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'If we continue to get growth numbers like this, absent trade policy risks, it's going to be tougher for the Bank of Canada to avoid rate hikes at some point in the distance.' - Derek Holt, Scotiabank

The Canadian economy performed better than expected during the March quarter amid strong consumer spending and business investment. Statistics Canada reported on Wednesday that the domestic economy expanded at an annualised pace of 3.7% in the Q2 of 2017, following the preceding quarter's upwardly revised rate of 2.7% but slightly missing expectations for a 3.9% growth pace. Within March, the economy grew 0.5% after holding steady in February, whereas analysts expected the economy to expand at a 0.3% pace during the reported month. Analysts suggested that the economy's stronger-than-expected performance would move the Bank of Canada closer to raising interest rates. According to economists, the Bank is set to remain on hold until 2018. Following the release, some analysts revised up their forecasts for Canadian economic growth. According to them, the economy is expected to grow 2.7% this year. Strong GDP growth was mainly driven by higher business investment, which rose 3.7%, and higher consumer spending, which climbed 1.1% during the reported quarter.

'It's good to see the bounce-back but we don't expect to see a repeat as underlying consumption growth is still weak.' - Su-Lin Ong, RBC Capital

Australian retail sales rebounded markedly in April, fresh figures showed on Wednesday. The Australian Bureau of Statistics reported that retail sales climbed 1.0% in April on a seasonally adjusted basis, following the preceding month's downwardly revised drop of 0.2% and topping analysts' expectations for a 0.3% gain. April marked the first retail trade rise in the past four months. However, the increase was mainly attributed to temporary factors. The stronger-than-expected data release is set to please the Reserve Bank of Australia, which was concerned about surging real estate prices. The café, restaurants and take away food services sector posted a 1.1% sales increase. A 1.2% sales climb was seen in food retailing, whereas department stores posted a 2.5% sales rise during the reported month. Sales of clothing and footwear advanced 0.3%, whereas sales of household goods increase 0.4%, following two consecutive months of declines. Analysts suggested that April's rebound was the answer to March's cyclone that hit the Queensland State. Sales in Queensland jumped 2.4% in April after five straight months of drops.

Russia: Upside pressures on the currency

In an effort to stabilize the ruble, Russia is looking to expand its Foreign-Exchange reserves (including Gold). Today, Russia will disclose this amount for the period ending 26 of May. Russia’s Central Bank has already made clear that one of its primary objectives is to increase those reserve holdings up to $500 billion as stated by Elvira Nabiullina, head of the central bank.

The reserves currently amount to $405 billion. By the way, Russian gold reserves could officially be above China gold reserves by year end. Regarding the state of the Russian economy, Nabiullina said the economy has been resilient regarding international sanctions. As a result she hinted that interest rates may go even lower. The key rate is standing at 9%.

Data-wise, inflation is collapsing, the last release printed at 4%. We recall that it was at an astonishing 16+% two years ago and the consumer prices growth is now standing at 4%. The unemployment rate is also on its way down and is now reaching 5.2%. However, real disposable income should continue its decline in May after the strong decline in April of -7.6%. We reload our RUB short position against the dollar for some more time and we target 57 ruble for one dollar in the short-term.

USD oversold

The data from the US continues to provide evidence that economic activity is improving from a soft 1Q. The ADP labor report and initial claims (180k and 238k respectively) are expected to indicate that labor markets remain strong and suggests a solid payroll read on Friday. In addition ISM manufacturing and construction spending (54.7 and 0.5% respectively) should indicated that growth is strengthening.

In the mid and long term we remain bearish on USD, however we currently see USD positioning oversold. European / US interest rates differentials have spread excessively wide in our view indicating a probable correction should the economic data force repricing of the Fed interest rate hikes. Today's Final EU PMI is unlikely to provide real insight into the European outlook.

We are constructive on the USD against G10 currencies in the short term. GBP continues to be driven by political uncertainty rather than economic fundamentals. Despite the fact that Theresa May missed a party leaders' debate and select polling results, bookmakers still assign a low probability of Labour ousting the Conservatives from power. Should the Conservatives hold on to power we anticipate a move to 1.30 on the reduction of domestic political concerns.

Brazil GDP expected to grow 1%q/q in the first quarter

Over the last couple of weeks, the Brazilian real has been mostly driven by political jitters rather than economic developments. The panic sell-off that took place after the alleged corruption of President Michel Temer is definitely over as market participants continued to discount an impeachment, in the short-term at least.

