The following is paraphrased from ScotiaBank:
USDCAD (1.3231) • CAD is flat, having recovered from a headline-induced decline to a fresh multi-month low as market participants reacted to Gov. Poloz’s postspeech Q&A in which he hinted to a 3-5 year timeline for Canada’s economic restructuring in response to the oil price shock. The outlook for relative central bank policy remains dominant, as we note the continued deterioration in expectations for the BoC with OIS pricing in a nearly 35% chance of a 25bpt rate cut over the next 12 months. The U.S.-Canada 2Y spread appears set to widen in a CAD-negative manner to levels last seen in June. Oil prices may gain greater near-term prominence on the back of OPEC-related headlines, however domestic risks should remain in focus into Friday’s monthly GDP for July. Measures of implied CAD volatility are elevated across a range of time horizons, and risk reversals have responded accordingly—pricing a greater premium for protection against downside risk. Remain bearish.
USDCAD short-term technicals: bullish—USDCAD has broken to a fresh multimonth high with gains above the 1.3250 resistance area that had served as key resistance in late July and mid-September (see middle chart). The balance of risk is biased to further upside as both trend and momentum signals are bullish. We look to gains toward 1.33 and 1.35.
EURUSD (1.1237) • Spot remains tightly range bound. We continue to note two distinct negative for the EUR – wide, short-term Eurozone-US interest rate spreads (145bps at the 2Y sector of the curve) and the continued pressure on Eurozone bank shares – that could yet trip the EUR up (impact on Merkel government and broader political situation) and should certainly suggest limited upside potential for the EUR in the near-term at the very least. We think EURUSD is fundamentally vulnerable to the downside and expect firm resistance in the upper 1.12s.
EURUSD short-term technicals: neutral/negative—EURUSD is showing little sign of weakness or vulnerability on the charts. Intraday price action looks firm, in fact, even if the market remains resolutely range bound. The 1- and 6-hour chart patterns suggest firm demand on short-term dips to the 1.1240 high/low support zone. We note strong, long-term resistance overhead at 1.1275/80, however, and rather favour using short-term EUR rallies as a selling opportunity.
GBPUSD (1.2968) • GBP is quiet, consolidating around 1.2950 at the lower end of its multi-month range. The balance of risk is biased to further downside, and Brexit-related concerns may deliver fresh lows for GBP as we note the continued focus on the timing of the negotiations and triggering of Article 50. There are no major domestic releases scheduled ahead of Friday’s final Q2 GDP figures, however we note that (departing) BoE MPC member Shafik is set to speak to media on Wednesday. Considerations of relative central bank policy and a renewed focus on Fed-BoE divergence could deliver added pressure to GBP. Measures of implied GBP volatility are climbing, and risk reversals are building a greater premium for protection against GBP weakness.
GBPUSD short-term technicals: bearish—momentum signals are bearish, DMI’s are providing confirmation, and moving averages are bearishly aligned. We look to a break of the trend channel (see bottom chart) and recent support around 1.2920 with risk to the August 16 open at 1.2880 followed by 1.2850 and the July low around 1.28.
USDJPY (100.40) • JPY is quiet, consolidating in a tight range around Monday’s close with near-term risk limited to sentiment in the absence of domestic data. The release of BoJ minutes from the late July meeting provided for minor knee-jerk strength in JPY to a fresh one month high, however the move was completely negated by the subsequent response to the U.S. election debate as broadbased risk appetite delivered JPY weakness. Sentiment is likely to remain dominant ahead of retail sales and CPI later this week. We highlight the significant turn in short-term risk reversals, repricing a greater premium for protection against JPY strength (USDJPY weakness) with a full retracement of the shift from mid-August.
USDJPY short-term technicals: bearish—USDJPY has tested a fresh one month low and is consolidating in a tight range around 100.50. Momentum signals are bearish, DMI’s are providing confirmation, and moving averages are bearishly aligned across a range of time horizons. We look to the mid-August low around 99.50 followed by the June 24 low around 99.