The Loonie Set To Decline, Yuan Included To The SDR
Swissquote Bank Ltd | Dec 01, 2015 05:48AM ET
Forex News and Events
Canada set to remain in technical recession
Major headlines this week focus on the ECB but this is also a very busy week for Canada with Q3 GDP released today and the rate decision of the BoC tomorrow. The country is, for the time being, in technical recession (two consecutive quarters of economic contraction), which is set to stop temporarily. For the first two quarters, GDP shrank 0.8% and 0.5% quarter-on-quarter respectively.
There are big expectations concerning the annualized Q3 GDP data, which should be released around 2% on a net improvement of the balance on trade in goods and services. Canada’s trade deficit also narrowed in September to $1.33 billion from $2.53 billion in August due to the retracement of commodity prices this summer. Unfortunately, commodity prices have fallen since then and Q4 should weaken due to renewed downside pressures on the trade deficit. Lingering low commodities prices have not stopped to weighing on the Canadian economy. At the same time, when commodities collapse, Canada holds it breath, the Bank of Canada has already cut rates twice this year in an effort to offset the effects of the oil decline.
We remain bearish on the loonie, which is holding above 1.3300 versus the greenback. On the medium term, we target the USDCAD to target 1.3500.
Yuan included to SDR
As we expected the IMF voted to add the yuan to the Special drawing rights. The current basket is made up of USD, EUR, GBP and JPY. This will be the first change to the SDR's composition since 1999 and will take effect on Oct. 1st 2016. The yuan will have a roughly 11% weighting in the basket. PBOC Deputy Governor Yi Gang after the IMF executive boards vote stated that China will continue to reform to make the yuan more “freely tradeable.” He went on to suggest that yuan would be "basically stable at equilibrium level" and further deprecation should not be a concern. We are one of the few analysts on the street to forecast yuan strength moving forward. The rationale is based on two critical components. Firstly, the inclusion of the yuan in the IMF SDR, which should lead to asset manages including the currency in their diversification strategy. Also, the decision will provide more confidence to the market on this historically volatile and managed currency. Secondly, our view is based on expectations that China economic conditions are stabilizing. Recent incoming China data on exports, housing and domestic consumer have been positive, suggesting the worst part of the downside is over. Moreover, massive fiscal and monetary stimulus will provide a boost domestically. Finally, in our view the Fed tightening is unlikely to have a profound effect on the yuan's managed price.
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The Risk Today
EUR/USD is now trading around 1.0600 and remains in a downtrend channel. The technical structure is clearly negative. Hourly support lies at 1.0566 (intraday low). Hourly resistance can be found at 1.0763 (19/11/2015 high). Stronger resistance stands at 1.0897 (05/11/2015 high). Expected to break support at 1.0566. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).
GBP/USD has bounced back from hourly support at 1.4994 (30/11/2015 low). Hourly resistance is given at 1.5336 (19/11/2015 high). Strong resistance can be found at 1.5529 (22/09/2015 high). The technical structure remains negative. The long-term technical pattern is negative and favours a further decline towards the key support at 1.5089 , as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.
USD/JPY is trading without real momentum. Hourly resistance is given at 123.76 (18/11/2015 high). Support is located at 122.23 (16/11/2015 low). Expected to fall back to the support at 122.23. A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 116.18 (24/08/2015 low).
USD/CHF is now consolidating and is still trading around its five-year high. Hourly support is given by the lower bound of the uptrend channel around 1.0200 while hourly resistance is given at 1.0328 (intraday high). The technical structure still suggests that the upside momentum should continue. In the long-term, the pair has broken resistance at 0.9448 and key resistance at 0.9957 suggesting further uptrend. Key support can be found 0.8986 (30/01/2015 low). As long as these levels hold, a long term bullish bias is favoured.
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