The real recovered partially from the sell-off with USD/BRL back below 3.25, compared to more than 3.40 exactly two weeks ago. Implied volatility eased substantially - 1m gauge fell to 14.74%, compared to 23.50% 2-weeks ago - suggesting that investors are confident again holding Brazilian assets.

On the fundamental side, the BCB cut the Selic rate by 1% yesterday. The decision was broadly expected by investors and had no effect on the currency. According to the latest BCB’s week survey, economists expect the Selic rate to reach 8.50% by year-end, while the main inflation gauge should stabilised 50bps below the central bank’s mid-point target of 4.50%.

As long as the political mess doesn’t escalate, we remain constructive on the real as investors mostly seized the opportunity to enter into long BRL positions at a discount. First quarter GDP growth is due for release later today. Growth is expected to have reached 1%q/q during the March quarter. A positive reading should accelerate the BRL recovery.

'The EUR/USD pair came under selling pressure in Asia, as risk-on trades gathered steam amid higher oil and Asian equities, which undermines the sentiment around the funding currency Euro.' – Dhwani Mehta (based on FX Street)

Pair's Outlook

EUR/USD was trading in a small range below the weekly R1 at 1.12480 since mid-Wednesday. Being at an eight-month high, traders may be cautious in terms of further appreciation, thus pushing the rate lower. As a result, the morning session can be characterised by weak volatility. It might be expected that the pair fails to trade above 1.1248, changing the situation in favour of the Euro bears. The closest support at 1.1204 is a rather distant target for today; thus, the price may halt somewhere in between the 1.1248/04 territory. Moreover, traders should be aware of fundamentals scheduled for today that may alter the pair's direction.

Traders' Sentiment

SWFX traders are bearish, as 60% of open positions are short. Meanwhile, pending orders remain neutral today.

'The narrowing in the polls has clearly dented sterling's performance and continues to weigh on the currency, and is probably likely to do so in the near term.' – Barclays (based on Business Recorder)

Pair's Outlook

For the third consecutive day yesterday the British currency was able to avoid losses and outperform the US Dollar, continuously retesting the wedge's support line. The Pound, however, is now expected to allow the Greenback to take the upper hand, which arises the risk of the wedge's lower boundary getting pierced today. Technical studies are still unable to confirm this possibility, meaning that the wedge's support could still succeed in limiting the losses; if not, the cluster around 1.2730 is likely to fulfil that task. We should also not rule out the possibility of another leg up, with the 1.2950 handle expected to be the intraday high.

Traders' Sentiment

There are 51% of traders holding long positions (previously 52%), but 57% of all pending orders are to buy the Sterling, up from 51%.

'The near-term balance of risk appears to favor JPY strength.' – Scotiabank (based on FXStreet)

Pair's Outlook

The USD/JPY pair's behavior fell in line with expectations yesterday, as the exchange rate remained relatively unchanged and no level of significance was pierced. Technically, the Greenback should rebound today, with the weekly S1 providing the required bullish momentum, but with the immediate resistance, namely thee 55-day SMA and the weekly PP, still remaining intact. On the other hand, technical indicators suggest the given pair is to decline today, which would make it the fifth consecutive drop. Poor ADP figures today could be the catalyst for a possible loss, however, it should not exceed 50 pips.

Traders' Sentiment

There are 53% of traders holding short positions today, compared to 57% on Wednesday. At the same time, the share of sell orders edged significantly higher, namely from 45 to 70%.

'Investors around the world are seeking safe havens ahead of tomorrow's Non-Farm payrolls and into next week's U.K. elections which have gone from a one horse race to an emotionally close one if you believe the polls.' – Market Pulse (based on Investing.com)

Pair's Outlook

The yellow metal has started this trading session with slight losses against the US Dollar. The pair is kept between the weekly R1 and the weekly PP at 1,275.49 and 1,261.80, respectively, leaving enough potential to trade either way. Contrary to the bearish momentum in the morning, the base scenario favours the pair trading higher, aiming fort the 1,275.49 mark. This assumption is likewise confirmed by bullish technical indicators. Nevertheless, it is not expected that the rate manages to push above this the weekly PP.

Traders' Sentiment

SWFX traders have increased their bullish sentiment, as 52% of open positions are long. In addition, 58% of set up orders are to buy the metal—a slight decrease from 59% on Wednesday.

