US AM Digest: CAD Gains Fade on Soft GDP, Trade Concerns Rise as US Look to Impose Tariffs

2018-05-31 13:20:00

US Market Snapshot via IG: DJIA 0.03%, Nasdaq 100 0.17%, S&P 500 0.05%

Major Headlines

Eurozone Inflation surges to 1.9% (Exp. 1.6%) on higher energy prices
US PCE Holds at FOMC’s 2% target
US Set to Impose Tariffs on EU, Canada and Mexico

EUR: Another morning of Euro buying as Italy’s League and 5 Star Party look to form a governing coalition. Clarity likely to be provided later today, in which an agreement to form a government could see the Euro afloat, given that the market perceive a failed attempt and the risk of a snap election to be a greater negative amid the surging support for the right-wing League party. Eurozone inflation also moved towards the ECB’s target at 1.9% vs. Exp. 1.6% following the surge in energy prices, underlying inflation also printed ahead of expectations at 1.1% (Exp. 1%). This provides the ECB with a dilemma due Spanish and Italian political woes weighing on investor sentiment, while a trade spat between the US and EU could escalate with US steel and aluminium tariffs set to be imposed tomorrow.

CAD: Yesterday’s hawkish hold by the BoC provided a bid for the Canadian Dollar, which strengthened to the low 1.28s against the US Dollar. However, much of the gains have been neutralised by the weaker than expected Canadian GDP figures, taking USDCAD back up to 1.29, while 2.8bln worth of option expiries will likely keep USDCAD magnetised at 1.29 till the NY cut 14:00GMT.

USD: The US Dollar has moderated somewhat in recent session with rising uncertainty over politics within the Eurozone, most notably Italy, weighing on Fed rate hike expectations for 3 additional rate rises. Subsequently, the greenback and US bond yields have looked toppish with the US 10yr yield back below the psychological 3% level. Focus will be on the NFP report, with eyes on the wage components for inflation pressures within the US. Elsewhere, trade wars is likely to come back into the fray with the US poised to impose tariffs on the EU, Canada and Mexico.

DailyFX Economic Calendar: Thursday, May 31, 2018 – North American Releases

DailyWebinar Calendar: Thursday, May 31, 2018

IG Client Sentiment Index: USDCAD Chart of the Day

USDCAD: Retail trader data shows 41.0% of traders are net-long with the ratio of traders short to long at 1.44 to 1. In fact, traders have remained net-short since May 22 when USDCAD traded near 1.28385; price has moved 0.2% higher since then. The number of traders net-long is 19.7% lower than yesterday and 3.5% higher from last week, while the number of traders net-short is 10.5% lower than yesterday and unchanged from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed USDCAD trading bias.

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