The following is paraphrased from Scotia Bank:
USDCAD (1.3157) • CAD is quiet, trading in a remarkably tight range for a second consecutive session as it consolidates around Friday’s close. CAD drivers are conflicted as higher oil prices are offset by widening yield spreads. We maintain a bearish CAD bias on the basis of relative central bank policy. Domestic policy expectations have deteriorated materially in the aftermath of Friday’s awful trade and employment data, with OIS now pricing a roughly 25% chance of a 25bpt BoC rate cut over the next 12 months. Measures of sentiment are neutral and risks appear asymmetric in the current environment, with limited potential for sentiment-driven CAD gains and considerable vulnerability to weakness in the event of a rise in risk aversion.
USDCAD short-term technicals: bullish—USDCAD is quiet around the mid-point of its gently rising trend channel from early June (see top chart). Trend and momentum indicators are neutral-bullish and short-term MA’s are bullishly aligned. Near-term support is expected between 1.3120 and 1.3100, with resistance anticipated above 1.3180. A break of 1.3200 would shift the focus toward the late July highs around 1.3250 and risk a break to fresh multi-month highs at levels last seen in March.
EURUSD (1.1076) • The EUR has traded sideways since Friday’s initial dip on the US NFP data release and is showing little desire to move too far from the 1.11 area. Eurozone/US short-term yield spreads have widened modestly in the USD’s favour in the wake of the jobs data but the spread is not making new ground and movement is sufficient to keep the EUR capped, rather than push spot significantly lower at this point. The growth/policy divergence trade remains alive, however, and we continue to favour EUR weakness over the balance of the year. Germany’s solid external surpluses (current account +EUR26.3bn) for June continue to provide some counter-balance to downward pressure on the single currency.
EURUSD short-term technicals: neutral/bearish—EURUSD recovered precisely 50% of the sharp sell-off seen Friday morning before consolidating and moving sideways Monday and through today so far. The broader technical picture remains negative, from our perspective, however, and we continue to view EUR gains to the mid/upper 1.11 area as unsustainable (55-day MA at 1.1160 figures as strong resistance, see middle chart). Near-term, we look for tight range trading around 1.11 to persist but we think longer-term technical factors favour EURUSD weakness moving forward.
GBPUSD (1.2970) • BoE MPC member McCafferty’s dovish comments pushed Cable below 1.30 in early Asian trade and poor trade data helped sustain downside pressure on the pound through London dealing. McCafferty’s remarks, suggesting that more easing was likely if the UK economy slowed in line with initial post-Brexit survey signals, did not provide any more insight beyond the policy outlook framed by Governor Carney last week, however. UK data reports reflected in line with expectations industrial production at +0.1% for June (but weaker-than-forecast manufacturing at -0.3%). The trade deficit was an uncomfortable blow out at –GBP12.4bn, however.
GBPUSD short-term technicals: bearish—Weakness in the GBP today extends losses below the base of the July consolidation and reaffirms the broader bearish outlook for the pound. We see support at 1.2818, the early July low, but we think there is immediate risk for Cable to the low 1.27s (see bottom chart). We see resistance at 1.30 now – a big psychological resistance point. EURGBP should rally further above 0.8610, the recent peak.
USDJPY (102.26) • JPY is up a modest 0.2% from Monday’s close, rising in tandem with SEK, MXN, NOK and AUD in the context of a remarkably conflicted market tone. Fundamentals and sentiment are shifting in a JPY-negative manner, as we note the impressive near-10bpt widening in the U.S.-Japan 2Y yield spread over the past several sessions as well as the continued shift in risk reversals suggesting an ongoing moderation in the premium for protection against JPY strength. Near-term risk lies with the broader tone in the absence of any significant domestic data releases scheduled for this week.
USDJPY short-term technicals: bearish-neutral—bearish momentum signals continue to moderate and USDJPY appears to be struggling around its 9 day MA. We highlight the potential for consolidation around the 102.00-102.50 congestion range from early August. Support is expected 101 and we note the absence of resistance between 102.50 and 104.00.