The following is paraphrased from Scotia Bank:
USDCAD (1.3108) • CAD is flat from Tuesday’s close, consolidating ahead of a NA session that is likely to be dominated by U.S. releases including the ADP employment and the non-manufacturing ISM. The broader market tone presents the greatest near-term risk for CAD as we note the emergence of a disconnect to its typical drivers (oil prices, yield spreads). Risk lies in the shifting Fed outlook and its impact on sentiment, as we note the gentle rise in measures of implied CAD volatility across a range of time frames. Risk reversals appear to be stabilizing, following an impressive post-Brexit moderation in the premium for protection against CAD weakness. We maintain our bearish, medium-term bias toward CAD.
USDCAD short-term technicals: bullish—trend and momentum signals are moderately bullish as USDCAD continues to climb within the ascending trend channel from early June (see top chart). Short-term MA’s appear to be providing near-term guidance as we note the emergence of support around the 21 day MA (closing basis) and the 9 day MA’s role in providing resistance over the past three sessions. Near-term support is expected around 1.3050 and resistance is limited ahead of 1.3200.
EURUSD (1.1201) • Final July PMI data showed slightly stronger services and composite readings than the preliminary data but the EUR paid little attention as investors pared positioning in quiet trade. Eurozone-US 2Y yield spreads have contacted modestly following the US Q2 GDP disappointment but, with the yield gap still near 130bps and within recent ranges, we see no grounds for the EUR to appreciate significantly at this point. In fact, our fair value model still suggests spot is relatively “rich” to our estimated equilibrium (1.08).
EURUSD short-term technicals: neutral/bearish—We retain a negative, longer-term technical perspective of EURUSD and note that this week’s rebound is showing signs of struggling as the market nears the retest of the late June channel breakdown at 1.1248 (note the 100-day MA at 1.1237 helped cap the market yesterday). Short-term momentum does look constructive but we still rather think near-term gains are likely to struggle to extend. We see support at 1.1150/60.
GBPUSD (1.3356) • Markit/CIPS finalized the preliminary July PMI data, leaving the services reading unchanged at 47.4 and nudging the composite reading slightly lower to 47.5 (47.7). Markets are looking for easing measures from the BoE tomorrow but there is some debate about how aggressive the BoE will be. Scotia looks for a 25bps cut in the bank’s key rate (to 0.25%) and for an additional GBP50 bn in QE. There is a consensus on the rate cut, less so on the asset purchase issue. Recall that CFTC data Friday showed record speculative net GBP shorts, suggesting ample room for a squeeze on positioning in the event of the BoE disappointing expectations.
GBPUSD short-term technicals: neutral/bearish—Sterling popped higher yesterday as the USD weakened broadly but there has been no follow through interest in the market this morning and intraday signals rather suggest the rally (which has been confined to recent ranges) has run out of steam. Price action has been confined to a triangular consolidation range since the late June sell-off; these formations are typically continuation patterns – which rather suggests an ongoing vulnerability to the downside (see middle chart). We see short-term gains capped around 1.3375/1.3425. Key support is 1.3165. We remain bearish.
USDJPY (101.13) • JPY is down a modest 0.3% and marginally underperforming most of the G10 with the exception of NZD and CHF. JPY is trading in a remarkably tight range around Tuesday’s high, ignoring comments from Vice Finance Minister Asakawa (key FX official)—highlighting ‘one-sided’ and ‘speculative’ movement in the FX market. Such rhetoric typically serves as a warning to markets ahead of intervention, however we see this risk as relatively low given that officials remained on the sidelines throughout the UK referendum turmoil from late June. The broader tone is likely to remain dominant, and its tentative nature leaves JPY vulnerable to gains in the event of a rise in risk aversion.
USDJPY short-term technicals: bearish—momentum signals are bearish and the RSI is at 36, leaving ample room for further downside before reaching oversold levels below 30. Trend signals are providing confirmation with a bearish alignment in DMI’s and the crossing of the 9 day MA below the 21 day MA. We look to further downside toward the July 11 open at 100.43 and the June 24 low around 99.02. A consideration of the 2011-2015 rally highlights the importance of 100.60 (50% retracement) and 94.64 (61.8% Fibo).