The following is paraphrased from Scotia Bank:
USDCAD (1.3240) • CAD is trading flat from the NA close and consolidating in a tight range just above Monday’s fresh multi-month low, with downside risk into the NA open as we consider the continued decline in oil prices and the broader market’s tentative tone. The U.S.-Canada yield spread is widening in a CAD-negative manner and measures of sentiment are providing for added pressure with a rise in implied volatility across a range of time frames. Risk reversals have responded accordingly, pricing a greater premium for protection against CAD weakness. Broader risks are likely to remain dominant throughout the week as we note the lack of domestic data releases ahead of Friday’s monthly GDP for May. We maintain a bearish CAD bias.
USDCAD short-term technicals: bullish—USDCAD has made a decisive break of its May 24 1.3188 high, clearing 1.32 to reach levels last seen in late March. We maintain a bullish USDCAD bias with expectations of a rise toward 1.33 and 1.35, and note that momentum indicators remain remarkably muted with an RSI of 64 leaving ample space for further upside ahead of the overbought threshold at 70.
EURUSD (1.1000) • Spot is little changed. Big swings on some of the key EUR crosses are not obviously affecting the spot rate. Absent any major data releases in Europe, markets have been left to trade the flows and technicals. That may change in our session if positive US data results support US short-term yields. EZ-US 2Y bond spreads are back to near recent peaks (136bps) and while the movement is spreads remains fairly limited, the USD’s yield advantage is considerable and, according to our models, suggest that EURUSD should be trading near 1.0625, all else remaining equal. At the very least, the USD’s yield advantage, and the increasing demand for USD funding evident in the EURUSD cross currency basis swap, should mean limited upside risk for EURUSD. We remain bearish.
EURUSD short-term technicals: bearish—Despite minor gains in the EUR yesterday and the intraday squeeze higher in spot, price signals remain negative. Even intraday signals look potentially bearish, with EURUSD rejecting levels above 1.1020 in fairly emphatic fashion. EURUSD’s minor rebound over the past day or so may have run its course and we expect weakness below 1.0995 intraday to signal renewed softness towards key support in the low/mid 1.09s.
GBPUSD (1.3116) • Sterling tumbled in early European trade as the FT reported that BoE MPC member Weale – who last week suggested he wanted “harder evidence” of Brexit’s impact on the UK economy before deciding whether additional stimulus was needed – now had “begun to favour immediate” stimulus to boost growth. Last week’s PMI data seem to have convinced him that action is needed sooner rather than later. Some UK banks have begun to warn of the risk of negative deposit rates if the BoE’s key policy rate is lowered further, suggesting commercial banks are prepping for more accommodation in August.
GBPUSD short-term technicals: bearish—Intraday signals are somewhat mixed; despite early weakness, Cable recovered well over the latter part of the morning session to test the mid 1.31 area. The market still looks to be consolidating and we continue to think downside risks are quite significant. We see strong resistance now at 1.3210/20 intraday and continue to see limited upside scope for the GBP in the current environment. Major daily support is 1.2990/00.
USDJPY (104.37) • JPY is up over 1% as we enter the NA session, outperforming all of the G10 currencies on the back of shifting expectations for fiscal stimulus following comments from Finance Minister Aso in which he failed to deliver details surrounding the size of the much-anticipated package set to be announced around the end of July. Aso’s evasive comments follow last week’s oddly-timed release of interview comments from BoJ Gov. Kuroda in which he pushed back on expectations of greater monetary policy experimentation—their combined impact serving to shift market participants’ expectations in a JPY-supportive manner. Flows are dominating as we consider USDJPY’s decline and divergence to both fundamentals (U.S-Japan 2Y yield spread widening in a USDJPY-supportive manner) and measures of sentiment (risk reversals softening the premium for protection against USDJPY downside).
USDJPY short-term technicals: bearish—we had maintained a cautiously bullish stance since last week’s bearish outside reversal and our caution has been validated with Tuesday’s plunge to two week lows. USDJPY has made a decisive break back below its 50 day MA (105.89), nearing its 21 day MA (103.90) for the first time since July 12th. Momentum signals are shifting quickly, softening their bullish bias. USDJPY risk lies to the downside and we look to the June 24 close at 102.22 followed by the July 11 open at 100.43.