Daily analysis | 21 August 2017
· The Canadian dollar jumped on Friday after data showed that the nation’s headline CPI rate rebounded, as was widely anticipated. Meanwhile, the core rate remained unchanged at +0.9% YoY, also in line with expectations. Despite underlying inflationary pressures remaining subdued, the rise in the headline rate is in line the BoC’s view that inflation is likely to rebound moving forward and the heightened market expectations for another rate hike this year. At the time of writing, the probability for another BoC rate increase this year is 90%, according to Canada’s Overnight Index Swaps (OIS).
· Overall, we think that the Loonie’s outlook remains positive amid the aforementioned speculation for another hike, solid economic data, and the prospect for further rebound in oil prices (see below). Our favorite proxy for further CAD gains is still USD/CAD, given the weakness in the greenback, which has remained on the back foot lately amid subdued expectations for another Fed hike this year and renewed political uncertainty in Washington D.C. The key risk to our view may be any comments from BoC officials expressing discomfort with the currency’s latest gains.
· USD/CAD traded lower on Friday following the rebound in Canada’s inflation rate. The pair slid after it hit resistance slightly below the 1.2700 (R1) line to stop near the 1.2555 (S1) support. In our view, the short-term bias is back to the downside and as such, if the bears prove strong enough to break the 1.2555 (S1) zone, we would expect them to aim for the next support territory of 1.2415 (S2) marked by the lows of the 26th, the 27th and the 31st of July.
· As for the bigger picture, the rate continues to trade below the downtrend line taken from the peak of the 11th of May, and well below the psychological zone of 1.3000, which acted as the lower bound of the sideways range that contained the price action from the 9th of September 2016 until the 30th of June 2017. Therefore, the bigger picture is negative as well, which enhances the case for the pair to continue trading south for a while.
Oil prices jump on the prospect of supply disruptions
· Oil prices surged on Friday, a few minutes ahead of the weekly Baker-Hughes data, which showed a decline in active oil rigs in the US. The early spike in the precious liquid may have been owed primarily to political developments in Venezuela. The renewed political turmoil in the country probably led to speculation that the US may intensify its economic sanctions, something that could remove a significant portion of Venezuelan oil production from the market. Moving forward, we think that the short-term outlook for oil has turned positive. Besides the decline in US oil rigs and the prospect of fewer exports from Venezuela, Libya’s largest oil field was shut down during the weekend, which is likely to weigh further on supply in the short-term.
· WTI surged on Friday, breaking above the resistance (now turned into support) barrier of 48.10 (S1). The rebound came after the price found support at the upper bound of the downside channel WTI was trading within from the beginning of February until the 25th of July. Thus, we see the likelihood for further advances and a test at 49.30 (R1) soon. A decisive break above that level is possible to see scope for more bullish extensions, perhaps towards the well-tested barrier of 50.35 (R2). Having said that though, we don’t expect any further gains to lead into a major healthy uptrend. We still believe that the range between 51.50 (R3) and 55.00 is the area where US shale producers may be attracted to increase production, something that may put a lid on any possible future gains.
· The economic calendar is empty today, with no major events, indicators, or speakers on the agenda.
As for the rest of the week:
· On Tuesday, Germany will release its ZEW survey for August, while on Wednesday, Eurozone’s preliminary manufacturing and services PMI for August will be in focus. On Thursday, in the US, the annual Jackson Hole economic symposium will commence and will conclude on Saturday. As for the economic data, we get GDP prints for Q2 from both the UK (2nd estimate) and Norway. Finally, on Friday, all eyes will be turned to speeches by both Fed Chair Yellen and ECB President Draghi, at the Jackson Hole. We expect market participants to tune into any updated signals on policy from two of the world’s top policymakers. As for the data, Japan’s CPI for July, Germany’s Ifo survey for August, and US durable goods orders for July are all coming out.
- Support: 1.2555 (S1), 1.2415 (S2), 1.2300 (S3)
- Resistance: 1.2700 (R1), 1.2775 (R2), 1.2680 (R3)
- Support: 48.10 (S1), 46.85 (S2), 45.500.7710 (S3)
- Resistance: 49.30 (R1), 50.35 (R2), 51.50 (R3)
All trading involves risk. It is possible to lose all your capital