Stronger loonie as NAFTA talks resume
The Canadian dollar continues to strengthen, pushed by higher expectations of North American Free Trade talks. USD/CAD is trading lower at 1.2948 and weakening since the beginning of the week (-0.68%). The pair is expected to approach the 1.2930 range in the short-term. Renegotiations are starting on a positive note today, as Canada’s Prime Minister Justin Trudeau hinted that a win-win agreement was likely. Continued US-China spats are CAD positive, as they push US President Trump to avoid additional trade confrontations. Still, time is ticking. An agreement must be signed by end September.
BoJ stays sidelined
As widely expected the BoJ kept interest rate unchanged at its September monetary meeting. The policy balance rate was maintained at -0.1%, while the 10-year yield target was left unchanged at 0%. The yen was little changed after the announcement and the press conference with USD/JPY trading sideways around 112.35. The currency pair has been trading in a relative tight range since the beginning of the summer following Donald Trump’s decision to ignite a trade war with its main trade partners.
Therefore, Haruhiko Kuroda had to comment the potential consequences for Japan of a worsening trade war. Indeed, the US is a key market for Japan, especially for the auto industry as it account for more than 33% of exports to the US. This trade story is also of good diversion as it draw investors’ attention away from the country’s anaemic inflationary pressure. Indeed, core inflation is northing close to Boj’s 2% inflation target. In July, the core measure printed at 0.8%y/y versus 0.9% in the previous month. August inflation figures are due for release next Friday. Headline measure should come in at 1.1%y/y, while the core gauge is expected at 0.9%.
Overall, the BoJ has no choice but to maintain its quantitative easing program. The monetary policy divergence with the Fed will accentuate, which would continue to push USD/JPY to the upside – at least as long as the Donald do not create too much trouble on the geopolitical scene. Indeed, the yen is still protected by its safe-haven status and with the recent escalation in the trade conflict between the US and China, investors have every reasons to stay long JPY.
GBP optimism ahead of Brexit meeting
Ahead of today’s meeting in Salzburg, sterling is strengthening, currently trading along 1.3205 USD and approaching the 1.3215 range in the short-term. At stake is whether the pound will benefit or not. This depends on EU’s view: many disparities remain, and the October deadline looms. We think the markets might be over-optimistic. The Bank of England will watch closely. Inflation is at its highest pace in 18 months, which could trigger a rate hike.
