Dovish Yellen Sent Stocks Higher and Pressured Dollar, Canadian Marches On Post- BoC

Dollar trades broadly lower as markets generally percevied Fed chair Janet Yellen’s testimony as a dovish one. DOW ended up 123.07 pts, or 0.57% at record high of 21532.14. Meanwhile, 10 year yield closed sharply lower by -0.035 at 2.327. A focus today is on 112.88 in USD/JPY which could trigger further selling of the greenback on breaking. EUR/USD retreated quite sharply overnight but is holding on to 1.1382 minor support, and thus maintains near term bullishness. And of course, USD/CAD is set to extend it’s near term down trend towards 1.2460 low as the Loonie is boosted by BoC’s neutral rate hike and rebound in oil price.

A key development in US was the strong 1.1%, 67.87 pts, rise in NASDAQ which closed at 6261.17. Such rebound argues that the consolidation from 6341.70 has possibly completed at 6081.96. Strong support was seen from 55 day EMA. The structure from 6341.71 also looks corrective. Hence, while bearish divergence condition is seen in daily MACD, the larger up trend isn’t over yet and break of 6341.70 could be seen soon.

10 year yield seemed to have faced strong resistance below 2.423 and risks being rejected from there. Focus is turned back to 55 day EMA (now at 2.272). Sustained break there will likely extend the corrective pattern from 2.621 with another fall through 2.103 support. And, falling yield plus rising stocks will argue that markets are expecting Fed’s monetary policy to stay loose for longer.

Fed Yellen: Rates no need to rise much futher to reach neutrality

Judging from the reactions from the markets, Fed chair Janet Yellen’s testimony was seen as dovish. The key takeaway is that in her view, the federal funds rate "would not have to rise all that much further" to reach a neutral level. And, she also warned that "considerable uncertainty always attends the economic outlook," and "there is, for example, uncertainty about when — and how much — inflation will respond to tightening resource utilization." Overall, the Fed "continues to expect that the evolution of the economy will warrant gradual increases in the federal funds rate over time". And the unwinding of the USD 4T balance sheet is likely to start this year.

Separately, Kansas City Fed President Esther George echoed that Fed will start trimming the balance sheet in the "near future". She warned that "holding long-term rates below the level that they might otherwise move to naturally, amidst improving economic fundamentals, risks creating financial imbalances." And, "the failure of longer-term rates to move up with short-term rates during this normalization cycle illustrates the risk for a disruptive repricing of assets as markets adjust to a more normal policy stance,"

BoC hike could be start of a tightening cycle

BoC raised overnight rate target by 25bps to 0.75% as widely expected. That’s the first rate hike in 7 years. The Bank Rate and the deposit rate rose to 1% and 0.5% respectively. More importantly, BoC concluded in the statement that "future adjustments to the target for the overnight rate will be guided by incoming data as they inform the Bank’s inflation outlook. That is, the central bank is open to further rate hikes depending on data. We expect today’s rate hike marks the beginning of BOC’s monetary normalization path, though any further increase would be gradual and data-dependent. More in BOC Hikes Rate to 0.75%, First in Seven Years.

Canadian Dollar is additionally boosted by the rebound in oil price. EIA reported that domestic crude supplies dropped -7.6b barrels for the week ended July 7. That’s more nearly trip of the expected of -2.6b barrels decline. WTI crude oil jumped to as high as 46.48. Technically, it’s still bounded below falling 55 day EMA. And the corrective fall from 55.24 is in favor to extend lower to 50% retracement of 26.05 to 55.24 at 40.65.

BoE hawk McCafferty pushed for balance sheet unwinding

BoE hawk Ian McCafferty said in an interview that the central bank should start considering to unwind its GBP 435b assets from the quantitative easing program. While there has been talks about rate hikes, this is so far the first voice regarding unwinding. Meanwhile, McCafferty maintained his views that interest rates should be raised and would continue to vote for a hike in August meeting. He cited the solid job data released earlier this week as the support for his view. Regarding inflation, he expects it to peak at around 3% while consumer growth will slow.

French President Macron urged deeper integration

In Eurozone, French President Emmanuel Macron urged deeper integration in the Eurozone. He pointed out that "a part of German competitiveness is due to the dysfunctionalities of the euro zone, and the weakness of other economies." While Germany has a strong economy, Macron said that it has "demographic weaknesses, economic and trade imbalances with its neighbors and shared responsibilities to give the euro area the future it deserves." It’s believed that Finance ministers of Germany and France would present a roadmap for harmonization of their corporate taxes at a joint cabinet meeting on Thursday.

On the data front

Australian consumer inflation expectation rose 4.4% in July. China trade surplus widened to USD 42.8b, CNY 294b in June. UK RICS house price balance dropped to 7 in June. Inflation data will be the key focus today. Germany will release June CPI final. Swiss will release PPI. Canada will release new housing price index. US will feature PPI and jobless claims.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.2884; (P) 1.2914; (R1) 1.2943; More….

USD/CAD’s fall from 1.3793 is still in progress and extends to as low as 1.2679 so far. The break of near term channel support indicates downside acceleration. Intraday bias stays on the downside. Current decline should target a test on 1.2460 low. On the upside, break of 1.2938 resistance is needed to indicate short term bottoming. Otherwise, outlook will remain bearish in case of recovery.

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