The Canadian dollar collapsed yesterday, after BoC Governor Poloz said that the Bank will watch movements in the exchange rate. His overall tone was somewhat cautious, leaving no hints that another BoC rate hike is imminent, at least at the upcoming October meeting. With no Canadian data releases on the economic calendar to distract investors until next Friday, we believe CAD could remain on the back foot over the next days.
USD/CAD surged yesterday following BoC Governor Poloz’s remarks. The rate emerged above the resistance (now turned into support) barrier of 1.2430 (S1) and subsequently, it broke above the medium-term downside resistance line drawn from the peak of the 5th of July. Bearing in mind that the price structure has been higher peaks and higher troughs above a short-term uptrend line since the 8th of September, we would expect the pair to continue trading north for a while. At the time of writing, the rate looks to be headed towards the 1.2535 (R1) resistance, where a clear break may pave the way for our next obstacle of 1.2600 (R2).
Zooming out to the daily chart, we see that USD/CAD continues to trade below the downtrend line taken from the peak of the 5th of May, which keeps the broader outlook cautiously negative. Having said that though, the positive divergence between our daily oscillators and the price action adds to our view that the latest recovery may continue in the next few days, perhaps until the rate challenges the aforementioned downtrend line.
USD uninterested in Trump’s tax plan
US President Trump provided an outline of his administration’s tax plan yesterday. Almost everything was in line with what recent reports suggested. The plan includes a reduction of the corporation tax to 20% and a one-time repatriation of corporate cash held abroad at a lower tax rate. In addition, it is expected to reduce the top-tier income tax bracket slightly, as well as eliminate the estate tax.
However, the dollar reacted very little to this announcement. We see two likely explanations for this lack of excitement. First, even though the plan includes a one-time repatriation, no specific rate was presented. Perhaps most importantly, given that the plan is set to increase the national deficit and provide large tax breaks to top income earners, it will likely encounter strong opposition from both Republican fiscal hawks as well as Democrats in Congress. This implies we may finally end up with a watered-down version of what was presented yesterday. We will therefore stick to our view that the USD is probably in for a bumpy ride over the next months, with lots of tax-related headlines likely to heighten volatility in the currency.
RBNZ remains on hold, maintains a neutral bias
The RBNZ kept its policy unchanged overnight. The most noteworthy change in the accompanying statement related to the Kiwi. Policymakers softened their tone on the currency, noting that a lower NZD would “help” the economy, as opposed to a lower NZD is “needed” in the previous statement. The reaction in the currency was negative, but not major. Moving forward, we expect the Kiwi’s forthcoming direction to depend primarily on election developments and specifically, on what coalition will be formed, which will become clearer in early October. Until then, the currency could continue to drift lower, weighed on by the increased political uncertainty, we think.
NZD/USD traded higher yesterday ahead of the RBNZ policy decision. However, the recovery remained limited below the 0.7245 (R1) resistance barrier and after the Bank reiterated some concerns over the Kiwi’s exchange rate, the pair slid to challenge once again the support of 0.7185 (S1). In our view, the outlook remains the same as yesterday. We believe that the pair is poised to continue trading lower and as such, we expect a decisive dip below 0.7185 (S1) to open the way for our next support of 0.7140 (S2).
Today’s highlights:
During the European morning, Germany’s preliminary CPI for September is due out, one day ahead of Eurozone’s print. The forecast is for the CPI rate to have ticked up, something that could help EUR recover some of its latest losses. In the US, the final estimate of GDP for Q2 is due out, but the final print is usually not a major market mover.
We have three speakers on the agenda. In Europe, we will hear from ECB Executive Board members Peter Praet and Sabine Lautenschlager. In the US, Fed Vice-Chair Stanley Fischer will deliver remarks.
USD/CAD
Support: 1.2430 (S1), 1.2335 (S2), 1.2250 (S3)
Resistance: 1.2535 (R1), 1.2600 (R2), 1.2660 (R3)
NZD/USD
Support: 0.7185 (S1), 0.7140 (S2), 0.7055 (S3)
Resistance: 0.7245 (R1), 0.7295 (R2), 0.7340 (R3)
