Range trading dominates ahead of ECB
Most currency pairs continued to consolidate on Wednesday as investors already started to shift attention towards the upcoming ECB meeting. Concerns over Italy’s fiscal situation will not vanish overnight; however, market participants will happily put this subject on the backburner for a day or two. EUR/USD has been sideways for the past 24 hours as it moved back and forth around the 1.1450 level.
It is going to be tough press conference for Mario Draghi as he’ll have to present a credible approach against the backdrop of rising uncertainty surrounding the fiscal clash between the EU and Italy as well as the approaching end of fresh asset purchases.
Investors also hope to receive further information regarding the reinvestment of proceeds from maturing debt: the pace of disinvestment, allocation per maturity and country, etc. Finally, investors will search for clues about the timing of the first rate hike. For now, expectations are for a late 2019 move and it appears unlikely that Draghi would try to change those.
We remain bullish on EUR/USD as we believe that the market has finished pricing the Fed rate cycle, which should end in 2020; therefore, there is not much room left for further USD appreciation. However, we may have to be patient to see an euro rally as Draghi will do everything to avoid such an event.
Bank of Canada good to go as trade issues easing
Trade issues will soon be merely a bad memory for Canadian companies, although issues remain. The new trilateral trade framework agreed by both US Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland called the United States-Mexico-Canada agreement (USMCA), to replace the 24-year old NAFTA agreement, is expected to be signed by end-November 2018. The relief in trade tensions give the BoC further flexibility in managing the monetary policy of the country.
Indeed, despite weaker headline inflation figures in September (y/y 2.20%, m/m -0.40%), market participants will be expecting a rise of the key rate by 25 bps from today’s MPC, putting the gauge at 1.75%, the third rise in 2018. Inflation remains slightly above 2% BoC’s target while the positive economic outlook of the Canadian economy, including strong economic growth and optimistic business sentiment, justify a more restrictive monetary policy.
However, trade discussions between all three trading partners is not over. Despite the arrangement found on topics such as automobile export caps to the US or the eligibility for US farmers to export dairy products to Canada, issues relating to Trump’s steel and aluminum tariffs remain – and Canada and Mexico are willing to remove them.
Accordingly, we expect USD/CAD to remain under pressure following the BoC announcement, heading towards 1.3030.
