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Canadian dollar update – Thursday July 16, 2020. Glass half empty.

FX & market recap:

For the first time in weeks, markets decided to take a glass-half-empty approach, looking through the better-than-expected China 2Q GDP (3.2% vs 2.4% expected) and rather focusing on the softer China June retail sales and the signs of the unevenness of the recovery. Although Asian stocks declined, the negative spillover into the FX world has been and should remain limited, with the near-term focus on the prospects of an agreement on the EU Recovery Fund and its potential boost to risk assets. In the US, the June retail sales should post another decent increase today (helped by the extended unemployment benefits including the extra US$600 per week), helping to offset the cautiousness caused by the China GDP data and in turn keep USD upside fairly limited.

The weekly US jobless claims report, June Retail Sales, and the Philadelphia Fed Manufacturing Index headline a list of American economic reports.

Canadian dollar highlights:

While there was nothing in the BoC MPR to suggest an outsized CAD rally (GDP remaining 8.8% lower year-over-year in Q4 & won’t return to end-2019 levels until around mid-2022; Canada’s potential output will be almost 4% lower in 2022 than projected back in January), widespread CAD strength on the crosses saw USD/CAD test key triple bottom support at 1.3505. A daily close below here would confirm a short-term price top and expose 1.3357 thereafter. Resistance is located at 1.3537 & 1.3585.

Euro highlights:

The ECB meeting today should be a non-event for EUR. No new measures are expected to be announced, the economy is gradually recovering, and the meeting should be more about testing President Christine Lagarde's communication skills rather than any new measures. Near-term, the more important EUR driver is the progress on an EU Recovery Fund with an agreement likely pushing EUR/USD to the 1.15 level. So far, the ECB measures have fully compressed the EUR risk premium and with a soft dollar environment to unfold further in coming months, EUR/USD should head higher, above 1.15 this summer and towards 1.20 by the year end.

British pound highlights:

The UK job numbers turned as expected, so far showing a lack of deterioration due to the furlough scheme. This will eventually change, and the employment situation is set to deteriorate later this year. GBP is back under pressure, being the worst performing G10 currency this week. The trend is set to continue as uncertainty about UK-EU trade negotiations keeps the pound on the back foot.

Asia Pacific highlights:

Australian jobs numbers jumped more than expected overnight, with headline employment rebounding to 211k in June. Usually a key AUD driver, the current virus situation is preventing the Aussie from rallying on good data. Incidentally, AUD is facing some negative spillover from the correction in Chinese equities and the yuan, having the highest correlation in G10 with CNY. AUD/USD may still prove unable to decisively break above 0.7000 today, AUD/NZD could soon be back at 1.0600.

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