The Dollar Finds Some Traction, While Bank Of Canada Highlights The North American Session

The CDU/CSU competition to find Merkel's successor has been resolved.  The CDU's Laschet edged past the CSU's Soeder.  However, it may prove to be a poisoned chalice.  The CDU/CSU, like its coalition partner, the SPD is no longer capturing the imagination (or hearts).  Both are seeing their public support continue to erode.  The Green's candidate Baerbock is more charismatic and, in the latest polls, is ahead of the CDU/CSU 28%-21%.  A Green-led government would represent a political shakeup in the heart of Europe, which given Germany's role, would likely send reverberation through the EU. 

The buying that lifted the euro for the past two weeks has evaporated ahead of tomorrow's ECB meeting.  Ironically, the ECB is expected to be a bit more optimistic given the vaccine rollout acceleration and the upbeat survey data.  The euro appears to have traced out a bearish shooting star candlestick yesterday, and follow-through selling has seen it test the $1.20 level in the European morning.  Initial support below there is seen near $1.1990.  Below there is the $1.1935 retracement target (38.2%) and the 200-day moving average near $1.1925.  Sterling also reversed yesterday after seeing its best level in over a month (~$1.4010).  It was sold to $1.3910 in Asia and has been confined to a narrow range in the European morning, capped near $1.3950.  The euro is holding support near GBP0.8600, but it looks vulnerable.  It is poised to retest the low seen Monday near GBP0.8590 and move toward our next target near GBP0.8565 (FXE, FXB).

America

Norway's central bank has already opened the door to a possible hike at the end of this year.  The Bank of Canada is not prepared to hike rates, but it is expected to adjust its forward guidance to prepare the market for reducing its bond purchases.  The central bank has allowed the emergency liquidity provisions to expire, and tapering would be the next logical step.  It is currently buying C$4 bln a week of federal bonds.  It may reduce the buying by a quarter as early as next week.  The central bank can be more confident of stimulus from both the Canadian government, which unveiled plans on Monday for C$101 bln of next policy acts and a budget deficit of C$155 bln or around 6.4% of GDP.  That may be a bit on the high side as the growth is likely to exceed the Bank of Canada's 4% estimate.  The IMF projects 5% growth while the OECD forecasts 4.7% growth.  The BA futures imply Canada's first rate hike in Q3 22.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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