The following is paraphrased from ScotiaBank:
USDCAD (1.3029) • CAD is soft, down 0.2% and testing Monday’s multi-week low at levels last seen in early August. Relative central bank policy is dominant as market participants consider an increasingly confident Fed and recalibrate their expectations for policy normalization. The adjustment is widening the 2Y U.S.-Canada yield spread in a CAD-negative manner and delivering added pressure via sentiment as we look to a broad turn in measures of implied CAD volatility. Risk reversals have responded accordingly and are pricing a greater premium for protection against CAD weakness. Near-term domestic risk is also elevated into the 8:30am ET release of Canada’s Q3 current account figures, with expectations of a widened deficit toward the record level observed in Q3 2010 (-20.2bn, see middle chart). We are biased to CAD weakness.
USDCAD short-term technicals: bullish—momentum signals are bullish, DMI’s are confirming the shift in the balance of risks, and USDCAD has made a clear break of its short-term MA’s. Near-term resistance has been observed around 1.3050, and a breach should see further gains toward 1.32 (see bottom chart). We look to nearterm support at 1.2950 followed by the August 26 open around 1.2920.
EURUSD (1.1170) • Soft regional CPI data in Germany suggest that national data for August may disappoint this morning, weighing somewhat on EUR sentiment through the European morning session. EC economic confidence measures weakened more than expected in August (103.5 versus 104.1 expected) on Brexit concerns. The EUR retains a soft undertone, with EZ-US short-term spreads remaining near recent (multi-year) highs; we think the USD’s yield premium (around 145bps at the 2Y sector of the curve) constitutes a strong source of support. Markets remain somewhat reluctant to extend positioning – perhaps until the Fed’s policy outlook is a little more definitive.
EURUSD short-term technicals: neutral/bearish—The EUR’s technical undertone remains negative but short-term price action suggests market participants are reluctant to extend the EUR decline at the moment. Intraday price signals suggest the EURUSD slide risks stalling intraday. Trend strength oscillators are aligned bearishly, however, which should mean limited scope for EUR gains nearterm. We see EURUSD support at 1.1160 and key support at 1.1115/20 (200-day MA at 1.1117 currently). We expect more downside pressure on the market through the latter part of the week.
GBPUSD (1.3114) • Cable is modestly softer, in line with the broadly firm USD undertone, but within recent trading ranges. Markets continue to await the UK government’s next steps in the Brexit process as well as evidence on the economic fall-out of the decision. The UK releases sentiment data tonight (GFK consumer confidence and the Lloyds Business Barometer – which plunged and then rebounded modestly after Brexit) later tonight. The manufacturing PMI data are released later in the week. We still rather think the full impact of Brexit has yet to be felt on the economy and continue to see downside risks for the GBPUSD as a result. EURGBP’s prospects are less clear after the cross staged a significant reversal from the 0.8650/0.87 area in the past three weeks.
GBPUSD short-term technicals: neutral/bearish—Cable has been consolidating essentially since the sharp decline in spot seen through late June. The market appears to be forming a classic triangle and we see firm resistance at 1.3250/00 now and key support at 1.2900 currently; weakness blow the 1.29 area should see Cable fall to new cycle lows.
USDJPY (102.28) • JPY is weak, down 0.4% and underperforming most of the G10 currencies in an environment of broad-based USD strength. JPY is testing fresh lows at levels last seen in early August, with risk of further weakness and a retracement of the BoJ-driven rally from July 29. The firming in Fed expectations is pressuring JPY, widening the U.S.-Japan 2Y yield spread beyond 100bpts toward levels last seen in late July. Domestic risks are compounding the weakness from relative policy on fresh interventionist rhetoric from PM Abe’s adviser Hamada, and measures of sentiment are delivering added pressure as risk reversals suggest a steady moderation in the premium for protection against JPY strength. Shorter-term measures are even pricing a small premium for protection against JPY weakness. We are biased to USDJPY gains (JPY weakness).
USDJPY short-term technicals: bullish—momentum signals are bullish and DMI’s are confirming. The 9 day MA (100.85) is climbing toward the 21 day MA (101.12) and USDJPY appears set to test its 50 day MA (102.71) for the first time since late July. We note the breach of the July 29 close (102.06) and see limited resistance ahead of the July 29 open (105.27).