EUR/USD: Trump prefers less hawkish candidates to Fed governor post
Macroeconomic overview: U.S. President Donald Trump is ramping up his search for a new chief for the U.S. central bank, meeting with former Federal Reserve Governor Kevin Warsh and three others and promising a decision this month. Warsh was a Fed governor between 2006 and 2011 and resigned from the board because of his opposition to the bond-buying program.
Trump has previously suggested he may reappoint Fed Chair Janet Yellen to the post. Jerome Powell, one of the current governors on the Fed’s board, also met with Trump last week about the Fed job.
A new Fed chair would take the helm as the central bank eases well away from crisis-era policies in response to a strengthening economy and falling unemployment, though inflation still lingers below the Fed’s 2% goal.
Under Yellen, the Fed has raised interest rates and launched a plan to shrink its USD 4.5 trillion balance sheet. Much of the latter was accumulated through a controversial bond-buying program that Yellen said helped the economy avert an even deeper downturn. Her term as chair expires in February.
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Donald Trump’s said today the choice for the next Fed chair could be a less hawkish candidate than some had expected. U.S. Treasury Secretary Steven Mnuchin favours Fed Governor Jerome Powell over former governor Kevin Warsh. What is more, Powell is seen as more dovish than Warsh, who has criticised the Fed’s bond-buying programme in the past.
The dollar had rallied earlier this week on speculation that Warsh might be the leading candidate to replace Yellen. A more hawkish Fed candidate would likely prompt investors to bet on more aggressive normalization of monetary policy, to the dollar’s benefit. But today’s suggestion from Trump lowers the chances of Warsh.
Technical analysis: The EUR/USD did not manage to close below 38.2% fibo of June-September rise at 1.1720 yesterday and expands its recovery today. The pair is still capped by 7-day exponential moving average and the EUR/USD bulls need a close above that level to think seriously about short-term trend reversal.
Short-term signal: Our long position looks safe with stop-loss below 1.1605 level (50% fibo of 1.1119-1.2092 rise).
Long-term outlook: Bullish
USD/CAD falls despite another dovish voice from BoC
Macroeconomic overview: Deputy Governor Sylvain Leduc said Canada’s economic growth is expected to decline over the next few quarters but continue to exceed the rate of potential output. While he did not directly mention monetary policy, Deputy Governor Sylvain Leduc said a rise in entry rates of new firms and a decline in business exits over the coming quarters could lead to a virtuous cycle of growth. “An increase in productive capacity resulting from new firm creation would therefore allow the economy to grow faster without creating inflationary pressures,” he said. The focus on rising productivity and higher potential output could signal more dovish statement at the bank’s October 25 rate decision.
The Bank of Canada raised interest rates twice, in July and September, citing unexpectedly strong economic growth and a need to raise borrowing costs before inflation rears its head. Financial markets are divided over whether the bank will hike rates again before the end of the year, and economists said Leduc’s tone added to the cautious note sounded last week by Governor Stephen Poloz.
We expect the Bank of Canada will continue to raise interest rates, but a hike in October is unlikely.
Canada’s trade data for August is due on Thursday and the September employment report is scheduled for release on Friday.
Technical analysis: Uptrend’s progress is being slowed by the upper 21-day Bolli and nearing the thick daily cloud’s base at 1.2602. The USD/CAD stays above 7-day exponential moving average, but a close below that level today could be the first signal of come back to downward trend.
Short-term signal: Short, target 1.1930, stop-loss 1.2680
Long-term outlook: Bearish
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