Canadian Dollar Lower on NAFTA Deadlock, Awaits CPI and Retail Sales

Market overviews

Dollar remains the strongest one for the week as supported by treasury yields. 10 year yield extended recent rally to close at 3.109 overnight, and it hits as high as 3.127 in Asian session. 30 year yield also jumped to near 30 year high at 3.246, breaking a key near term resistance at 3.221. Nonetheless, the current round of Dollar buying was mainly centered against Euro and Yen. The greenback remains bounded in established range against other major currencies.

As for today, Canadian Dollar is trading as the weakest one. The May 17 deadline of NAFTA negotiation passed without any progress, and could be no where close to a deal. Canadian Dollar traders also turned a bit cautious ahead of inflation and retail sales data to be featured today. Technically, focus will remain on 1.3450/3607 range edges in GBP/USD, 0.9956/1.0056 range edges in USD/CHF.

EU to use Blocking Statute against extraterritorial effects of US sanctions of Iran

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EU leaders showed unity in clashing with US President Donald Trump on preserving the Iran nuclear deal. European Council President Donald Tusk said after the summit in Sofia that “on Iran nuclear deal, we agreed unanimously that the EU will stay in the agreement as long as Iran remains fully committed to it. Additionally the Commission was given a green light to be ready to act whenever European interests are affected.”

European Commission President Jean-Claude Juncker added that the “the effects of the US sanctions will be felt” And, “it is the duty of the EU therefore to protect European business and that applies particularly to smaller and medium-size businesses.” He also said in strong words that “we will not negotiate with the sword of Damocles hanging over our heads” and “it’s a matter of dignity, and it’s a matter of principle”.

Juncker will begin a legal process to prohibit EU companies to comply with US sanctions on Iran. The “blocking statue” process will begin, accord to Juncker, to “neutralise the extraterritorial effects of US sanctions in the EU”. And “we will do it tomorrow [Friday] morning at 10.30.” In addition, Juncker said EU “also decided to allow the European Investment Bank to facilitate European companies’ investment in Iran”

German Chancellor Angel Merkel noted “All European Union member states are still backing this agreement, despite the fact the United States has decided not to, and we will continue talks with the United States”. She added “we can see whether we can give small and medium-sized companies certain relief. That is being examined … As for compensating all businesses in a comprehensive way for such measures by the United States of America, I think we cannot and must not create illusions.”

USTR Lighthizer: Nowhere near close to a NAFTA deal

US Trade Representative Robert Lighthizer poured cold water after the May 17 deadline for NAFTA negotiation passed without breakthrough. He said “the NAFTA countries are nowhere near close to a deal.” with “gaping differences” on a number of issues. He pledged to work towards the “best possible deal for American farmers, ranchers, workers, and businesses.”

Just hours before Lighthizer’s comments, Canadian Prime Minister Justin Trudeau said he was “positive” about NAFTA talks. He said “it’s right down to the last conversations. … I’m feeling positive about this, but it won’t be done until it’s done.”

Mexico’s economy minister Ildefonso Guajardo also said a deal could be reached by the end of May. But he didn’t rule out extending the talks beyond July 1 Mexican presidential election.

May 17 was a deadline House Speaker Paul Ryan told the NAFTA countries for having the deal approved by the current Congress by the end of this year.

Falls in World Trade Outlook indicator could be linked to increased trade tensions

The World Trade Outlook Indicator of the WTO dropped to 101.8 as of May 17, down from 102.3 back in February.

WTO noted that the value remains “above the baseline value of 100” which suggests “continued solid trade growth in Q2. However, it’s “probably at a somewhat slow pace” than Q1.

It also pointed out that the dip in WTOI reflects declines in export orders and air freight. And that “may be linked to rising economic uncertainty due to increased trade tensions.”

Japan CPI core slowed to 0.7% yoy, missed expectation

Japan national CPI core, ex-food, slowed to 0.7% yoy in April, down from 0.9% yoy and below expectation of 0.8% yoy. That’s the second month of decline and it moved further away from BoJ’s 2% target. It’s also the lowest level since September 2017 and off recent cyclical high of 1.0% set in February. Overall CPI slowed to 0.6% yoy, down from 1.1% yoy. Ex-food, ex-energy CPI slowed to just 0.4% yoy, down from 0.5% yoy.

Recently, BoJ just dropped the time frame for meeting the 2% inflation target. And it maintained the stance to continue with ultra loose monetary easing. While recent surge in oil price could help lift overall and ex-food CPI ahead, the core-core CPI remained worryingly weak.

Looking ahead

Germany WPI and PPI will be featured in European session. Eurozone will release current account and trade balance. Canadian data is the main focus in US session with CPI and retail sales scheduled.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.2760; (P) 1.2794; (R1) 1.2843; More….

Intraday bias in USD/CAD remains neutral for the moment. For now, we’re still favoring the bullish case that rise from 1.2061 is still in progress. Above 1.2996 resistance will affirm this view and target 1.3124 and above. However, break of 1.2728 will now dampen our bullish view and turn focus back to 1.2526 support instead.

In the bigger picture, current development suggests that rebound from 1.2061 has not completed yet. Focus is back on 38.2% retracement of 1.4689 to 1.2061 at 1.3065. Sustained trading above there will confirm medium term bullish reversal. That is, down trend from 1.4689 has completed at 1.2061 already. In that case, next target will be 61.8% retracement at 1.3685. However, break of 1.2526 support will dampen this bullish view again. And, focus will be back on 1.2061 key support level, which is close to 50% retracement of 0.9406 (2011 low) to 1.4689 (2015 high) at 1.2048

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
23:30 JPY National CPI Core Y/Y Apr 0.70% 0.80% 0.90%
06:00 EUR German WPI M/M Apr 0.20% 0.00%
06:00 EUR German PPI Y/Y Apr 1.80% 1.90%
06:00 EUR German PPI M/M Apr 0.30% 0.10%
08:00 EUR Eurozone Current Account (EUR) Mar 35.1B 35.1B
09:00 EUR Eurozone Trade Balance (EUR) Mar 21.1B 21.0B
12:30 CAD Retail Sales M/M Mar 0.40% 0.40%
12:30 CAD Retail Sales Ex Auto M/M Mar 0.50% 0.00%
12:30 CAD CPI M/M Apr 0.30% 0.30%
12:30 CAD CPI Y/Y Apr 2.30% 2.30%
12:30 CAD CPI Core – Common Y/Y Apr 1.90% 1.90%
12:30 CAD CPI Core – Median Y/Y Apr 2.10% 2.10%
12:30 CAD CPI Core – Trim Y/Y Apr 2.10% 2.00%