Market calm ahead of Powell testimony
On Wednesday, the US dollar consolidated recent gains ahead of a speech by Fed Chair Powell before the House of Representatives. The dollar index stabilised around 97.48, trading flat on the session. The single currency stayed above the 1.12 psychological support, while the Aussie and the Kiwi fell the most amongst G10 currencies, thanks to disappointing Chinese inflations figures and lower rate outlook. NZD/USD eased as low as 0.6590, down 0.17% on the session. AUD/USD fell to 0.6910, down 0.25% on the day. Further lows are expected, thanks to a slowing Chinese economy.
The recovery in US treasury yields helped to prop up the greenback as investors scale down their dovish rate expectations. Market participants now expects the US central bank to trim the fund rate target band by 25bps to 2%-2.25%, compared to an expected cut of 50bps a week ago. Despite optimist words from Donald Trump following the G20 meeting, trade talks between China and US remain at centre stage. Surprisingly, news released yesterday that Donald Trump last month promised president Xi Jinping that the US government would soften the tone regarding the massive protest in Hong Kong in order to rekindle negotiations failed to boost the equity market. S&P 500 futures are back below the 1,980 threshold, while the EuroSTOXX 600 is stuck below the 388 level.
Given the high level of uncertainty regarding Powell’s next move, traders would most likely remain on the sidelines ahead of Powell testimony. Indeed, it would be one of the last chance for Powell, together with Thursday testimony, to polish its communication before the July 31 FOMC meeting.
CAD should maintain course against G10 currencies
It seems that Canada is well positioned to stay the top performing G10 currency this year. Although the Canadian manufacturing sector continues to see decreasing production amid subdued demand from domestic and export markets, inflation continues to overshoot inflation target of 2% while the labor market stays firm, thus encouraging the Bank of Canada to follow the Fed’s footsteps. Meanwhile, relations with the US on the front of trade appears on good track as the US Commerce Department recently confirmed it will not impose tariffs on Canadian steel and aluminum exports ahead of a ratification of the US-Mexico-Canada trade agreement by fall 2019. Furthermore, the decision taken by OPEC+ to extend supply cuts by 1.2 million bpd until March 2020 in an attempt to stabilize crude oil prices should also benefit the loonie.
Untouched since last October at 1.75%, the BoC overnight rate is likely to stay unchanged as the central bank will maintain its dovish stance due to continued downside risks on the global economy and adopt a wait-and-see, data-dependent approach, monitoring inflation and manufacturing activities. We see limited downward potential for the CAD, which is expected to stand up against USD despite today’s Fed Chair Powell speech (USD/CAD: -3.75% year-to-date).
