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Unexpected 4th of July Fireworks

With the US markets closed for Fourth of July festivities, it was a somewhat directionless overnight session due to lack of participation, but the overriding tone is cautionary with a touch of risk off in the wake of a highly provocative North Korean test of an intercontinental ballistic missile. A topic that will be atop of the G-20 agenda which begins on Friday as North Korea attempts to puts their ICBM and Nuclear-tipped bargaining chips on the table.

The escalation in geopolitical tensions was quickly tempered after Russia and China led the global outcry for both US and South Korea to agree to a Chinese-led de-escalation plan.With cooler heads prevailing, the market quickly retraced the original headline panicked clamouring for scarcely offered haven assets in holiday thinned-trading conditions.But given the immensity of this latest crisis and G20 looming we've not heard the last on this front.

On the currency markets, there were pockets of interest as the CAD remained the markets darling thanks to both surging oil prices and the Bank of Canada's hawkish tone. While the Aussie fell out of favour after the RBA baulked at stepping in line with the chorus of hawkish central banks and issued more dovish than expected statement

Australian dollar

The Aussie remains on its back after a heavy sell-off when the RBA failed to live up to expectations and join the policy convergence club that had traders clamouring for top side exposure in G-10 currencies believing formal policy coordination was afoot. While the global policy convergence narrative will eventually play out the RBA has quashed the notion of a consorted rate rise amongst global central banks.While the RBA stuck to their neutral guidance, there appears to be not one primary catalyst that has convinced the bank to alter that view and refused to remove the downside risk to interest rates which seem to be the popular narrative amongst other central banks.

It's evident the short term market was disappointed after speculators succumbed to the allure of riding a wave of shifting policy, but regardless of the RBA latest musing the tide is turning on global easy money policy, and it might be too early to give up on the Aussie dollar just yet.

Euro

The Forex market is taking a breather conscious of some potentially bullish US$ risk events on the horizon; primarily FOMC minutes and US payroll data this Wednesday and Friday respectively. So we expect the EUR to remain rather rangy.

Japanese Yen

With risk aversion lingering, headline risk, and no shortage of, will dominate USDJPY flow as we head towards Friday's G20 summit keeping topside risk in check

Friday is looking l is looking like a very actionable day.

The Canadian dollar appreciated on the Fourth of July trading session on the back of comments from Bank of Canada (BoC) Governor Stephen Poloz to a German newspaper where he once again reiterated that he is concentrating on where the economy will be 18 to 24 months from now. The BoC came out of left field in June with a couple of statements from senior policy makers that surprised the market which had not priced in a rate hike this year for Canadian interest rates. The market is now considering a 50 percent probability of a rate hike during the July 12.

Governor Poloz told the Handelsblatt that Canadian inflation should be well into an uptrend by the first half of 2018. The timeline sheds some light on the change in tone from the Central bank that is now dropping heavy hints of upcoming monetary policy changes. Previously Mr. Poloz did not broach the subject of inflation as energy prices have dampened the Canadian CPI to 1.3 percent on an annual basis and far from the central bank’s target of 2 percent.

Inflationary growth is a major concern, not only for the BoC but for all major central banks. The economies of Europe, Japan, the United States and England appear to be on the mend by most indicators, the missing link inflation. The U.S. Federal Reserve has said that it won’t let inflation get in a the way of tighter monetary policy as it gets ready to hike once again and reduce the massive balance sheet it accumulated during the quantitive easing program. The European Central Bank (ECB) and Bank of England (BoE) have started the hawkish rhetoric, but will have to first sort out the tapering of their stimulus programs. The Bank of Japan (BOJ) is holding the rear as some political turmoil after the Tokyo elections could signal a fracture of old dynamics and reduce the power of Prime Minister Shinzo Abe. The Japanese central bank has mentioned the possibility of ending its QE program, but as it stands it won’t happen in the short term.

The USD/CAD lost 0.493 in the last 24 hours. The currency pair is trading at 1.2936 during the Fourth of July holiday in the United States has reduced liquidity. The CAD kept rising despite a holiday on Monday due to Canada Day, with the extra long weekend limiting the action on the currency pair. Governor Poloz is making sure the market receives the July 12 signal loud and clear. Prior to June 11 the market was not considering a change in monetary policy this year. The BoC was proactive in 2015 with two rate cuts to ease the impact of the impending drop in oil prices. Now the central bank has deemed those cuts served their purpose and with energy enjoying some stability and the U.S. Federal Reserve already up to a 100–125 basis points range with at least another to come, the BoC quickly put on the table a rate hike that could come as early as the next meeting on July 12.

