Eurozone CPI confirmed at 1.3% but how will Canada fare?
Fawad Razaqzada February 23, 2018 12:23 PM
While the Bank of Canada has moved ahead of the European Central Bank in raising interest rates first, this hasn’t stopped the EUR/CAD from rising...
While the Bank of Canada has moved ahead of the European Central Bank in raising interest rates first, this hasn’t stopped the EUR/CAD from rising. So, has the BOC moved too prematurely and thus made a mistake, or has it been too clever by tightening its belt without causing its currency to appreciate? After all, unlike the ECB, the BOC now has more ammunition in case of another economic downturn. But on the flip side a sudden downturn in economic conditions would mean the BOC will have a lot less credibility. Of course, it is not as simple as that. The ECB is responsible for the whole of the Eurozone, not just a single country. So, it has a slightly more difficult job than the BOC. Nevertheless, the ECB is turning hawkish and soon it will have to tighten conditions.
Eurozone economy and inflation on the rise
After all, Eurostat today confirmed that headline CPI was indeed at 1.3% year-over-year in January, as expected, with core CPI was also left unrevised at +1.0%. In addition, the Federal Statistics Office (Destatis) confirmed that Germany grew by 0.6% in Q4 as exports rose by 2.7% while imports increased by 2%. With Germany being the Eurozone economic powerhouse and a global trading nation, a stronger euro is probably not in its best economic interest as this would weigh on exports. But that’s the price one pays for having a strong economy. With inflation now on the rise, and economic conditions positive, it means that there is less need for ECB’s monetary support. This could help keep the euro underpinned in the months ahead, especially against her weaker rivals.
Canadian data far less rosy
Now, in Canada, things have started to turn less rosy as indicated for example by the 1.8% drop in core retail sales as we found out yesterday. If today’s CPI also disappoints expectations then this could be further bad news for the Canadian dollar. Inflation in the North American country is expected to have rebounded by 0.4% month-over-month in January after a similar drop the month before. On a year-over-year basis, CPI is seen dropping to 1.4% from 1.9% in December.
Canada’s crude problems
And let’s not forget about Canada’s other problem: crude oil. Canada’s main export market is its southern neighbour – the US, which is fast becoming self-sufficient in its energy needs. So, it doesn’t really need Canadian oil. As a result, Canadian oil companies are forced to sell crude at a significant discount. With Canada’s oil selling at just $34 per barrel, this represents a 45% discount to US oil. Canada wants to deal with the problem by building new pipelines so that it could export its oil elsewhere, but there have been delays in approving the plans and this is costing the Canadian economy dearly. So, the Canadian dollar is not just falling because of expectations that oil prices will remain low, but also because of Canada’s own crude problems.
EUR/CAD trending higher
Thanks to the above fundamental considerations, the trend on the EUR/CAD has been bullish even if the pair is trading lower at the time of this writing. This doesn’t necessarily mean that price will continue to push higher from here of course. But we are of the view that the higher probability setups are in the direction of the trend until we see a clear reversal pattern unfold. So far, we haven’t seen a clear reversal pattern, so we remain bullish on this pair even if it looks overbought. After all, price is holding above its key moving averages (21, 50 and 200) which are all pointing higher, too. What’s more, there is a rising trend line supporting the dips and price has been making higher highs and higher lows. Thus, we look for supports to be defended and resistance levels to break. Among the key supports to watch is 1.5625 – the high from Wednesday, which was breached after yesterday’s poor retail sales data from Canada and could turn into support today. Below this is 1.5550, likewise an old support and resistance level. But the key support is all the way down at 1.5370/5 – the 2017 high. However as this level has already been tested, another potential test could see a break down towards the long-term trend line. Meanwhile in terms of resistance, 1.5685-1.5700 marks the confluence of a long-term 127.2% Fibonacci extension level with a previous support. Price has already tested this level earlier today and responded by going lower ahead of Canadian CPI. If this level eventually breaks then there is not a lot of further resistance until the psychologically-important level of 1.6000. Of course, you shouldn’t expect price to get there without retracements, so keep an eye on price closely and especially around round and mid handles such as 1.5800 and 1.5850 etc.
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