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Intraday Comment 22/01/2015

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The dollar traded lower against almost all of its G10 peers during the European morning Thursday. It was higher only against NOK.

With all eyes on the ECB President Draghi’s press conference following the rate decision, the EUR continued its choppy price action established after SNB’s shock announcement last Thursday. The big question to be answered is not if the Bank will introduce a quantitative easing (QE) program, but rather what are the details of such a plan. At this point anything less than EUR 50bn a month for one year will probably disappoint the market and is likely to determine the near term bias for EUR, in our view. (See our morning comment for details.)

On Wednesday, the Bank of Canada unexpectedly cut its key interest rate by 25bps to 0.75%, the first rate move since September 2010. The move was to counter the effects of the collapse in oil prices on economic growth and inflation. Given that the base-case projections assume oil prices around USD 60/bbl, we would expect further downward revisions of the growth and inflation outlook and perhaps further cuts in interest rates. This possibility is likely to keep CAD vulnerable and under increased selling pressure, in our view.

USD/CAD surged on Wednesday after the Bank of Canada surprised the market with a rate cut. The rate violated two resistance (turned into support) obstacles after the release, to hit resistance near 1.2370 (R1). Today during the European morning, USDCAD moved in a quiet mode, staying slightly below that line. However I expect the pair to continue to race higher. Tomorrow’s announcement of Canada’s CPI for December is a possible trigger; the market consensus is that it slowed, which could ignite speculation about further rate cuts. A clear move above 1.2370 (R1) is likely to pull the trigger for the psychological zone of 1.2500 (R2). Our daily momentum indicators detect accelerating positive momentum and magnify the case for further up legs. The 14-day RSI, already within its overbought territory, it rebounded from its 70 line, while the MACD, at extreme high levels, stands above its trigger line and is pointing up. As for the overall trend, as long as the rate is trading above both the 50- and the 200- period moving averages, and above the blue uptrend line taken from back at the low of the 10th of July, the overall picture stays positive.

• Support: 1.2260 (S1), 1.2115 (S2), 1.2050 (S3).

• Resistance: 1.2370 (R1), 1.2500 (R2), 1.2715 (R3).

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