The following is paraphrased from ScotiaBank:
USDCAD (1.3101) • CAD is weak, down 0.5% and underperforming all of the G10 currencies in tandem with AUD in an environment of elevated risk aversion. The broader tone is dominant, oil prices are weakening, and yield spreads are widening in a CAD-negative manner, leaving CAD vulnerable to further decline. This week’s domestic risk events are limited to Wednesday’s public appearance from BoC Senior Deputy Governor Wilkins’, whose speech—titled ‘(S)low for Long and Financial Stability’—should expand on some of the key components of last week’s ‘tilt’ in tone. Relative policy divergence between an increasingly hawkish Fed and a tentatively dovish BoC should weigh on CAD. In terms of sentiment, we note the broad rise in measures of implied CAD volatility across a range of time horizons and the corresponding increase in the premium for protection against CAD weakness. Remain bearish.
USDCAD short-term technicals: bullish—USDCAD has cleared 1.31 on the back of its fourth consecutive session of gains, rallying toward the late August-early September highs around 1.3150 and the late July high around 1.3250. Momentum signals are modestly bullish, DMI’s are confirming the shift in the balance of risk, and short-term MA’s are bullishly aligned. Near-term support is expected between 1.3050 and 1.3020.
EURUSD (1.1232) • EUR is soft, retreating back toward 1.12 as it retraces last week’s U.S. data (non-mfg ISM) and ECB-driven rally. Fundamental releases have been limited, leaving the focus squarely centered on the broader market tone as markets digest a shifting outlook for Fed rate hikes. EUR’s greatest near-term risk lies with Fed BoG member Brainard’s speech at 1:15pm ET, her tone, and its impact on the outlook for relative central bank policy. Measures of implied EUR volatility are climbing across a range of time horizons and risk reversals suggest a rise in the premium for protection against EUR weakness. Remain bearish.
EURUSD short-term technicals: bearish—EUR is under pressure, retreating from last week’s short-lived high above 1.13. Thursday’s shooting star candle has been followed by two consecutive sessions of weakness, and EUR is testing near-term support around the 100 day MA at 1.1211. We look to further weakness through 1.12 toward the September 6 open around 1.1150 followed by the August 31 low around 1.1120. Near-term gains are likely to be limited above 1.1250.
GBPUSD (1.3289) • GBP is quiet, consolidating in a tight range around Friday’s close, its movement limited in the absence of domestic data and its relative performance underscoring its risk profile in periods of risk aversion. Domestic risk will remain elevated throughout the week as market participants look to Tuesday’s CPI, Wednesday’s employment, and Thursday’s retail sales data and BoE policy decision. A BoE hold on Thursday (0.25%) is widely expected and the tone will be key as policymakers interpret the shifting outlook following the most recent round of stronger-than-expected PMI’s. Lastly, note that MPC member Shafik is set to leave the BoE at the end of February 17. The departure was unexpected.
GBPUSD short-term technicals: bearish—GBP has made a fresh marginal low under 1.3250 and it continues to retreat from the recent high around 1.3450. GBP has broken through its 9 day MA (1.3290) and its clearing of the September 1 close (1.3268) leaves little support ahead of the September 1 open at 1.3138.
USDJPY (101.79) • JPY is outperforming all of the G10 currencies with a 0.6% gain, its strength driven by the broader market tone of risk aversion. Domestic releases have been mixed, the upside surprise to machine orders offset by weaker than expected PPI. JPY’s greatest near-term risk lies with the 1:15pm ET speech from Fed BoG member Brainard and its impact on the broader market tone. Continued risk aversion would be expected to provide added support to JPY (pressure USDJPY).
USDJPY short-term technicals: neutral-bearish—momentum signals are shifting and the RSI has dropped back below 50. USDJPY has broken 102 and appears set to decline toward its 21 day MA at 101.67. We look to further weakness toward 101.50 followed by 101.20.