Canadian Dollar Rises on Hawkish BoC again, Little Reaction to Korea Tensions

Dollar recovers this week but momentum isn’t too strong so far. Indeed, the greenback is overwhelmed by the strength in Canadian Dollar, which follows high oil prices and hawkish BoC comments. Dollar is still holding well below near term resistance against Euro, Pound and even Aussie, and maintains bearishness. Meanwhile, Yen also tried to recover on news of geopolitical tensions in Korea but no follow through buying is seen. US markets will be back from holiday today with major focus on FOMC minutes. Sterling will look into PMI services for inspirations.

US and South Korea conducted missile drill

The US and South Korea jointly conducted a missile drill after North Korea’s missile launch yesterday. Pentagon said that "together with the Republic of Korea, we conducted a combined exercise to show our precision fire capability." And the US Army said that’s an exercise to counteract North Korea’s "destabilizing and unlawful actions." Meanwhile, the US also confirmed that North Korea’s claim that the one tested was an intercontinental ballistic missile. North Korea head Kim Jong-un said that the launch was a July 4 "gift" to the Trump administration. Forex markets’ reaction to the news was rather muted. Also about US, Fed chair Janet Yellen was hospitalized over the weekend to treat a urinary tract infection while she was on holiday in London. Yellen was released on Monday and is returning to work as planned this week.

BoC Poloz reiterated hawkish comments

Bank of Canada Governor Stephen Poloz was interviewed by a German newspaper Handelsblatt. He said that while core inflation is "fair soft" recently, the central back has to look through the near term reading and anticipate the picture 18 to 24 months ahead. He said that "if we only watched inflation and reacted to inflation, we would never reach our inflation target, we’d always be two years behind in the reaction." Hence, "we have to look at the rest of our indicators in the models that predict inflation." He noted that output gap would close some time in first half of 2018 and inflation will then be well into an up trend. Thus, it’s appropriate to start removing some of the monetary stimulus. Meanwhile, Poloz sounded unconcerned with recent volatility in oil price and said that the fall from around 50 to 40 was "not a big issue". Markets are pricing in over 50% chance of a 25bps rate hike by BoC to 0.75% on July 12 next week.

BoE hawks stay hawkish

There were three BoE policy makers who voted for a rate hike last month. Two of them maintained their hawkish stance as they spoke yesterday. Michael Saunders said that "households should prepare for interest rates to go higher at some point". But he noted that if rates do go up, "it will be in the context of the economy doing OK and unemployment being low and probably falling". Meanwhile, he is "reasonably confidence" that investments and exports would offset the slowdown in consumer spending. Ian McCafferty said in a newspaper interview that on the balance of monetary policy, "there is a need for change". And a rate hike would be "justified" and "the prudent thing to do at this stage".

ECB Praet called for patience

ECB chief economist and Executive Board member Peter Praet called for patience regarding stimulus exit as "inflation convergence needs more time to show through convincingly in the data". And he emphasized that "we need to be persistent, because the baseline scenario for future inflation remains crucially contingent on very easy financing conditions which, to a large extent, depend on the current accommodative monetary policy stance." Looking at the current outlook, Praet said that "measured inflation remains exceedingly volatile and metrics of underlying price pressures continue to be subdued. The entire distribution of inflation expectations still needs to shift a fair distance to the right."

ECB Governing Council member Ewald Nowotny also urged that a "steady hand" is needed for monetary policy. He said that "we again have a revival in investment, and together with the recovery of exports that’s a significant reason for the clear upturn that we now see in Europe." Another Governing Council member Yves Mersch said that there will be "compositional discussion" on QE in ECB. And, the central bank will "in the not too distant future have to review the specific role of ABS in the context of the broader issue of QE beyond 2017."

In the economic calendar

UK BRC shop prices dropped -0.3% yoy in June. China Caixin PMI services dropped to 51.6 in June. UK PMI services will be the main focus in European session. Eurozone will release PMI services final and retail sales. Later in the day, US will release factory orders. But main focus will be on FOMC minutes. Markets will look into the discussions between policy makers. The key question will be whether Fed will hike again in September and start shrinking balance sheet in December. Or Fed will start cutting the balance sheet first and hike in December. Or, Fed will just do one of them this year.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.2892; (P) 1.2953; (R1) 1.2994; More….

USD/CAD edges lower to 1.2911 as recent decline continues. Intraday bias stays on the downside. Sustained trading below 1.2968 cluster support, 61.8% retracement of 1.2460 to 1.3793 at 1.2969 will pave the way to retesting 1.2460 low. On the upside, above 1.3013 minor resistance will indicate short term bottoming, on bullish convergence condition in 4 hour MACD. In such case, stronger rebound would be seen back to 1.3164/3346 resistance zone first, before staying another fall .

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The second leg should have finished at 1.3793. Break of 1.2460 will extend such correction to 50% retracement of 0.9406 to 1.4869 at 1.2048. At this point, we’d look for strong support from there to contain downside and bring rebound. However, firm break there will target 100% projection of 1.4689 to 1.2460 from 1.3793 at 1.1564.

Economic Indicators Update