The Canadian dollar surged on Monday, following comments from BoC Deputy Governor Carolyn Wilkins. In a hawkish twist, the policymaker indicated the Bank will be assessing whether all of the monetary stimulus currently in place is still required. Her comments on the Canadian outlook were upbeat as well, indicating that growth in Q1 was ‘pretty impressive’, and that the economy’s adjustment to lower oil prices is largely behind us. Investors may have interpreted these comments as a first sign that the next move in interest rates will likely be higher.
Coming on top of Friday’s stellar employment gains, these comments confirm our view that the Loonie could remain under buying interest in the short run. USD/CAD fell below the support (now turned into resistance) barrier of 1.3420 (R3) on Wilkins’s comments, crushed two more obstacles, and stopped near the 1.3270 (S1) line. The tumble confirmed a forthcoming lower low on the 4-hour chart and thus, it turned the short-term outlook back to the downside. A dip below 1.3270 (S1) is likely to aim for our next support hurdle of 1.3220 (S2). Nevertheless, given that yesterday’s tumble appears overextended, we would stay mindful that a corrective rebound may be on the cards before the next negative leg.
As for the bigger picture, although we expect the Canadian currency to strengthen in the near term, a sustained appreciation could exacerbate the softness in exports we saw in Q1 and also place downward pressure on the core CPI rate, which remains far below from the BoC’s target. Therefore, we would stay cautious that when it meets next, on the 12th of July, the BoC may pour some cold water on speculation that a rate increase is drawing closer.
UK politics: Deal or no deal?
Today, sterling traders will probably leave their gaze locked on UK political developments, as the new Parliament is set to meet for the first time. Meanwhile, Theresa May will meet with the Democratic Unionist Party (DUP), in order to negotiate the terms of the DUP’s backing for her government. Yesterday, May apologized to Conservative lawmakers, accepting responsibility for the party’s poor performance and indicating that she will get the party out of the mess she put it in. As such, the spotlight will now be on whether she will manage to get the DUP and its 10 MPs on her side.
EUR/GBP has been trading in a short-term uptrend since the 10th of May, while the latest weakening of the pound pushed the rate up to 0.8870 (R1) confirming a forthcoming higher high. In case a Tory-DUP agreement takes flesh today or in the coming days, we could see sterling recover some of its latest losses and thus EUR/GBP may correct lower for another test near 0.8775 (S1). However, we maintain the view that as long as the UK political landscape remains so uncertain, any near-term bounces in GBP are likely to remain relatively limited. We expect EUR/GBP bulls to take the reins again soon and push for the continuation of the prevailing uptrend, targeting once again the 0.8870 (R1) hurdle. A clear break above that zone is possible to open the way for our next resistance of 0.8945 (R2).
As for the rest of today’s highlights:
During the European day, the UK CPI data for May will be in the spotlight. The forecast is for both the headline and the core rates to have remained unchanged. However, we view the risks surrounding those forecasts as skewed to the downside, given that the UK services PMI for the month showed the weakest increase in prices charged since November. In case there’s a downside surprise we could see the pound coming under some selling interest, but we think that market focus is likely to remain primarily on politics.
We get May’s CPI data from Sweden as well. The forecast is for both the headline and the underlying rates to have declined, which could hurt the krona somewhat. However, bearing that such a retreat comes after a robust acceleration, we don’t expect this piece of data to be particularly worrisome for Riksbank officials.
In Germany, the ZEW survey for June will be in focus. The consensus is for both the expectations and the current conditions indices to have risen again, which could increase the likelihood for the common currency to continue trending higher, at least in the near term.
As for the speakers, we have two on the agenda: ECB Board member Sabine Lautenschlager and Riksbank Governor Stefan Ingves.
USD/CAD
Support: 1.3270 (S1), 1.3220 (S2), 1.3160 (S3)
Resistance: 1.3335 (R1), 1.3350 (R2), 1.3420 (R3)
EUR/GBP
Support: 0.8775 (S1), 0.8700 (S2), 0.8640 (S3)
Resistance: 0.8870 (R1), 0.8945 (R2), 0.9000 (R3)
