Yesterday, US and Cinese delegations signed off the Phase One deal. This doesn’t end the trade war, as Chinese officials have commented on, but China seems content with the deal. Chinese officials said that the deal is balanced, which was one of the issues for them, fearing a one sided deal, US just forcing China to buy stuff. China feels it can purchase $200 billion of US goods without much hassle and both sides have pointed to lowering/removing some of the tariffs, so the situation has improved, but markets still remain cautious because there are many unknowns in this trading equation right now; the global economy is still pretty weak, central banks are still pretty dovish, geopolitical tensions continue, Brexit will happen at the end of the year and so on, so traders are skeptical of picking any sides right now.

In the European session, we had the ECB minutes from their last meeting being released and they sounded less dovish then in the previous meetings. They pointed to stabilizing inflation, which is true since CPI has stabilized in recent months just above 1%, after having climbed from below there. In the US session, the retail sales for December were positive, especially core sales, but November was revised lower, so they balanced each other out.

The European Session

• Chinese Official Commenting on Phase One Deal – Yesterday US and Chinese delegations signed the phase one deal. This morning, Chinese vice premier, Liu He commented via state media, saying that Chinese imports of US farm products will be based on market principles. US-China trade deal on agriculture will not affect third party’s interests. Chinese companies will import US agricultural goods according to consumers’ need, demand and supply in the market. They added later that the deal is balanced, with both countries agreeing to buy from each other.

• EU’s Hogan Speaking on Trade – EU’s Hogan commented earlier saying that there won’t be unity on trade in the short-term. Trump still sees tariffs. Trump thinking about the short-term i.e. between now and the election. There won’t be unity on trade in the short-term. He also commented on China:

  • We are very open, China is not open
  • China is not opening up as promised
  • China is looking for dominance, influence geopolitically through trade and investment
  • Says that cannot let Chinese dominance put EU companies out of business based on unfair subsidies
• ECB Meeting Minutes – The ECB releases the account of its December monetary policy meeting. Minutes seem more positive than in the previous meeting:
  • There had been solid upward movement in underlying inflation, excl. holiday prices
  • Data pointing to weak but stabilising growth dynamics
  • Geopolitical tensions not conducive to lowering uncertainty
  • But sentiment has improved over receding global trade tensions
  • Industry slump may bottom out before creating spillover
  • Stimulus impact in latest outlook rather conservative
  • Must better understand reasons for weak inflation
  • Policy could be adjusted to reduce unwanted side effects
  • Must be vigilant on efficacy of policy measures

The US Session

• RBSA Cuts Interest Rates – The global economic weakness is catching up with South Africa too. The cenrtral bank of the country lowered benchmark rate to 6.25% from 6.50%. The Reserve Bank said it sees risk to the inflation outlook as balanced. SARB model shows 2 rate decreases of 25 bps each in Q1 and Q4 2020.
• US Retail Sales – Retail sales report for December has bene released and headline sales increased by 0.3% as expected. Core sales posted a bigger increase of 0.7%, from 0.1% in November and against 0.5% expected. Control group also beat expectations coming at +0.5% vs +0.4% expected, but November was revised form +0.1% to -0.1%. Prior control group stood at 0.1% but was revised lower to -0.1%.
• US Philly FED Business Outlook – The US Philadelphia business outlook indicator has been declining and fell to 0.3% in December. But, it improved this  month and the figures below show that:
  • Philadelphia Fed index up 17.0 versus 3.7 estimate
  • prior month 2.4%. It was originally released at 0.3 but revised higher before today’s report
  • new orders 18.2 versus 11.1 last month
  • price is paid 22.1 versus 19 last month
  • employment 19.3 versus 16.8 last month
  • average work week 5.2 versus 8.5 last month
  • prices received 14.7 versus 11.0 last month
  • shipments 23.4 versus 15.7 last month
  • unfilled orders -3.7 versus 8.6 last month
  • delivery time -0.4 versus 12.5 last month
  • inventories -2.3 versus +5.0 last month
  • The index is the highest level since May 2019 when it reached 17.5
  the six-month forward data forecast shows
  • general business activity 38.4 versus 34.8 last month
  • new orders 41.9 versus 33.6 last month
  • number of employees 24.3 versus 27.4 last month
  • average work week 13.2 versus 17.5 last month
  • capital expenditures 32.9 versus 26.0 last month
  • shipments 42.4 versus 38.7 last month
  • price is paid 41.9 versus 46.0 last month
  • prices received 34.0 versus 45.1 last month

Trades in Sight

Bullish USD/CAD

• The trend has changed for crude Oil
• The 50 SMA has turned into support
• The USD is turning bullish
• The support at 1.30 is holding

The 50 SMA is acting as support today

USD/CAD turned bearish in December, as the CAD turned bullish, following crude Oil after OPEC+ decided to cut production again and place new quotas of 50k barrels/day, on top of the previous ones. As a result, USD/CAD remained bearish all months and lost nearly 400 pips from top to bottom. This pair slipped below 1.30 at the end of the month, but reversed higher this month. The tensions in the Middle East gave crude Oil a push higher, but tensions abated after the US didn’t decide to attack Iran back, after Iran retaliated on US military bases in Iraq.

So, crude Oil retreated lower, with WTI losing around 8 cents and as a result, USD/CAD turned bullish, climbing above 1.30 again. Last week, this pair climbed just abov 1.31, but it has been retracing lower this week. Although, it seems like a support level has formed at 1.30 and tghe retrace is now complete, so we decided to go long on this pair and opened a buy signal a while ago. Now, USD/CAD has bounced off the 50 SMA (yellow) after the positive US retail sales for December, so this trade seems to be going well now.

In Conclusion

markets remain quiet today after the Phase One deal was signed and the minutes from the ECB meeting didn’t get them going, despite being less dovish. The US retail sales came in positive for December, but November’s numbers were revised lower, so the initial impact was minimal on the USD. But, it has started to gain pace now.