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‘Risk-On’ As Prospect of More Stimulus Nears

Published July 11, 2016
  • Equity markets continue to rise following last week's record closing high for the S&P 500 as Central Banks appear ready to step in with more stimulative polices to support growth
  • Japan's Nikkei Index rose almost 4% on Monday following a sweeping victory by Prime Minister Abe's ruling party who have championed fiscal stimulus and a commitment to low rates in their efforts to revive decades of anemic GDP and inflation growth
  • The good times kept rolling as European shares followed suit with gains seen across the UK and the continent
  • The Bank of England is widely expected to lower rates this Thursday and they may even announce further measures (corporate bond purchases?) to support lending and to improve confidence in the UK following the 'Brexit' decision
  • On Wednesday, Bank of Canada Governor Stephen Poloz will announce his latest interest rate decision and also deliver a fresh set of economic projections for the Canadian economy
  • No change in rates is expected, however given the challenges to the Canadian economy this year and the feeble level of job growth, he may be disposed to a slightly more dovish tone than in previous outings which could hurt the Canadian dollar
  • USDCAD is testing the upper end of its familiar range this morning near 1.3100, likely influenced by lower oil prices which have fallen to two month lows on oversupply concerns
  • Canadian crude is trading at a $15 discount to WTI, the largest spread in two months, as the lessened risk from wildfires has increased supply of heavy crude from Northern Alberta creating bottle necks at what few pipelines Canadian producers have available to them
  • Data released this morning showed that Canada had 218K housing starts last month, smashing expectations for a 190K print, however the Loonie has ignored the data for now and looks to be trading lock step with oil
  • Wednesday's 10am ET Bank of Canada decision is the only other major release for Canada this week, while the US has a slew of data in the docket highlighted by June's CPI numbers on Friday

Chart: USDCAD sideways consolidation continues. As we approach the apex of the ascending triangle, there is risk of a topside breakout.