The loonie has risen on solid energy prices but also a lack of traction from the USD. The Trump administration is still struggling to pass the divisive healthcare reform that is now clogging the path of more pro-growth policies that were promised. The Canadian dollar

Oil rose 0.611 percent on Tuesday. The price of West Texas Intermediate is trading at $46.93 after a 8 session rally continues into a 9th with one of the best performances of crude prices since 2010. US crude inventories are usually published on Wednesday at 10:30 am EDT, but this week the Fourth of July holiday will push back the release date to Thursday. Forecasts are pointing to another drop in crude inventories.

The Organization of the Petroleum Exporting Countries (OPEC) production cut agreement has stabilized prices, but rising US production has cancelled out more positive effects. Nigeria and Libya although OPEC members are exempt from the deal as disruptions had hit their output, but are now back at normal levels putting some pressure on energy prices.

Oil markets will be awaiting the numbers form the Energy Information Administration (EIA) on Thursday as the supply battle between the OPEC and US shale producers continues with low evidence of a recovery of global demand.

Market events to watch this week:

Wednesday, July 5
4:30 am GBP Services PMI
2:00 pm USD FOMC Meeting Minutes
9:30 pm AUD Trade Balance

Thursday, July 6
8:15 am USD ADP Non-Farm Employment Change
8:30 am CAD Trade Balance
8:30 am USD Unemployment Claims
10:00 am USD ISM Non-Manufacturing PMI
11:30 am USD Crude Oil Inventories

Friday, July 7
4:30 am GBP Manufacturing Production m/m
8:30 am CAD Employment Change
8:30 am CAD Unemployment Rate
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change

Gold is almost unchanged in the Tuesday session. In North American trade, spot gold is trading at $1222.92 per ounce. In the US, there are no events, as US markets are off for Independence Day. On Wednesday, the Federal Reserve will publish the minutes of its June policy meeting.

It was an inauspicious start to the trading week, as gold dropped sharply on Monday, down 1.5%. The metal dropped below $1219, marking its lowest level since May 11. Gold is down 4.4% since Thursday, when the metal appeared headed to break above the symbolic $1300 level. The week started with good news from the manufacturing sector, as ISM Manufacturing PMI improved to 57.8, its highest level since November 2014. Global economic conditions have improved, and a stronger demand for US exports has boosted the manufacturing sector.

Interest rates are inversely related to gold prices, so gold investors and traders are following the Federal Reserve closely. Will the Fed make good on its forecast to raise rates for a third time in 2017? The markets remain somewhat skeptical, as the odds of a rate hike in December have fallen to 47%, down from 53% last week, according to the CME Group. With the US economy giving a mediocre performance in the first quarter, and inflation levels remains low, there are Fed policymakers who are currently lukewarm to the idea of raising rates again this year. Key economic indicators have not looked particularly sharp in the second quarter, notably housing and consumer spending numbers. If inflation numbers do not improve and GDP reports for Q2 remain soft, the odds of a December hike will drop even further, which could translate into higher gold prices.

GBP/USD has recorded small losses in the Tuesday session. In North American trade, the pair is trading at 1.2930. On the release front, British Construction PMI, softened in June, with a reading of 54.8. This was slightly below the estimate of 55.0. Later in the day, the UK releases the BRC Shop Price Index. In the US, there are no events, as US markets are off for Independence Day. On Wednesday, the Federal Reserve will publish the minutes of its June policy meeting.

The European forum of central bankers usually plays second fiddle to the Fed's Jackson Hole meeting, but this year's European forum won't be forgotten anytime soon. Last week's meeting in Portugal triggered sharp rises from the euro and British pound, following hawkish remarks from Mario Draghi and Mark Carney. The pound jumped 2.4%, last week, boosted by hawkish comments from BoE Governor Mark Carney. Carney said that the BoE would have to consider removing monetary stimulus, and the markets jumped on his comments as a possible sign that he was not adamantly opposed to rate hikes in the near future. BoE policymakers have waged a public debate about rate policy, with Carney stating last week that he was opposed to hikes, only to be contradicted by MPC member Ande Haldane, who said he had been close to voting in favor of a rate hike at the June rate meeting. The vote at the meeting was 5-3 in favor of maintaining rates, surprising the markets, which had predicted a 7-1 vote to keep rates at current levels. Although there are renewed fears that Brexit will take a toll on the British economy, inflation is running close to 3%, well above the BoE's target of 2 percent. A rate increase would help lower inflation, but Carney, who has voiced concerns about Brexit's negative ramifications since the vote last June, had been solidly against a rate increase.

