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The Loonie might be more dependent this week on offshore news such as China-US trade talks.

Jeffrey Scott

The Loonie strengthened against the Greenback on Friday on the back of surprisingly strong local economic data. USD/CAD moved from intraday highs of 1.3329 down to 1.3232 following an impressive January employment report. Statistics Canada revealed that the number of employed people in Canada rose by 66.8 k in January, driven by jobs for youth in services and record private-sector hiring, a sign of strength in an economy facing several other headwinds. Economists were forecasting only a 5k employment increase in January. Despite that increase, the unemployment rate rose to 5.8 percent amid a higher participation rate.

This morning the USD/CAD pair is trading flat at 1.3276. It touched an intraday high of 1.3297 and an intraday low of 1.3262, despite a weak crude oil WTI which is falling over 2 percent this morning. Taking a technical approach, we expect the USD/CAD to have a resistance around 1.3310 and a support around 1.3250.

China and trade return to the forefront this week, as Liu He, Mnuchin and Lighthizer meet in Beijing for a fresh round of talks. Lighthizer dampened hopes of a positive outcome in the short term recently stating that it’s not sure a pact could be reached. Also, Trump's stopgap deal to keep the US government open expires this Friday, 15 February, with border wall funding again threatening another shutdown episode. These situations might give the USD/CAD pair more volatility given that there are not relevant releases in Canada this week.

The US dollar index hit a high of 96.87, representing a 0.22 percent increase after US President Trump said it was “probably too soon” to be meeting with the Chinese President. Hopes that a trade deal can be reached to stop a new round of U.S import tariffs on Chinese imports coming into force in March seem to be on the back burner yet again. If an agreement is not met, tariffs on USD 200 billion worth of Chinese goods will rise from 10 percent to 25 percent.

Market participants are awaiting a raft of delayed US data in the wake of the shutdown of the Federal government. This includes durable goods orders, retail sales growth, core inflation, and Q4 GDP growth which will probably be released during the week. Fed Chair Powell is also due to speak on Tuesday, CPI index will be published on Wednesday, and retail sales will be released on Thursday.

For this week, the US dollar could continue to see gains if the political risks return no progress and the economic backdrop continues to abate. Furthermore, the focus will remain on trade talks, Brexit, and corporate earnings in the US.

The Euro closed the week at close to two-week lows, with support coming in at and around the 1.1300 handle against the Greenback. Last week we saw the single currency post its steepest weekly drop (decline of 1.1 percent) against the US dollar in over four months in the wake of data that showed an economic slowdown in Europe was spreading.

On the data front, there aren’t any relevant macroeconomic releases scheduled today. Looking ahead this week and we will see the release of Industrial Production for the month of December, Q4 Gross Domestic Product for both Germany and the EU and Q4 EU flash employment data. Finally, on Friday we will see the release of the EU Trade Balance for the month of December.

The GBP/USD pair drifted lower to the 1.29 handle in the overnight trading session as the Greenback’s index increased last week around 1 percent and 0.2 percent on Friday. There wasn’t much by way of UK or US economic data to make mention of.

Brexit headlines haven’t had much impact, either. Theresa May has responded to Jeremy Corbyn’s letter setting out his five demands for a Brexit deal. The PM would like any talks to focus on alternative arrangements for the Irish backstop. However, the clock is ticking, and the more extended markets go without news of a potential deal, the more this will likely continue to weigh on the British Pound. The parliamentary debate continues on February 14th, and it remains to be seen if we'll have some form of a vote on the day itself.

So, this week could well be busier in FX and so a more volatile one for the Pound, certainly when compared with last week. Bank of England’s Governor Carney is due to speak tomorrow, and UK inflation data will be released on Wednesday.

The AUD/USD pair continued falling in the overnight trading session, and it is now trading close to Friday’s opening level at 0.7070, representing a 0.16 percent fall.

The next macroeconomic releases are scheduled for Tuesday and Wednesday, with the Australian Bureau of Statistics releasing their Home Loans data, showing the change in the number of new loans granted for owner-occupied homes. Major banks NAB and Westpac will also release their own data regarding business confidence and consumer sentiment respectively.

The NZD/USD pair was trading weaker into the end of last week and has it has been trading flat throughout most of the overnight trading session. It is trading at 0.6740 at the time of this writing.

This week looks to be another big week for the New Zealand dollar with the RBNZ set to release their monetary policy statement on Wednesday, in which there may be a reference, direct or otherwise, to the weak NZ employment report last week.