Quiet FX market ahead of US CPI
The CPI surprised to the upside in January as the headline gauge printed at 2.1%y/y versus 1.9% expected, while the core measure, which excludes the most volatile components came in at 1.8%y/y versus 1.7% median forecast. Investors reacted quite strongly as they adjusted their positioning in anticipation of a steeper monetary policy path. This surprise triggered a US dollar rally but it was ephemeral as retails sales came in well below expectation. However, today is another story.
According to the latest survey, market participants do not expect that those conditions have persisted in February. The core measure is expected to stabilise at 1.8%y/y, while the headline gauge should increase slight to 2.2%y/y from 2.1% in January. Unlike last month, February retail sales will not be released on the same day. It means that traders will most likely react strongly in case of a surprise reading. Indeed, February retail sales will be release tomorrow.
This is the last CPI report before the March FOMC meeting; it will therefore be closely monitored. We remain sceptical about another upside surprise in inflation reading. The risk to the core CPI is roughly balanced with slight downward skew. Since the beginning of the week, EUR/USD has been trading sideways around 1.2420. The closest resistance lies at 1.2446 (high from March 8th), while on the downside a support can be found at 1.2273 (low from March 9th). We maintain our bullish medium-term view on the pair. However, we expect that the greenback will appreciate against the Swiss franc and the Japanese yen as investors continue to load on risk.
Stronger CAD supported by a comforting job report
5.80%, a level that was not seen since the 1970s. February Net change in employment is estimated at 15’400 following January decline at -88’000, mainly boosted by an increase in part-time jobs and decline in full-time positions while Canadian hourly earnings remained solid, valued at 3.10% (previous: 3.30%), signalling a deceleration in the job market, just like the world economy.
As ongoing negotiations between Trump’s administration and its neighbour commercial partners concerning NAFTA trilateral agreements continue, we see the former as a key driver for the foreseeable future of Canadian economic health. In any case, if no agreements are found, Canada and Mexico will be subject to US tariffs on steel and aluminium, losing their privileged treatment.
Currently trading at 1.2855, USD/CAD remains stable since the beginning of the year (YTD: +2.47%), approaching its hourly resistance at 1.3015 (07/05/2017 high) and expected to become event-driven for the periods to come.
