Trump’s Comments Weigh Further on Market Sentiment, BoC Decides on Rates

Risk sentiment was hurt further yesterday after US President Donald Trump said that a trade deal with China may come after the 2020 Presidential elections. Among the G10 currencies, AUD was the main loser which apart from the trade headlines, also felt the heat of Australia’s below-consensus GDP for Q3. As for today, focus is likely to fall on the ISM non-manufacturing PMI, as well as the BoC interest rate decision.

Trump Says US-China Deal May Come After Elections

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

The strengthening of the safe havens yen and franc, combined with the relative weakness of the Aussie and the Kiwi, suggests that investors’ morale remained subdued. Indeed, most major EU and US indices traded in the red, with the negative sentiment rolling into the Asian session today. Both Japan’s Nikkei 225 and China’s Shanghai Composite slid 1.05% and 0.23% respectively.

Following his decision to restore tariffs on Brazil and Argentina, US President Trump said yesterday that a trade deal with China has “no deadline” and that it may come after the 2020 US Presidential elections. What’s more, US Commerce Secretary Wilbur Ross said that if there is no notable progress soon, more tariffs on Chinese imports will take effect on December 15 th. Coming on top of Trump’s signing of the legislation supporting Hong Kong protests, yesterday’s remarks weighed further on hopes with regards to a “phase one” trade deal that were boosted last week. Remember that back then, we remained cautious over a long-lasting recovery in risk appetite, saying that history has shown that everything could easily fall apart. Indeed, it seems that a few headlines were enough for the optimism to fade.

As for today, focus for equity investors, as well as for USD-traders, is likely to turn to the ISM non-manufacturing PMI for November, which is expected to have slid to 54.5 from 54.7. On Monday, the manufacturing index for the month slid to 48.1 from 48.3, marking the fourth month of contraction and thereby raising concerns over the performance of the US economy. Thus, a disappointing non-manufacturing index could add to those concerns and combined with the pessimism surrounding the US-China trade saga may prompt investors to bring further forth the timing of when they expect the Fed to cut rates again. Yesterday morning, such a move was priced in for September next year, while today, following the aforementioned trade headlines, it is fully factored in for June.

USD/JPY — Technical Outlook

Yesterday, USD/JPY took another strong hit, which led to a break of the short-term tentative upside support line drawn from the low of October 3 rd. The pair fell below its 200 EMA on the 4-hour chart, drifted lower and found support near the 108.47 hurdle, which is also the low of November 22 nd. Given the current risk-off environment, we believe there might be more downside to come, at least in the short run.

If the rate slides below the above-mentioned 108.47 zone, this would confirm a forthcoming lower low and the next potential support area to consider might be around the 108.25 mark, which is near the lows of November 14 thand 21 st. USD/JPY might stall around there, or even rebound back up a bit. That said, if the pair remains below the aforementioned upside line, this could lead to another round of selling, possibly bringing the rate back to the 108.25 obstacle. If that level gets broken, this could set the stage for some further declines. We will then aim for the 107.88 level, marked by the lowest point of November.

Alternatively, if the rate climbs back above the previously-discussed upside line and pushes above the 109.21 barrier, marked by yesterday’s high, this could invite more buyers back into the action. The pair could then rise to the 109.40 area, a break of which may lead USD/JPY to the current high of December, at 109.73.

AUD the Main G10 loser, BoC Takes the Central Bank Torch

The Aussie was the main loser among the G10s, which apart from the trade headlines, also felt the heat of Australia’s below-consensus GDP for Q3. Specifically, the qoq rate came in at +0.4%, below the +0.5% forecast, but the Q2 print was revised up to +0.6% from +0.5%, thereby leaving the yoy rate unchanged at +1.7%. The message we got from yesterday’s RBA meeting is that officials are more comfortable staying sidelined than investors have previously believed, which according to Australia’s OIS (Overnight Index Swaps) prompted participants to push the timing of when they expect another cut to July from April. However, after the disappointing GDP, they brought their expectations forth again, pricing in a rate decrease to be delivered in May. Focus for Aussie traders now shifts to retail sales for October, due out tonight, which are forecast to have accelerated somewhat, to +0.3% mom from +0.2%.

Following the RBA decision yesterday, today, the central bank torch will be passed to the BoC. 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.

However, a couple of weeks ago, the Governor said that monetary conditions are “about right”, prompting investors to push back their bets with regards to a rate cut by the BoC. According to Canada’s OIS (Overnight Index Swaps), there is only around 2% chance for a cut at this gathering. That said, the percentage for January is notably higher, at around 25%. Thus, investors will look for hints as to whether other policymakers share Poloz’s latest view, or whether they still have the idea of easing on the back of their heads.

EUR/CAD — Technical Outlook

Overall, EUR/CAD continues to trade inside a wide rising channel pattern, which is taken from the beginning of October. On Monday, the pair exploded to the upside, making its way closer to the upper bound of the channel. This morning we are seeing a bit of retracement, which could be considered as a temporary correction before another leg of buying. For now, we will stay cautiously-bullish.

If EUR/CAD goes for a bit more correction to downside, but then fails to move below the 1.4700 territory, the bulls could try and take advantage of the lower rate and push it back up again. We will then target the 1.4755 barrier, which is near yesterday’s high, where a break might clear the path to some higher areas. We will then target the 1.4771 obstacle, which if also broken could set the stage for a move to the 1.4796 level, marked by an intraday swing low of August 26 th.

If the above-discussed 1.4700 zone fails to withhold the pair from moving lower, this could make the bulls worry. We will consider slightly lower areas if we see the rate sliding below the 1.4673 hurdle, which is the high of November 26 th. This way more sellers might join in and lead EUR/CAD further south, initially targeting the 1.4648 obstacle, a break of which might open door for a move to the support zone between the 1.4611 and 1.4600 levels, marked by the lows of November 28 thand 29 threspectively.

As for the Rest of Today’s Events

During the European morning, we get Eurozone’s final services and composite PMIs for November, which as it is always the case, they are expected to confirm their preliminary estimates. The UK services and composite indices are also coming out. The services print is anticipated to have slide into contractionary territory, to 48.6 from 50.0, with the composite index expected to move in a similar fashion. Specifically, it is expected to decline to 48.5 from 50.0.

We get more PMIs from the US. Apart from the ISM non-manufacturing index, we also get the final Markit services and composite prints, which are expected to match their initial forecasts. The ADP employment report for the month is due to be released as well, with the forecast suggesting that the private sector has gained 140k jobs, slightly more than October’s 125k.

With regards to the energy market, the EIA (Energy Information Administration) weekly report on crude oil inventories is coming out and expectations are for a 1.734mn barrels slide, following a 1.572mn inventory build the week before. That said, yesterday, the API report revealed a 3.720mn decline, which tilts the risks of the EIA forecast somewhat to the downside.

As for the speakers, we have two during the Asian morning Thursday. Those are RBNZ Governor Adrian Orr and BoJ Board member Yutaka Harada.

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Originally published at https://www.jfdbank.com on December 4, 2019.