EUR/USD: Dollar retreats from multi-year high
- With no major economic data or policymaker speeches scheduled and the Christmas holiday approaching, the euro dragged itself from Tuesday's 14-year low back up to the 1.0400 area.
- Traders are casting an eye on Italy's troubled bank Banca Monte dei Paschi di Siena SpA (OTC:BMDPD), which needs to raise EUR 5 billion by the end of the year to avoid being wound up by the European Central Bank.
- The EUR/USD is in a fight between short-covering pressure and political uncertainty. Upside rejection on December 8 weighs heavily on the market, means the overall bias remains on the downside. Spot has hit new multi-year lows. We are looking to get short at 1.0590, which is below the kijun line at 1.0613 and we expect this should continue to cap recovery attempts.
USD/CAD: CAD strengthens on higher oil prices
- The CAD strengthened against its U.S. counterpart, recovering from a near three-week low earlier, as higher oil prices and stronger-than-expected domestic data offset broader gains for the greenback.
- The value of Canadian wholesale trade rose 1.1% in October, the biggest gain in five months. In volume terms, sales were up 0.9%, which could bode well for broader economic growth at the start of the fourth quarter. However, the economy is expected to slow in the final quarter of the year following a strong rebound in the third quarter.
- Oil edged up on Wednesday, driven by expectations for a decline in U.S. crude inventories and bringing price gains for December to 10%, which would be the strongest performance in the final month of the year in six years. Oil is one of Canada's major exports.
- The U.S. Energy Information Administration will release weekly inventory data at 15:30 GMT today. Oil inventories are expected to have fallen for a fifth consecutive week.
- We expect the Canadian dollar to be the main beneficiary of the rise in oil prices in the long term. The CAD’s outperformance of its commodity FX peers since the OPEC agreement to cut production suggests that the market is gradually aligning itself with our constructive view of the currency. Canadian employment dynamics have improved significantly since oil production returned in the second half of 2016. In due time, this should be reflected in higher inflation, which is not far from target anyway. Following that, markets are likely to start bringing forward the timing of rate hikes.
- Our CAD outlook for 2017 is bullish.
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