June, despite sliding 38.7% on a qoq annualized basis, while last Friday’s employment report, even though it missed estimates, it came on the decent side, with the unemployment rate sliding to 10.2% from 10.9%. So, with all that in mind, we don’t expect BoC policymakers to act at this gathering. We believe that they will stand pat and reiterated their readiness to adjust their programs if market conditions change.
As for the Loonie, it may gain somewhat if the BoC refrains from taking additional easing steps, but we don’t expect this to last for long. With oil price tumbling, the Canadian currency may be poised to give back any BoC-related gains and continue trading lower, especially against the US dollar, which has been in a recovery mode recently, due to the tech-driven selloff in equites.
USD/CAD — Technical Outlook
USD/CAD had a strong move to the upside yesterday, initially breaking the previous highest point of September, at 1.3161, and making its way to the 1.3245 barrier, marked by the high of August 20 th, where it found a temporary hold-up. This morning, the pair is correcting a bit lower, but continues to trade around its 200 EMA on the 4-hour chart. Given yesterday’s strong uprise, there might be a possibility of seeing a continuation of that upmove. But in order to get a bit more comfortable with that idea, a push above the 1.3245 area would be required, hence why we will stay somewhat positive until that break happens.
If USD/CAD does get a boost from the buyers and rises above the aforementioned 1.3245 zone, that may allow more bulls to run into the field, forcing the pair to travel further north. That’s when we will examine a potential test of the 1.3271 obstacle, a break of which could lift the rate to the 1.3320 hurdle, marked by an intraday swing low of August 12 th. USD/CAD may stall there for a bit, but if the buying interest is still strong, that might lead the pair further up, possibly aiming for the 1.3347 level, marked by the high of August 12 th.
On the other hand, if the rate suddenly falls back below the 1.3205 hurdle, marked by the high of August 26 th, that may lead USD/CAD to a further decline, as some new buyers might stay away from entering for a while. The pair might then drift to the 1.3161 obstacle, marked by the high of September 3 rd, which could provide a temporary hold-up. That said, if the selling continues, the next possible support area to consider might be at 1.3140, which is the high of September 4 th. Slightly below it the pair could end up testing a short-term tentative upside line drawn from the low of September 1 st, which could provide additional support. If it does that, then this whole move lower might have been seen as a temporary correction, before another potential move higher.
As for the Rest of Today’s Events
From Canada, apart from the BoC interest rate decision, we also get the nation’s housing starts for August. The US JOLTs job openings for July are also due to be released.
With regards to the energy market, we have the API (American Petroleum Institute) report on crude oil inventories for last week, but as it is always the case, no forecast is available.
As for tonight, during the Asian morning Thursday, New Zealand’s electronic card retail sales for August and Japan’s core machinery orders for July are due to be released.
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Originally published at https://www.jfdbank.com on September 9, 2020.