Market Drivers April 25, 2017
Europe and Asia
GBP: PSNB 4.3B vs.1.5
North America
USD: Consumer Confidence 10:00
USD: New Home Sales 10:00
USD/JPY soared through the 110.50 level in Asian and early European trade while commodity dollars languished in the wake of US tariffs against Canadian lumber. The loonie was in freefall throughout the overnight trade after US government announced a 20% tariff against Canadian lumber. Canada is US's largest trading partner and US is Canada's biggest export market so the escalation of hostilities by the Trump administration was taken badly by the market which pushed USD/CAD through the key 1.3550 level. With oil below the $50/bbl level and with US seemingly much more protectionist minded at this point, the loonie is under attack from all sides.
Technically the pair has stiff resistance at the 1.3600 figure which is the top for a multi-month range, but if trade tensions continue to escalate and disputes over products and services increase on both sides of the border, the loonie could weaken much further with longs trying to push USD/CAD towards the key 1.4000 mark. The dour news on the loonie, dragged the whole commodity dollar complex lower with kiwi especially hard hit as the pair drifted down to .6950 level.
The drop in commodity prices only added to the selloff, but the pair has very strong support at the .6900 figure and should hold that level barring any additional declines in the commodity complex. On the other hand, Mr. Trump also stated that he was willing to delay the negotiations about the wall until the fall averting a possible clash with the Democrats that could have caused a government shutdown this week. The news helped to fuel a relief rally in USD/JPY which rallied steadily to take out the the 110.50 level and remained well bid into the North American open.
With US calendar only carrying Consumer Confidence and New Homes data, the economic releases are unlikely to have much impact on trade today. One surprising side effect of the Macron win on Sunday has been a marked upgrade in expectations for a Fed rate hike June. We think that the sentiment is misplaced and that the Fed is much more likely to stand down for this cycle given the slowdown in US economic data and the tepid inflation readings. Furthermore, with little progress on the legislative front the market bet that some sort of quick tax reform will appear by the summer looks more tenuous by the day. All of which suggests that this rally in USD/JPY is likely to fade in the 111.00-112.00 corridor once reality sets in.