The following is paraphrased from ScotiaBank:
USDCAD (1.3215) • CAD is soft, trading at the lower end of its one week range and threatening a break through its 200 day MA. Near-term domestic risk is elevated as market participants await the release of international merchandise trade figures for August, with a tightened focus on non-resource exports following the impressive improvement seen in July. CAD’s drivers are moving in opposite directions, and the outlook for relative central bank policy appears to be dominating, despite the fresh highs in oil prices with WTI rallying toward $50/bbl (see bottom chart). The 2Y U.S.- Canada yield spread continues to widen (in a CAD-negative manner) to fresh highs above 25bpts at levels last seen in early June, climbing in response to the deterioration in expectations for the BoC amid signs of an increasingly confident Fed. Measures of sentiment hint to a continued rise in demand for protection against CAD weakness, with longer-term risk reversals moving beyond levels observed through the Brexit panic from late June. CAD appears vulnerable and may see considerable downside in the event of a turn in oil prices.
USDCAD short-term technicals: neutral-bullish—USDCAD is rising back toward Tuesday’s high at the upper end of its one week range, threatening a break through its 200 day MA (1.3217), a level of resistance that prevailed (on a closing basis) through the rally from late September. The broader trend is bullish with a series of higher lows and higher highs since May. We look to a sustained break of 1.32, 1.3250, and the late September high around 1.3280, toward the 1.33-1.35 range.
EURUSD (1.1216) • EUR is steady, consolidating around 1.12 following Tuesday’s impressive headline-driven knee-jerk response to rumors surrounding the outlook for ECB policy. Media reports have focused on policymakers’ discussions related to the ECB’s EUR80bn/month asset purchase program, with rumors of a shift towards a potential taper. Specifically, a 10bn pace of tapering has been floated, reducing the degree of accommodation at a rate similar to that observed at the Federal reserve. euro area sovereign bond markets have responded, sending yields higher across the curve for both core and peripheral countries. Spreads remain extended, in a EUR-negative manner with the 2Y Germany-U.S. spread holding steady around -150bpts. Lastly, we note that the most recent round of PMI’s has delivered a mixed picture for economic activity with a slight softening in the pace of expansion across the major economies.
EURUSD short-term technicals: neutral-bearish—Tuesday’s impressive EUR reversal lost momentum above 1.12 and its rally failed to deliver gains above Monday’s open. Momentum signals remain neutral and the ADX is trendless. We look to resistance above 1.1250 and anticipate a fresh attempt at a break below the longer term (50/100/200) MA’s clustered between 1.1165 and 1.1206.
GBPUSD (1.2718) • GBP is quiet, consolidating around Tuesday’s close following a drop to a fresh, marginal, multi-decade low under 1.27. Fundamentals and BoE commentary have delivered support, with an upside surprise to the services PMI (52.6 vs. 52.2 exp.) and confidence from BoE MPC member Broadbent in which he highlighted the stimulative influence of a weaker exchange rate and the U.K. economy’s resilience in the aftermath of the referendum. The 2Y U.K.-U.S. yield spread continues to widen, falling to fresh lows under -70bpts. Measures of sentiment are delivering added pressure as implied GBP volatility continues to climb across a range of time horizons, delivering a steady rise in the premium for protection against GBP weakness.
GBPUSD short-term technicals: bearish—momentum signals are bearish and the RSI is just above the oversold threshold at 30. DMI’s are providing confirmation and moving averages are bearishly aligned across a range of time horizons. The break of 1.27 has been short-lived, however we continue to look to weakness toward 1.25 and note the absence of major support ahead of 1.05.
USDJPY (103.13) • JPY is soft, down a modest 0.2% while underperforming most of the G10 currencies with a 7th consecutive session of decline vs. the USD. Domestic developments have been limited, with relative central bank policy driving the most recent move in JPY as market participants reassess the shifting Fed outlook in an environment of moderating risk aversion. Near-term risk lies with the U.S. ADP employment release and its impact on the Fed outlook and sentiment heading into Friday’s payrolls.
USDJPY short-term technicals: bullish—both the MACD and RSI have turned bullish in response to the impressive seven-session rally in USDJPY. The 50 day MA has been cleared and all eyes are on the 100 day MA at 103.75—a trend level that has not been breached since February 2nd. Near-term support is expected at 102.