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The Loonie gets a boost from improved market sentiment and optimism in US-China trade talks.

Jeffrey Scott

The USD/CAD pair has found a strong resistance at around 1.3310, as mentioned in the daily commentary yesterday. As expected, the Loonie is getting more dependent on foreign news such as US-China trade talks and the USD/CAD pair is falling 0.35 percent this morning (stronger Loonie). Furthermore, there is a 3 percent increase in the crude oil WTI price this morning (it is trading slightly below 54 dollars a barrel), which is helping the Loonie to get more buyers than sellers.

The main reason for the Loonie’s appreciation this morning is the optimism about the US-China trade discussions that is improving the general risk sentiment and is bolstering risky assets and currencies such as the Canadian dollar, which get a boost as business confidence improves.

Technically speaking the USD/CAD pair has a support at around 1.3225 and 1.3205 and a strong resistance at around the 1.3300 handle. It is important to mention that the USD/CAD has been trading in an uptrend channel since February 2018, and it was tested in October 2018 and on February 1st this year when it made a new low of 1.3068. This is the main reason why any Loonie appreciation should be taken with a grain of salt until that uptrend channel is broken.

The US dollar index touched new highs for the year during the overnight trading session of around 97.20 (the highest level in 2018 was around 97.71). The headline that top US lawmakers would meet Monday afternoon to avert a government shutdown, only helped to accentuate the move in the dollar. One of the main currencies, the British Pound, part of the US dollar index basket, was weaker yesterday after an anemic UK Q4 GDP print, which was a reminder that economies can’t escape the weight of uncertainty whether it be Brexit, trade tensions, or China growth. The UK GDP printed at 0.2 percent quarter to quarter versus the 0.3 percent expected, but this masks the severity of the weakness with UK growth, which has the lowest annual rate in 6 years. The Euro fell in sympathy with the British Pound while even the Japanese Yen slipped into negative territory for the year as short US dollar positions have unwound, encouraging a strong buying pressure of US dollars and making the US dollar soar to new highs.

However, this morning, optimism about the US-China trade discussions bolstered risk assets. The US dollar index is falling around 0.15 percent and currencies such as the Aussie, Kiwi and Canadian dollar got a boost as business confidence improves. Likewise, emerging markets currencies, such as the South African Rand, Mexican Peso and Chinese Yuan are getting more expensive against the US dollar this morning. Finally, the North American session seems more optimistic with equity futures rising as a result of trade talk outcomes.

Regarding economic releases, the US inflation figures due tomorrow will likely show that wages continue to stagnate, and inflation continues to remain in the 1.5 –2.5 percent range.

We saw overall strength in the Greenback on Monday as concerns grew that the latest round of U.S.-China talks may not yield a deal between the world’s largest economies. However, the Euro is stronger this morning, trading at around the 1.1300 handle.

On the data front, there aren’t any relevant macroeconomic releases scheduled today. Looking ahead this week and tomorrow we will see the release of industrial production for the month of December. Then on Thursday, we will see the release of Q4 gross domestic product for both Germany and the EU.

The British Pound was sold off yesterday following the release of weaker than expected UK GDP, which printed at -0.4 percent month on month versus expectations for 0.0 percent and +0.2 percent quarter on quarter vs. expectations for 0.3 percent. Weaker business investment was the primary driver, likely a result of the Brexit impasse.

The GBP/USD pair did rebound this morning 0.31 percent, trading at 1.2893. Brexit headlines will continue to drive direction in the GBP/USD pair. Both US and UK central bank heads are due to speak today as well.

The AUD/USD pair has been steady over the last 24 hours or a little weaker because of a well-bid dollar. Australian home loans data also printed more fragile than expected overnight, which hasn’t helped the Aussie dollar’s cause.

Focus for Aussie dollar traders will likely be on US-China talks amid a lack of any top tier local data releases.

The NZD/USD pair has settled lower over the past few trading sessions, undermined by the general risk-off tone in markets.

We may see a steady range endure at least in the run-up to the RBNZ Monetary Policy Statement due later tonight. The central bank is most likely to signal no change in interest rates but some expectations are creeping in that Governor Orr may sound a little more dovish than he has in previous meetings. Traders are pricing in a 90 percent chance of a rate cut by November.