Forex Markets Tread Water, Canadian Dollar Firm as Supported by Recovery in Oil Price

The forex markets are treading water in a rather dull start to the week, staying mostly in ranges. Other financial markets are mixed too. NASDAQ hit record high overnight and closed up 0.36% at 6410.81. But DOW and S&P 500 closed down by -0.31% at 21513.17 and -0.11% at 2469.91 respectively. Treasury yield staged a mild recovery with 10 year yield closed up 0.022 at 2.254. Asian markets are trading in tight range with mild loss in Nikkei as it struggles to regain 20,000 handle. In other markets, Gold is losing some upside momentum ahead of 1260 but is staying near term bullish. WTI crude oil is back above 46.6 on recovery and helped keeping USD/CAD below 1.25 handle.

BoJ minutes showed members divided on revealing exit strategy

The minutes of the June 15-16 BoJ meeting showed that board members were divided on how much information about exit strategy should be revealed to the public. The minutes noted that "some members said it was important to thoroughly explain the BOJ’s thinking on how it will manage policy and the impact on the central bank’s finances to gain understanding." On the other hand, "several members said providing uncertain information before meeting the inflation target could cause market confusion, so it is important to continue internal analysis on this subject." BoJ will released summary of opinions in the July meeting later on Friday, which could more information on the discussions afterwards.

Crude Oil Recovers as Saudi Arabia Promised to Cut Exports in August

Oil price recovered mildly after Saudi Arabia’s oil minister Khalid Al-Falih announced that it would cap its exports at 6.6M bpd in August, 1M bpd below that the same period last year. He acknowledged that "the market has turned bearish with several key factors driving these sentiments", admitting that weaker compliance with cuts by some OPEC states and a rise in OPEC exports were one of the factors leading to weaker oil prices. He added that "some countries continue to lag which is a concern we must address head on" and "exports have now become the key matrix to financial markets and we need to find a way to reconcile credible exports data with production data". On the global oil demand outlook, Falih expect growth would reach +1.4- 1.6M bpd in 2018, a rate that should offset US output expansion.

Markets awaiting FOMC

FOMC meeting is the highlight of the week even though Fed is not expected to make any change to its monetary policies. Opinions are divided on what Fed would do in the second half of the year. One more rate hike and an announcement to shrink the balance is still the base case for most analysts. But more are now leaning towards the case for Fed to hike in December, rather than September. Fed fund futures are pricing in less that 10% chance of a September hike, and around 50% chance of December hike.

While Fed officials are seeing the slow down in inflation in Q2 as due to temporary factors, it might take a few more months to convince them that this is the correct view. Also, there are still a lot of uncertainties on what fiscal policies US President Donald Trump would deliver. IMF lowered growth forecasts for US to 2.1% in 2017 and 2.1% in 2018, sharply down from April projection of 2.3% and 2.5% respectively. And, "uncertainty about the timing and nature of U.S. fiscal policy changes" was cited as the key reason behind the downgrade. Hence, Fed could just announce a change in its reinvestment plan in September to start unwinding the balance sheet first.

Looking ahead for today

German Ifo business climate will be the main focus in European session. Germany will release import price index while UK will release CBI trends total orders. US will release house prices and consumer confidence.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.2478; (P) 1.2514; (R1) 1.2546; More….

Intraday bias in USD/CAD remains on the downside for 1.2460 key support level. Considering bullish convergence condition in 4 hour MACD, we’ll be cautious on strong support from there to contain downside and bring rebound. On the upside, break of 1.2608 minor resistance will indicate short term bottoming and turn bias back to the upside for 1.2968 support turned resistance. However, firm break of 1.2460 will target next key fibonacci level at 1.2048.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. Fall from 1.3793 is seen as the third leg and should target 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