The following is paraphrased from ScotiaBank
USDCAD (1.3042) • CAD is up 0.2%, rising vs. the USD in an environment of elevated risk appetite with notable underperformance relative to most of its G10 currency peers with the exception of havens JPY and CHF. The broader tone remains dominant and CAD continues to trade in tandem with oil prices as we note the ongoing disconnect to yield spreads. A renewed widening in the 2Y U.S.-Canada yield spread would likely pressure CAD (support USDCAD). Domestic risk is limited ahead of Thursday’s monthly GDP report for April — one of the last major data releases ahead of the July 13 BoC policy decision and MPR forecast update. Measures of CAD sentiment are remarkably stable as risk reversals suggest a steady premium for protection against CAD weakness.
USDCAD short-term technicals: bullish—USDCAD is struggling to break above its 100 day MA following the bullish resolution of its triangular consolidation from early May (see middle chart). Momentum indicators are bullish and the 9 day MA has broken above its 21 day MA. We look to further upside with a focus on the May 24 high 1.3188 followed by our long anticipated 1.33-1.35 range. Near-term support is expected at 1.2950.
EURUSD (1.1074) • EURUSD has steadied in generally calmer trade. There was little data of any consequence from Europe today. Chancellor Merkel warned the UK that it will not get preferential treatment once it leaves the EU. Nothing has changed in the grander scheme of things post-Brexit so we expect only limited scope for EURUSD to gain currently. There are large 1.10 option expiries today at the NY cut (EUR1.95bn).
EURUSD short-term technicals: neutral/bearish—The sell-off has stopped but a reversal is absent from the charts at this point. At most, markets appear to be consolidating ahead of another push lower. Short-term trends suggest strong initial resistance for EURUSD in the 1.1130 area, which coincides with longer-term (former trend channel support on the daily chart) at 1.1140. Broader trend signals are still aligned bearishly, albeit relatively weakly at this stage.
GBPUSD (1.3333) • Awkward. PM Cameron meets his EU counter-parts face to face in Brussels today. Football wags suggest that the England team would be helpful in developing a quick exit plan from Europe. More seriously, the UK remains politically rudderless, with candidates lining up to replace Cameron and Labour leader Corbyn facing a confidence vote from his party. The situation reeks of an early election. The BoE allotted GBP3.1bn in liquidity today, less than half the amount the market asked for. The GBP may have steadied but there are still significant political and economic risks ahead. We remain bearish.
GBPUSD short-term technicals: neutral/bearish—A 1.7% gain in Cable looks quite positive but, in the context of the 12% drop from Thursday’s peak that preceded it, this is a bounce of the “dead cat” variety. There is still a little more corrective potential in the GBP in the short term towards the mid/upper 1.34 area but we expect sterling to struggle on gains to the mid/upper 1.34s.
USDJPY (102.35) • JPY is soft, down 0.4% vs. the USD while underperforming its G10 peers in an environment of elevated risk appetite. JPY weakness has been relatively muted with a remarkably tight trading range over the past few sessions. The broader tone remains dominant and we continue to highlight JPY’s vulnerability to haven-driven gains. Measures of sentiment are relatively steady, as risk reversals hint to a slight moderation in the premium for protection against JPY strength. Comments from Japanese officials have been remarkably sanguine, with Finance Minister Aso highlighting FX market stability relative to his ‘worst-case scenario thinking’. Intervention risk remains low.
USDJPY short-term technicals: bearish—USDJPY has been remarkably stable around 102 over the past two sessions however the broader technical picture remains biased to further downside. Trend and momentum signals are bearish despite a moderation in the RSI—rising off the extended oversold (sub-30) levels from last Monday. Bearish trend signals appear to be strengthening.