The Australian dollar had a relatively volatile session overnight. AUD/USD gained initially on Australia's strong retail sales for April, but gave back all of its gains to trade even lower in the next minutes, following the release of China's Caixin manufacturing PMI for May. The Chinese index fell unexpectedly into contractionary territory for the first time in almost a year, generating renewed concerns about a slowdown of the Chinese economy. Bearing in mind Australia's heavy trade exposure to China, should market participants begin to focus increasingly more on the prospect of such a slowdown, the Aussie could remain on the back foot for a while. Especially considering the continued decline in iron ore prices over the past couple of months.

AUD/USD traded lower after the disappointing Caixin PMI, falling below the support (now-turned-into-resistance) hurdle of 0.7420 (R1), before finding fresh buy orders near the 0.7385 (S1) zone and subsequently rebounding somewhat. In case market focus shifts back to a potential Chinese slowdown, or if iron ore prices continue to slide, we would expect the bears to retake control and aim for another test of the 0.7385 (S1) territory. A clear break of that area could initially aim for the 0.7365 (S2) zone.

Today's highlights:

During the European day, we get the final manufacturing PMIs for May from several European nations and the Eurozone as a whole. Given that the final figures are expected to confirm the preliminary estimates, the reaction in the euro could remain relatively limited, unless we have notable revisions.

In the UK, the manufacturing PMI for May will be in focus and the forecast is for a decline. Even though this could hurt sterling somewhat, we think investors may prefer to wait for the services index that will be released on Monday before assessing how the UK economy performed in May. The service sector accounts for the vast majority of UK GDP. What's more, we think that over the next week ahead of the General Election, UK political developments will probably overshadow economics and thus, incoming opinion polls could remain the key driver of sterling. New polls showing that the Conservative - Labour gap continues to narrow could weigh on the pound, and vice-versa. Indeed, yesterday the British pound recovered notably after several polls showed the Conservatives being safely ahead, casting doubts on the recent YouGov poll that showed Theresa May and the Conservative Party failing to secure an absolute majority in Parliament.

From the US, we get the ADP employment report for May. The forecast is for the private sector to have added 185k jobs, more than April's print of 177k. Such a solid figure could raise speculation for the nonfarm payrolls print to also meet its forecast of 183k and thereby, support the dollar. We also get the ISM manufacturing PMI for the same month. Expectations are for the figure to have declined marginally, but still to remain safely above the critical 50 mark. In case of a solid ADP print but a modest slip in the ISM index, we think investors may focus more on the ADP figure, as tomorrow's employment report will probably add the finishing touch to market expectations regarding a June rate hike.

USD/JPY rebounded yesterday after it hit support near the 110.50 (S1) territory. If the ADP print is solid today, we could see the latest rebound continue and perhaps challenge the 111.50 (R1) territory. A decisive break of that level could set the stage for further upside extensions, towards the 112.10 (R2) zone.

We have two speakers on the agenda: Fed Board Governor Jerome Powell and ECB Executive Board member Sabine Lautenschlager. It would be particularly interesting to hear from Powell, considering that he will be addressing the Economic Club of New York and that he is a permanent FOMC voting member that has not expressed his views on policy recently.

AUD/USD

Support: 0.7385 (S1), 0.7365 (S2), 0.7330 (S3)

Resistance: 0.7420 (R1), 0.7470 (R2), 0.7510 (R3)

USD/JPY

Support: 110.50 (S1), 110.20 (S2), 109.70 (S3)

Resistance: 111.50 (R1), 112.10 (R2), 113.10 (R3)

The pair bounced above 111.00 barrier on Thursday, on fresh dollar's strength ahead of key US data today and Friday.

Two-day bearish acceleration was contained by strong support at 110.50 (Fibo 61.8% of 108.11/114.36 rally), with Wednesday's action ending in long-legged Doji and signaling indecision.

However, current rally is so far seen as correction ahead of fresh attempts lower, as overall structure remains bearish and keeps the downside at risk.

Close below 110.50 pivot is needed to confirm bearish stance for attack at key supports at 110.26/23 (200SMA / 18 May low) and 110.00 (daily cloud top).

Strong barrier at 111.30 (daily Tenkan-sen) is expected to ideally cap correction and keep Tenkan-sen and Kijun-sen lines in bearish setup for fresh attempts lower.

Extended upticks would face another barrier at 111.50 (Fibo 61.8% of 112.12/110.48) break of which would signal reversal and expose next pivot at 111.80 (daily cloud top).

Res: 111.30, 111.50, 111.80, 112.12
Sup: 111.00, 110.62, 110.50, 110.23

EURUSD is trading higher, now well above the upper channel line which is a suggestion that bulls are on the move. That said specifically we see price trading in sub-wave four, as part of a higher degree wave 3, that may unfold in sessions ahead.

EURUSD, 1H