The following is paraphrased from ScotiaBank:
USDCAD (1.3049) • CAD is strong, up 0.6% from Monday’s close and strengthening in tandem with its growth-sensitive commodity currency peers in an environment of elevated risk appetite. Domestic risk is limited ahead of Wednesday’s Bank of Canada policy decision and MPR forecast update, leaving Tuesday’s focus squarely centered on the broader market tone. Fundamentals favor CAD weakness as we look to relative central bank policy, the renewed widening in the 2Y U.S.-Canada yield spread, and expectations for a decisively neutral BoC against a tentatively hawkish Fed. Measures of CAD sentiment have remained remarkably steady through this most recent period of risk appetite, and risk reversals have failed to fade any meaningful portion of the late-June build in the premium for protection against downside risk. We maintain a bias to CAD weakness.
USDCAD short-term technicals: bullish—USDCAD has fully faded Monday’s rally to a fresh one month high, however its technical picture remains biased to gains as we consider the combination of bullish trend and momentum indicators. The rising trend channel off the May-June lows is well defined, and USDCAD continues to trade above its 100 day MA (1.2995). We look to near-term support around 1.30 and highlight the absence of significant resistance between 1.3150 and 1.33.
EURUSD (1.1085) • The EUR remains in consolidation mode. The market has remained in the lower half of the big range seen around the Brexit reaction since the UK referendum two weeks ago and we note that Eurozone/US short-term rate spreads are widening modestly against the EUR again (at around 134bps this morning for the 2Y tenor). We also note, however, that spot has been – very unusually – negatively correlated with yield spreads in the post-Brexit environment. With the market rangey and unresponsive to typical drivers, we look for more sideways movement in the market near-term. German CPI was finalized at +0.1% m/m in June (unchanged from the preliminary report).
EURUSD short-term technicals: neutral/bearish—Spot has clambered back above 1.11 to trade a cent above last week’s low. There has been good support evident on EURUSD dips since late last week and we rather think the rebound is a reaction to the market’s failure to trade lower – rather than a positive reassessment of the EUR’s outlook. Longer-term signals remain bearish and we look for EURUSD gains to struggle and reverse in the low/mid 1.11s. EURUSD really needs to get back through 1.1170/80 – major, short-term resistance now – to have a real chance of stabilizing or improving.
GBPUSD (1.3137) • Sterling is getting a decent relief bounce on the quick progress made to put a new PM in place of David Cameron – who will step down later today and allow Theresa May to step in. The rebound may not last. The new PM still has a lot of work to do, is facing an uncertain outlook and may see the Bank of England ease policy aggressively later this week in response to the Brexit fall out. We expect a 50bps cut in the overnight rate – whereas the street is expecting a 25bps. Having taken the steps to warn the markets that easier policy was likely, we doubt Mr Carney will mess around. Easing will pull the GBP rally up short, aggressive easing will send the GBP sliding again.
GBPUSD short-term technicals: neutral/bearish—An objective view of the charts has to concede that the GBP is looking in better shape, delivering on the modestly constructive developments noted yesterday. The market has not yet done enough to persuade us that the rebound is at all durable, however. Cable has recovered through the 1.3140/50 area that we expected to cap, however, boosting the prospects of further, near-term gains towards 1.32 or so. At best, this remains a consolidation ahead of another push lower. The initial retracement of the Brexit plunge stands at 1.3337 (23.6% of 1.50/1.28, see middle chart).
USDJPY (103.85) • JPY is underperforming with a 0.9% decline, weakening for a second consecutive session to test fresh post-UK referendum lows on the back of selling pressure driven by market participants’ continued focus on the prospect of fiscal stimulus. Details (size, funding) are under discussion and set to be finalized by the end of the month, with risk of a combined monetary/fiscal effort as we note the timing of the next BoJ policy meeting on July 29. Fundamentals and sentiment favor JPY weakness in the current environment as we consider the continued widening in the 2Y U.S.-Japan yield spread and the impressive turn in risk reversals (fading the premium for protection against JPY strength).
USDJPY short-term technicals: bullish—USDJPY has broken above its 21 day MA (103.27), shifting the focus to the June 24 open at 106.16 and the 50 day MA at 106.42. The MACD has turned bullish, the RSI appears set to break above 50, and DMI’s suggest a significant shift in the balance of risk. We look to near-term support at 103.