Daily Commentary
 | 22/05/2017

Dollar carnage pauses; but is it over?

• The greenback rebounded yesterday helped by a video clip of former FBI Director Comey’s testimony on the 3rd of May. Under oath, Comey suggested that there had been no obstructions to FBI investigations. Following recent reports that President Trump asked the former FBI Director to drop an investigation regarding ties between Trump’s prior security advisor Michael Flynn and Russia, this video was passed around as a proof that Trump didn’t pressured him. The result was a rebound in the dollar, a retreat in safe havens and a recovery in equity markets.

• However, if someone listens to the clip more carefully, he should notice that Comey was asked specifically if someone at the Department of Justice or the Attorney General had ever asked him to halt an investigation. In our view, this disregards the video as an evidence of Comey not being pressured by the White House and thus, we don’t expect any material change in market sentiment in the absence of any stronger evidence. Risk aversion may prevail again, at least for the next few days, supporting safe havens and bringing equity markets under renewed selling interest. The dollar could also resume its latest tumble.

• USD/JPY edged north after it hit support below the 110.50 (S2) level. The pair emerged back above 111.10 (S1), but it was stopped slightly below the resistance hurdle of 111.90 (R1). Bearing in mind that the pair remains within the channel that has been in place since December, we still see the likelihood for the bears to take the reins again soon and perhaps aim for another test near 110.50 (S2).

Canada’s CPIs take center stage today

• The main event today will probably be the release of Canada’s CPI data for April. The forecast is for both the headline and the core CPI rates to have ticked up, following notable tumbles in March. The forecast is supported by the nation’s Markit manufacturing PMI for April, which showed another robust increase in factory gate prices.

• A rebound in these rates would likely be an encouraging development for BoC officials as it could confirm that the softness in March was only transitory, and may thereby support CAD. Nevertheless, we doubt that it will lead to a material change in the Bank’s dovish bias. The BoC made it clear that it is going to maintain a cautious stance until uncertainties around trade clear up, something we don’t see happening anytime soon given the recent tariffs from the US government.

• USD/CAD has been trading in a consolidative manner in the last couple of days, oscillating around the key support obstacle of 1.3600 (S1). We believe that the rate may continue to trade at those levels today, waiting for Canada’s CPI data. If indeed we get a rebound in the nation’s inflation rates, sellers may take the opportunity and drive the battle below the aforementioned obstacle. Something like that may initially pave the way for our next support of 1.3530 (S2).

As for the rest of today’s events:

• During the European day, the economic calendar is very light. The most noteworthy data we get is Germany’s PPI for April and Eurozone’s current account balance for March. However, neither of these indicators is usually a major market mover for EUR.

• From Canada, besides the CPI data, we also get retail sales for March.

• We have three speakers on the agenda: ECB Vice President Vitor Constancio, ECB Executive Board member Peter Praet and St. Louis Fed President James Bullard.

USD/JPY

• Support: 111.10 (S1), 110.50 (S2), 109.70 (S3)

• Resistance: 111.90 (R1), 112.35 (R2), 113.10 (R3)

USD/CAD

• Support: 1.3600 (S1), 1.3530 (S2), 1.3420 (S3)

• Resistance: 1.3660 (R1), 1.3750 (R2), 1.3790 (R3)