Tuesday, October 29, 2019

EU leaders agree to extend Brexit deadline; will the Bank of Canada cut rates?

  • China
  • Dollar
  • Gold
  • Euro
  • Pound
  • Stocks

Market recap: US-China trade optimism continues to increase

US President Donald Trump announced on Monday that he is expecting to sign part of the new trade deal with China ahead of the Asian Pacific Economic Cooperation Summit in November. US Equities extended their gains on Monday, after his comments further increased investor optimism regarding US-China relations. Microsoft shares rose 2.46% after it won the Pentagon’s US$10bn cloud computing contract from Amazon. The DJIA gained 0.49% and the Nasdaq surged 1.01%. The S&P 500 rose 0.56% to close at a record high of 3,039.42.

Sterling gained 0.28% on Monday, after the EU announced its decision to extend the Brexit deadline to January 31st 2020. Yesterday, British Prime Minister Boris Johnson failed once again to secure the two-thirds majority of votes in the UK’s parliament he needs to call an early general election, but signalled that he will try again by proposing to change the date set in law for the next election to December 12th. Johnson will only require a simple majority to be successful this way.

Meanwhile, safe haven assets retreated after Trump’s comments, with gold dropping 0.81% and the yen weakening against the dollar by 0.26%. US Treasuries fell, with two-year yields rising 3bps to 1.64% and 10-year yields gaining 5bps to 1.84%.

Asia started Tuesday higher, with the Nikkei, Hang Seng Index and the Straits Times Index opening 0.37%, 0.51% and 0.81% higher.

Earnings season continues today, as investors await reports from Mastercard, S&P, Kellogg’s and General Motors.

Today’s analysis: Bank of Canada looks set to maintain interest rates

The Bank of Canada (BoC) is set to decide on its monetary policy tomorrow, Wednesday, October 30th at 6pm (GMT +4). At the last monetary policy meeting, BoC officials kept interest rates unchanged at 1.75%, justifying their decision by highlighting a stronger domestic economy and uncertain global economic outlook due to trade tensions.

Canada’s economy has recovered from a stunted start to 2019, after unexpected cold weather and heavy rainfall caused retail trade to contract by 0.1% (month-on-month) in May. Since the last meeting in July, Canada’s inflation rate has been steadily ranging between 1.9% to 2%; well within the target range of 1-3% set by the BoC. Aside from inflation, unemployment fell slightly to 5.5% while employment increased by 53,700 for September. Exports also grew in August to C$50.58bn.

Domestically, the BoC has little reason to make changes to its interest rates as the Canadian economy continues to head back towards the BoC’s target rate of growth. In addition, BoC Governor Stephen Poloz said that the central bank was satisfied with the current rates and its impact on the Canadian economy during his speech on July’s monetary policy.

Internationally, the Canadian economy will likely be affected by geopolitical risks, especially since its two largest trade partners are the US (60.51% of Canada’s total trade in 2018) and China (9.59% of Canada’s total trade in 2018). With China’s slowing economy and global uncertainty on trade policy, demand is likely to suffer. But the BoC has indicated it has taken global risks into account and will react accordingly.

BoC's revision to inflation and GDP targets

We expect the BoC to hold rates at 1.75%, as Canada’s domestic economy shows little signs of slowing and global trade tensions seem to have cooled slightly, with the first phase of the new trade pact between the US and China progressing positively.

Futures tracking the BoC’s interest rates suggest a 99.1% probability that the BoC will keep rates unchanged, meaning USD/CAD is likely to see little change on the BoC’s monetary policy announcement. But expect the USD/CAD currency pair to be affected by demand for the greenback this week, as the Fed is expected to cut rates on October 30th. USD/CAD will likely drop if the Fed cuts rates, to range between 1.3024 and 1.3050.

If, however, the BoC shifts its stance to be more dovish after holding rates, then USD/CAD may rise past 1.3081 to range between 1.3114 to 1.3081

Bears will continue to put pressure on USD/CAD to break the 1.3050 support (H4)

USD/CAD is currently trading below the 20-day and 100-day moving averages. It is likely to continue to trend downwards as US trade relations ease and if the Fed cuts rates later this week. The bears will likely try to retest the support level of 1.3050 before then, and will likely break it if the Fed announces a rate cut. USD/CAD is then likely to range between 1.3024 and 1.3050.