The Federal Reserve has sent out the message that it plans to raise interest rates one more time in 2017, but the markets are becoming more skeptical. The odds of a rate hike in December have fallen to 47%, down from 53% last week, according to the CME Group. With the US economy giving a mediocre performance in the first quarter, and inflation levels remains low, there are Fed policymakers who are currently lukewarm to the idea of raising rates again this year. Key economic indicators have not looked particularly sharp in the second quarter, notably housing and consumer spending numbers. If inflation numbers do not improve and GDP reports for Q2 remain soft, the odds of a December hike will drop even further, which could translate into broad losses for the US dollar.

USD/JPY has steadied on Tuesday, after posting considerable gains in the Monday session. In the North American session, the pair is trading slightly at 113.20. On the release front, BOJ Core CPI edged up to 0.3%, matching the forecast. There are no US releases, as US markets are closed for the Fourth of July holiday.

An improved global economy has translated into stronger demand for Japanese products, boosting Japan's manufacturing and export sectors. Still, consumer spending and inflation remain sore points. Japanese retail sales slowed to just 2.0% in May, compared to 3.2% a month earlier. The weak figure points to a Japanese consumer who is pessimistic about the economy and hesitant to open the purse strings. Wages have been stagnant, which has hampered consumer spending. Inflation is stuck below 1 percent, well below the BoJ's target of 2 percent. Tokyo Core CPI, the primary gauge of consumer inflation, edged down to 0.0%, below the estimate of 0.2%. The index has posted just one gain in the past 18 months, underscoring that despite the BoJ's ultra-loose monetary policy, inflation levels remain well below the bank's target of 2 percent.

The Federal Reserve has all but signed in writing that it would raise interest rates three times in 2017, but the markets are becoming more skeptical. The odds of a rate hike in December have fallen to 47%, down from 53% last week, according to the CME Group. With the US economy giving a mediocre performance in the first quarter, and inflation levels remains low, there are Fed policymakers who are currently lukewarm to the idea of raising rates again this year. Key economic indicators have not looked particularly sharp in the second quarter, notably housing and consumer spending numbers. If inflation numbers do not improve and GDP reports for Q2 remain soft, the odds of a December hike will drop even further, which could translate into broad losses for the US dollar.

It was a relatively quiet forex trading session for Europe on Tuesday, as the 4th of July holiday in the US brought down volumes and overall activity.

The main news of the day was the test of a long-range missile by North Korea, which led investors to seek the safety of havens such as the yen and gold. The gains by both the yen and gold were relatively modest however, suggesting that the North Korean action did not unsettle investors too much. Dollar/yen fell to as low as 112.84 but managed to recover to 113.23, while gold traded in the $1223-1225 an ounce range. Both gold and the yen were under pressure during the previous days.

The dollar was up both against the pound and the euro, but did not manage to benefit much from the positive momentum of the previous day's better-than-expected ISM manufacturing PMI. Euro/dollar fell to 1.1343 and pound/dollar fell to 1.2925.

In other economic news, the ECB's Chief Economist, Peter Praet, sounded a cautious note with respect to potential interest rate increases in the Eurozone. Low interest rates were a key condition of the plan to raise inflation to the ECB's 2% target, according to Praet. The speech moderated the optimism of some market participants that the ECB would shift to an outlook of gradual tightening in the near future.

In the UK, construction PMI for June came in close to expectations at 54.8. Analysts had forecasted 55.0 whereas the previous month's figure was at 56. UK manufacturing PMI was disappointing the previous day, which had weighed on sterling.

The Australian dollar managed to stabilize versus the US dollar around the 0.76 mark after suffering a significant drop following the release of the Reserve Bank of Australia's policy statement during Asian trading. The central bank was not as hawkish as some had expected and there was little in the statement that pointed in the direction of a rate hike soon.

The Riksbank in Sweden announced that it was now less likely to cut rates further, although it also did not completely rule out more easing. Sweden's policy rate currently stands at -0.50%. The Swedish Krona lost ground versus the euro to trade around 9.6760 compared with 9.6442 at the close of US trading the previous day.

Crude oil was under some pressure during Tuesday's Asian session, but managed to recover to cross above the $47 a barrel mark (WTI contract) to $47.23. This also had a positive effect on the Canadian dollar as USD/CAD fell below 1.2946.

Looking ahead, the bi-weekly dairy auction results were eagerly expected by kiwi traders. With respect to the remaining days of the week, Wednesday's Fed meeting minutes and Friday's employment report out of the US were the two highlights for the US dollar.

