During the European afternoon Thursday, the dollar gave back some of the gains it posted earlier in the day (particularly vs JPY), while US equities declined amid renewed concerns regarding President Trump’s ability to implement his administration’s fiscal agenda. Stocks and the USD tumbled after rumors that the White House Economic Council Director, Gary Cohn, was going to resign. Cohn is an influential member of the administration, and has been widely touted as the top candidate to replace Janet Yellen as Fed Chair once her term ends in early 2018. Coming on top of the recent resignations of key White House figures, the mere suggestion that he might depart as well was probably enough to heighten concerns among investors. Even though the White House quickly denied the rumors, neither equities nor the USD managed to recover all of their Cohn-related losses.
A few hours later, reports suggested that the White House will not move forward with its planned Advisory Council on infrastructure, which was expected to advise Trump regarding infrastructure projects. Considering that in the past few days the President disbanded two other advisory bodies, this development may have been seen as lowering even further the likelihood of successful fiscal reform. Moving forward, we think that the near-term outlook for the greenback remains bleak. The continued uncertainty on the political front continues to weigh on the currency, while there are no major data releases or events on the US economic calendar next week to support the dollar. Even though it has been announced that Chair Yellen will speak at the Jackson Hole symposium, given that her speech will center on financial stability, any remarks that impact USD appear unlikely.
USD/JPY traded somewhat higher during the European morning Thursday, hit resistance near the 110.30 (R2) hurdle and subsequently it plunged to break below the support (now-turned-into-resistance) barrier of 109.80 (R1). At the time of writing, the rate seems to be headed for a test near the crossroads of the 108.70 (S1) territory and the upside support line taken from the low of the 17th of April. If the bears prove strong enough to break below that crossroads, that would confirm a forthcoming lower low on the 4-hour chart and it could set the stage for further declines, perhaps towards the 108.10 (S2) area, also marked by the low of the 17th of April.
ECB minutes express concerns about future EUR appreciation
The minutes of the ECB’s July policy meeting revealed concerns regarding the risk of exchange rate overshooting in the future. Even though officials noted that the recent EUR appreciation could be seen as reflecting changes in the fundamentals of the Eurozone, an exchange rate overshoot in the future would still be concerning. In other words, the Governing Council can tolerate the euro’s recent strength, but would be worried if it were to continue gaining. Even though the euro is trading somewhat higher than it was back then, in our view this suggests that the likelihood of the ECB talking down the currency is relatively low, unless it resumes its uptrend.
As for today’s highlights:
Today, Canada’s CPI data for July will be in focus. The consensus is for the headline rate to have risen somewhat, something supported by the rebound in the yearly change of oil prices, while no forecast is available for the core print. A potential rebound in headline inflation could confirm the BoC’s view that inflation is likely to pick up again soon despite the recent slowdown and thereby, heighten even further market expectations regarding another rate hike this year. Even though something like that could support the Loonie somewhat, we think that market focus may be primarily on any movement in the core rate, as that could play an even bigger role in determining the timing of the next BoC rate increase.
USD/CAD traded higher yesterday, after it hit support near the 1.2600 (S1) level and the upside support line taken from the low of the 28th of July. The price structure on the 4-hour chart suggests a short-term uptrend above the aforementioned line, but given that Canada’s headline inflation rate is expected to rebound today, we would stay mindful of a potential pullback in the pair. A rebound in inflation could encourage the bears to pull the trigger for another test near 1.2600 (S1) area, and if they manage to overcome it, we may see further declines towards 1.2550 (S2). Zooming out to the daily chart, even though the short-term bias of the pair appears to be positive at the moment, as long as the rate remains below the psychological zone of 1.3000, we consider the broader outlook to be cautiously negative.
From the US, we get the preliminary U of M consumer sentiment index for August.
USD/JPY
Support: 108.70 (S1), 108.10 (S2), 107.00 (S3)
Resistance: 109.80 (R1), 110.30 (R2), 111.00 (R3)
USD/CAD
Support: 1.2600 (S1), 1.2550 (S2), 1.2500 (S3)
Resistance: 1.2700 (R1), 1.2770 (R2), 1.2850 (R3)
