The following is paraphrased from ScotiaBank:
USDCAD (1.3060) • CAD is soft, testing fresh July lows at levels last seen in the aftermath of the UK referendum in late June. Downside risk is elevated as we consider the continued decline in oil prices and the impressive widening in the U.S.-Canada yield spread—now 10bpts off the 5bpt low from last Tuesday. Relative policy should dominate throughout the week as market participants look to Wednesday’s BoC policy decision and MPR forecast update with risk of a neutral-cautious tone following the release of disappointing GDP, trade and BoC Business Outlook Survey figures. OIS are currently pricing in a roughly 30% chance of a 25bpt rate cut over the next 12 months, the most since early March. Measures of CAD sentiment are relatively steady, with risk reversals consolidating the recent rise in the premium for protection against downside risk.
USDCAD short-term technicals: bullish—momentum signals are bullish and receiving confirmation from the short-term MA’s. USDCAD is threatening a break of the late June high near 1.3120 with risk of a rise toward the late May high just below 1.32. We maintain a bullish bias with expectations of medium-term gains toward 1.33 and 1.35.
EURUSD (1.1053) • EURUSD remains under modest pressure. European officials meet today to discuss Italian banks and budget issues in Spain and Portugal. Bank pressures remain a key risk for the EUR but Eurozone-US short-term spreads are nudging a few bps wider again, suggesting that the yield consideration for spot cannot be ignored either at this stage. We remain of the view that spreads and banks are a potential drag on the EUR’s valuation. Our bank share performance and spread-based fair value model for EURUSD suggests spot ‘should’ be trading below 1.0350 currently.
EURUSD short-term technicals: neutral/bearish—The market has consolidated around the mid 1.10 area over the past week and the market remains reluctant to push spot decisively below 1.10 – where good support has emerged on the short-term charts since Friday. But broader price patterns are week (soft close on Friday for the weekly chart) and trend signals are aligning bearishly – if somewhat weakly at the moment – for the EUR. Lower levels are a matter of time. Technical patterns suggest strong interest to sell EUR will emerge on minor gains.
GBPUSD (1.2983) • Many expect the BoE to ease policy this week; most expect policy makers to cut the overnight rate 25bps after Governor Carney gave strong hints that policy easing might be required in the aftermath of Brexit. Our view is “why wait”? We expect a 50bps cut to take the overnight rate to zero this week and leave the door open to a boost for QE in August. The BoE is not standing in the way of a lower GBP and, in fact, has suggested that the lower exchange rate will help the economic adjustment. We look for new lows this week on more aggressive policy steps than the street is expecting. News that Theresa May might be unopposed in the Conservative party leadership may give the GBP a modest boost but this means better levels for shorts to engage.
GBPUSD short-term technicals: neutral/bearish—Intraday price action looks modestly constructive but we see good, short-term resistance around 1.2980. Above here may see spot return to the 1.31/1.32 range near-term but we expect 1.3140/50 resistance to cap. Broader trends and momentum indicators remain bearish and we continue to think that lower levels are very likely going forward. Minor gains are an opportunity for GBP shorts.
USDJPY (102.40) • JPY is weak and underperforming with a 1.8% decline from Friday’s close, trading around the lower end of its one week range following Sunday’s upper house election victory for PM Abe’s ruling coalition. The win has shifted the focus to Japan’s policy mix and long-rumored fiscal stimulus and delivered an impressive turn in sentiment with risk reversals fading some of the premium for protection against JPY strength. Near-term risks are balanced to the downside as we consider the outlook for relative central bank policy and the potential for a renewed firming in expectations for Fed tightening. The 2Y U.S.-Japan yield spread has climbed roughly 10bpts from its recent lows at the lower end of the 2016 range.
USDJPY short-term technicals: neutral-bullish—bearish momentum signals are fading and USDJPY has broken above its 9 day MA (101.99) for the first time since late June, opening up the risk of a continued rise toward the 21 day MA (103.38) and the June 24 open around 106.