MACRO {{ "2018-03-23 15:30:00Z" | moment:{inputFormat: 'YYYY-MM-DD HH:mm:ssZ'} }}

Nafta optimism, rising inflation pull CAD from the brink

The Canadian dollar dodged a bullet, and the technicals and fundamentals seem to agree.

Last week, USDCAD was threatening to blow through resistance in the 1.3125-40 area en route to 1.3380 and then 1.3550. It didn’t happen. Instead, the break of support in the 1.2990-1.3015 zone snapped the uptrend line that had been in place since February 16. The subsequent plunge to 1.2835 turned the intraday technicals bearish. The break of support at 1.2950 suggests a short-term top is in place at 1.3125.

News that the US removed the 50% auto content in the Nafta renegotiations could be a sign that the Americans are truly interested in getting a new trade deal done. The March 7 Bank of Canada statement, meanwhile, expressed concern that trade policies were a growing source of uncertainty for its outlook. USDCAD then rallied on speculation of a diminished risk for a rate hike. 

If Nafta is a fading issue, it opens the door to fresh talk about another Bank of Canada rate increase. Today's CPI report helped. 

The Federal Reserve may not be as dovish as it seems. After all, it did upgrade growth forecasts and indicated higher rates than previously forecast for 2019 and 2020. Also, the BoC may want to match the next Fed move to avert a precipitous fall in the value of the loonie.

Nevertheless, USDCAD downside may be limited due to added risk aversion from trade war concerns and shaky equity markets. Furthermore, the US demand for 50% American content in automobiles may have just been a ploy to wrangle more concessions out of Canada and Mexico. 

Canada will have a harder time walking away from a deal if the US insists on a “sunset clause” to any agreement, or demands Canada scrap dairy and agricultural supply management boards.

The intraday USDCAD technicals are bearish while prices are below 1.2950 with the break of the 1.3000-15 area suggesting a short-term top is in place at 1.3125. USDCAD will find support at 1.2800 and at 1.2730.

The week ahead

The coming week should have a lot less drama than the earlier week, in part because the Good Friday holidays around the globe make it a short week. There is not any policy, just a bunch of data. Trade war developments and equity market movements will likely drive the dollar.

Monday: Monday may be quiet. There are no significant economic data releases.

Tuesday: The data calendar is light. Eurozone Economic Sentiment Indicator and the US Case-Shiller Home Price Indices headline – second-tier data reports.

Wednesday: The data cupboard is still bare, at least until New York opens. Q4 GDP could cause a stir if it surpasses the 2.6% forecast, year-on-year. If not, it will be another slow session.

Thursday: FX markets should come alive as Japan Retail Trade (forecast 1.7% versus January 1.6%, y/y) provides the entertainment in Asia. GBPUSD will be in focus in Europe thanks to the release of Q4 GDP (forecast 1.5% versus previous 1.4%, y/y) Total Business Investment, Mortgage Approvals and other third-tier reports. EURUSD traders will focus on the Eurozone March HICP inflation data. The US Personal Spending and Consumption data should have little impact due to last week’s FOMC meeting. Canada January GDP (forecast 0.1%, mmonth-on-month, unchanged from December)

Friday: Good Friday observances in the major trading centers ensure a very quiet session. The US is open, but they will be lonely

The week that was

Monday: FX markets were nervous at the Asia open. USDJPY suffered after a poll showed Prime Minister Abe’s popularity sinking due to a land scandal. The antipodeans drifted lower but recovered the losses in Europe. GBPUSD bounced from its overnight low on rumours that the EU and UK would announce a Brexit transition deal. They did, just as New York opened. Sterling soared, rising to 1.4086. EURUSD rallied as well, helped by a Reuters story, citing “sources” saying a hawkish shift in guidance was being discussed at the ECB. Wall Street closed deep in the red led by a 6.77% drop in Facebook shares due to a data scandal. The US dollar ended the session with losses across the board, compared to Friday’s close. The only exception was the Japanese yen, which was unchanged.

Tuesday: The looming FOMC meeting put a damper on trading. around the globe. The major currencies stayed in tight ranges in Asia and Europe, despite many economic data releases. Reasonably upbeat minutes from the Reserve Bank of Australia meeting two weeks earlier did not have a lasting impact on AUDUSD. EURUSD traded down from 1.2353 to 1.2313, in part because of weaker than expected German and Eurozone ZEW Economic Sentiment Indices. Sterling traders ignored soft PPI data, preferring to look ahead to Thursday’s Bank of England policy meeting. The greenback inched higher in New York. Wall Street closed with small gains and oil prices climbed, helped by a drop in US crude inventories.

Wednesday: The New York afternoon FOMC meeting and talk of new US tariffs on China, spooked traders. NZDUSD bore the brunt of the jitters. Japan was closed for a national holiday. Markets were thin. USDCAD got slammed in Asia after news of Nafta negotiation progress on auto content rules. EURUSD traded quietly in Europe but not Sterling. GDPUSD rallied after a strong employment report. The dollar opened in New York with small losses across the board but recovered by the close in Europe with traders in park awaiting the Fed meeting results. The FOMC raised rates 0.25%, as expected but left the dot-plot forecast unchanged, which wasn’t. The US dollar plunged led by the Australian dollar. Oil prices soared after the EIA reported a drop in crude inventories, with an added lift from the weak US dollar. Wall Street ended the day with small losses.

Thursday: The Reserve Bank of New Zealand meeting and statement was a non-event for NZDUSD. The Australian unemployment data wasn’t: it was lower than expected and AUDUSD started a slide that lasted until the New York close. The disappointment from the FOMC dot-plots left USDJPY under pressure, and it closed in New York threatening support in the 105.20-40 area. GBPUSD rallied after UK Retail Sales grew at 1.5% beating the forecast of a 1.3% gain. It never saw the level again. The Bank of England left rates unchanged but a modestly cautious tone in the minutes renewed selling pressure. New York markets were jittery ahead of a rumoured White House announcement about trade sanctions on China. The rumours were true, but FX markets were underwhelmed. Wall Street wasn't. It crashed led by a nearly 3% drop in the Dow. The US dollar finished the session with gains all around, except against the Japanese yen.

Friday:  Mild risk-aversion permeated FX markets in Asia and Europe after The US and China levied new tariffs on each other. The revolving door at the White House added to the concern after the National Security Adviser was fired. 

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