The following is paraphrased from Scotia Bank:
USDCAD (1.3169) • CAD is soft, down 0.2% from Friday’s close and trading just above the lower bound of its four month range. Domestic risk is limited ahead of Friday’s monthly GDP for May, leaving the near-term focus squarely centered on the broader market tone. CAD is trading in tandem with (softer) oil prices, and a renewed widening in the U.S.-Canada 2Y yield spread is likely to provide added pressure to CAD. Measures of sentiment are steady, and risk reversals suggest a modest premium for protection against CAD weakness across a range of time horizons. We maintain a bias to medium-term USDCAD gains toward 1.33 and 1.35.
USDCAD short-term technicals: bullish—USDCAD appears set to make an imminent break of its May 24 1.3188 high, opening up the risk of gains toward levels last seen in early April. Momentum indicators are bullish and trend indicators are providing confirmation. A break would shift the focus toward the major retracement levels of the January-May decline at 1.3312 (38.2% Fibo) and 1.3575 (50%, see middle chart).
EURUSD (1.0987) • Better German IFO survey data for July (108.3) was weaker than June (108.7) but better than the market consensus call (107.5) provided the EUR with a little support on the session – though the data do not provide much more information than the (somewhat weaker) ZEW or (moderately better than expected) PMI data from last week. Broadly, the EUR remains weighed down by the still evolving asymmetric growth and diverging monetary policy story that we think recent developments (Brexit, improving growth trends in the US through Q2) have done nothing but embellish. We look for losses to extend to retest the recent 1.0915 low shortly.
EURUSD short-term technicals: bearish—We remain broadly bearish on EURUSD’s prospects. The intraday pattern of trade does suggest, however, that near-term risks are tilted very slightly higher as a minor, inverse H&S appears to have formed around the overnight low near 1.0950/55. Upside risks extend to the low 1.10 area only, we expect, which is likely to attract renewed selling interest. Broader price patterns are negative (break under 2016 consolidation range base near 1.12) and trend strength oscillators are aligned bearishly across a range of timeframes, suggesting limited and only short-lived scope for the EUR to mount counter-trend rallies. We target a near-term drop to test 1.0915 support and look for a test of the 2015 low (1.0464) below there.
GBPUSD (1.3132) • Sterling started the session well enough but the release of the UK CBI’s latest manufacturing confidence data suggest Brexit has been a massively negative blow to businesses and weighed on the pound. The business optimism component of the CBI’s survey dropped to -47 in the latest quarter, from -5 in April. This was the lowest reading in the survey since 2009 when the UK economy was in the midst of a prolonged recession. The UK reports Q2 GDP Wednesday but this data will not capture much Brexit impact. House prices and the GFk consumer confidence data (due Thursday and Friday respectively) may be more influential for the GBP in the short run.
GBPUSD short-term technicals: bearish—Cable consolidated some of last week’s drop from 1.3285 but the minor rebound has stalled at the 38.2% retracement of the 1.33/1.31 decline and price looks to be forming a minor bear flag intraday (resistance at 1.3160, bearish below 1.3107); a break lower should put Cable on track for a push to the low 1.29 area in fairly quick order. More broadly, we are negative on the GBP. The bearish alignment of trend strength oscillators across a range of short, medium and longerterm time frames implies limited upside scope and more downside pressure for the GBP going forward.
USDJPY (106.22) • JPY is flat from Friday’s close, trading around the mid-point of its one week range with considerable risk into this week’s highly-anticipated BoJ meeting and policy decision (following Thursday’s NA close). The BoJ’s policy outlook has been the subject of intense speculation with risk balanced to greater accommodation and some potential coordination with fiscal authorities. Fundamentals are providing for JPY weakness as the U.S.-Japan 2Y yield spread climbs to the upper end of its two month range, and measures of sentiment are adding to JPY pressure as risk reversals continue to fade the late June (Brexit-driven) rise in the premium for protection against JPY strength.
USDJPY short-term technicals: bullish, with caution—momentum signals are bullish however their magnitude is fading and USDJPY appears to be threatening a break of support around its 9 day MA (105.79). Last Thursday’s candle delivered a decisively bearish signal with the completion of an outside reversal, its range providing for support around 105.50 and resistance around 107.50. We await a break of either level for clues to the near-term path.