USD/CHF - 0.9655

Most recent candlesticks pattern : N/A

Trend                                    : Near term down

Tenkan-Sen level                  : 0.9641

Kijun-Sen level                    : 0.9640

Ichimoku cloud top                 : 0.9602

Ichimoku cloud bottom              : 0.9591

Original strategy :

Buy at 0.9590, Target: 0.9690, Stop: 0.9555

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.9600, Target: 0.9700, Stop: 0.9565

Position : -

Target :  -

Stop : -

As the greenback staged a strong rebound after finding good support at 0.9552, suggesting a temporary low has been formed there and consolidation with mild upside bias is seen for this move to bring retracement of recent decline, hence gain to 0.9667-76 (61.8% Fibonacci retracement of 0.9738-0.9552 and previous support turned resistance) is likely, however, reckon upside would be limited to 0.9700 and price should falter below resistance at 0.9738.

In view of this, we are looking to turn long on pullback as the lower Kumo (now at 0.9591) should limit downside and bring another rise later. Below 0.9565-70 would abort and signal intra-day top is formed, risk retest of 0.9552 first.

GBP/USD - 1.2931

Most recent candlesticks pattern   : N/A

Trend                                 : Near term up

Tenkan-Sen level                 : 1.2937

Kijun-Sen level                    : 1.2941

Ichimoku cloud top              : 1.2987

Ichimoku cloud bottom        : 1.2985

Original strategy :

Buy at 1.2865, Target: 1.3000, Stop: 1.2830

Position : - 

Target :  -

Stop : -

New strategy  :

Buy at 1.2865, Target: 1.3000, Stop: 1.2830

Position : -

Target :  -

Stop : -

Cable’s retreat after faltering below last week’s high of 1.3030 suggests consolidation below this level would be seen, hence weakness to 1.2916 support cannot be ruled out, however, reckon downside would be limited to 1.2865-70 and bring another upmove later, above said resistance at 1.3030 would signal recent upmove is still in progress and may extend further gain towards recent high 1.3048 but loss of near term upward momentum should prevent sharp move beyond 1.3075-80 today and reckon 1.3100 would hold on first testing. 

In view of this, would not chase this rise here and we are looking to buy cable again on pullback as 1.2900 should limit downside and bring another rally. Below previous resistance at 1.2861 would suggest a temporary top is formed instead, risk weakness to 1.2830-35 (50% Fibonacci retracement of 1.2640-1.3030) but support at 1.2794 should remain intact.

EUR/USD - 1.1345

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 1.1357

Kijun-Sen level                  : 1.1357

Ichimoku cloud top             : 1.1404

Ichimoku cloud bottom      : 1.1392

Original strategy  :

Buy at 1.1300, Target: 1.1400, Stop: 1.1265

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.1300, Target: 1.1400, Stop: 1.1265

Position : -

Target :  -

Stop : -

As euro’s retreat from last week’s high of 1.1446 has kept the single currency under near term pressure, suggesting initial downside risk remains for retracement of recent upmove to 1.1325-30 (38.2% Fibonacci retracement of 1.1139-1.1446), however, reckon support at 1.1292 (as well as 50% Fibonacci retracement) would hold and bring another rise, above 1.1400-10 would bring retest of said resistance at 1.1446, break there would extend recent rise to 1.1455-60 (61.8% projection of 1.1119-1.1389 measuring from 1.1292), then 1.1480.

In view of this, would not chase this rise here and would be prudent to buy euro on pullback as 1.1292 (previous support as well as 50% Fibonacci retracement of 1.1139-1.1446) should limit downside, bring rebound. Below 1.1270 would abort and signal a temporary top is formed, bring correction to 1.1250-55 first.

USD/JPY - 113.19

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 113.02

Kijun-Sen level                  : 113.11

Ichimoku cloud top             : 112.62

Ichimoku cloud bottom      : 112.40

New strategy  :

Stand aside

Position :  -

Target :  -

Stop : -

Although the greenback retreated after rising to 113.47 and consolidation below this level would be seen, reckon downside would be limited to the upper Kumo (now at 112.62) and 112.40 should hold, bring another rise later, above said resistance at 113.47 would signal recent upmove is still in progress for headway to 113.75-80 but loss of momentum should prevent sharp move beyond 114.00, bring retreat later.

In view of this, would not chase this rise here and would be prudent to stand aside for now. Below the lower Kumo (now at 112.40) would suggest top is possibly formed but break of 111.90-95 is needed to add credence to this view, bring test of 111.73 support first.