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The loonie was lower against the US dollar despite commodities rising. Moody’s downgraded six major Canadian banks citing high private and household debt that have fuelled a housing bubble. The concerns about a potential crash and its effect on the losses to the financial sector prompted the decision by the ratings agency. Prime Minister Justin Trudeau addressed the downgrades and admitted to the challenges around housing.

The price of oil rose continuing its gains from yesterday after the fall in weekly US crude inventories but it could offer little support to the Canadian dollar that has been caught amidst rising questions about the overall health of the financial sector after Home Trust Capital saw withdrawals wipe out its long term deposits. Housing speculation has been a known subject that has been discussed by major organizations and the government but with historic low rates it has dominated headlines and household budgets.

Reuters reported that Steve Verheul, the negotiator behind the trade agreement between Canada and Europe will head the NAFTA talks. The Trump administration will go into the negotiations in a position of strength after imposing tariffs on softwood lumber and threatening to abandon the deal altogether took a toll on the loonie.

The USD/CAD gained 0.298 percent in the last 24 hours. The currency pair is trading at 1.3694 after the Moody’s downgrade threw a curveball to the CAD. A housing bubble in particular in the two largest cities has been going on for years fuelled by historic low rates. Rising household debt has urged the ratings agency to downgrade the standing of the six major Canadian banks. Delinquency rates are low… but so are interest rates. There are multiple question marks on what will happen when rates go up and people cannot afford to service those mortgages.

The Canadian dollar was down from Wednesday when oil prices spiked following a larger than expected drawdown in the US. The correlation between oil and the loonie is strong, but turbulence in the solid Canadian financial system gave investors cause to break that correlation as they sold the CAD.

There are various calls around the market urging the Bank of Canada to raise interest rates to cool down the overheating housing market but with low inflation, low oil prices and a forecasted slower growth in the second quarter it is questionable the BoC can follow through on that advice.

Oil gained 1.172 percent on Thursday. The price of West Texas is trading at $47.65 following a move that started yesterday with the higher than anticipated drawdown in US inventories. The deal to curb production by the Organization of the Petroleum Exporting Countries (OPEC) and major producers such as Russia stabilized prices since the details were still being hashed out last year. Originally a six month agreement, the group will meet on May 25 to discuss an extension. US producers have benefited from higher prices and have ramped up production minimizing the overall effect of the OPEC deal on prices.

Gold gained 0.545 percent in the last 24 hours. The yellow metal is trading at $1,224.52 after a second day in positive territory. The USD rally that started at the beginning of the week is losing some steam. Fed comments has stoked the USD rally and put downward pressure on the yellow metal, but US political risk after the firing of FBI Director James Comey is keeping the safe haven asset bid.

Market events to watch this week:

Friday, May 12
All day G7 Meetings
8:30am USD CPI m/m
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
10:00am USD Prelim UoM Consumer Sentiment
Saturday, May 13
All day G7 Meetings

GBP/USD has lost ground in the Thursday session. In North American trade, GBP/USD is trading at 1.2881. On the release front, it's been a very busy day. The Bank of England maintained the benchmark rate at 0.25%, but the minutes of the May policy meeting were pessimistic. There was more bad news as Manufacturing Production declined 0.6%, worse than the forecast of -0.2%. US numbers were strong, as PPI improved to 0.5%, and unemployment claims ticked lower to 236 thousand. Both indicators beat their estimates.

As expected, the BoE made no changes to interest rates or its asset-purchase scheme. However, the BoE stated in its minutes that it expected living standards to drop, as it downgraded its forecast for average earning growth to 2%, down from 3% in February. On the inflation front, the BoE raised its projection for inflation in Q1 to 2.7%, compared to 2.4% in February. The Bank added that if inflation is higher than predicted, it might have to respond by raising interest rates. The minutes added that these forecasts were based on a "smooth" Brexit (which is by no means guaranteed, especially with the bad blood between the EU and Prime Minister Theresa May). Predictably, the gloomy message from the BoE has pushed the British pound lower in Thursday trade. A weak manufacturing production report is also weighing on the pound, and if upcoming data also misses expectations, the pound could continue to lose ground.

Washington is in the grips of a major political crisis (some analysts are even claiming a constitutional crisis), following Trump's firing of FBI director James Comey on Tuesday. Comey, who has been conducting an investigation into possible collusion between Trump and Russia during the presidential campaign, clearly has been a thorn in Trump's side. The White House has claimed that it fired Comey over his handling of an email scandal involving Hillary Clinton, but the move has been roundly condemned by the Democrats, and some key Republicans have also voiced opposition as well. The firestorm could heat up further, with calls in Congress to appoint an independent investigator into Trump's connections with Russia. Has Trump gone one step to far? This latest controversy shows no signs of fading away anytime soon, and could delay Trump agenda of tax reform and increased fiscal spending.

USD/CHF - 1.0088

Most recent candlesticks pattern : N/A

Trend                                    : Near term up

Tenkan-Sen level                  : 1.0085

Kijun-Sen level                    : 1.0072

Ichimoku cloud top                 : 1.0054

Ichimoku cloud bottom              : 0.9987

Original strategy :

Buy at 1.0015, Target: 1.0115, Stop: 0.9980

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.0005, Target: 1.0105, Stop: 0.9970

Position : -

Target :  -

Stop : -

As the greenback has retreated after marginal rise to 1.0100, suggesting recent upmove is not ready to resume yet and further consolidation below previous resistance at 1.0108 would be seen, hence consolidation with initial downside risk is seen for test of 1.0048, however, reckon 1.0000-10 (38.2% Fibonacci retracement of 0.9859-1.0100) would limit downside and bring another rise later, above said resistance at 1.0108 would confirm resumption of early rise to 1.0130 and then 1.0150-55 which is likely to hold from here due to loss of near term upward momentum. 

In view of this, would not chase this rise here and we are looking to buy dollar on pullback as 1.0000-10 should limit downside. Below 0.9980 (50% Fibonacci retracement of 0.9859-1.0100) would defer and suggest top is possibly formed but break of previous resistance at 0.9957 is needed to signal top is formed, bring further fall to 0.9920-25, however, previous resistance at 0.9903 should remain intact.

In line with our expectation, the Bank of England (BoE) made no policy changes at its May meeting and reiterated its neutral stance by repeating it could move 'in either direction'.

However, against our expectation, the BoE also maintained its hawkish twist. First, Kristin Forbes (a known hawk) still voted for a hike (note, though, that she is leaving the BoE on 30 June 2017, which makes her hawkish stance less important). Second, some members still think that '…it would take relatively little further upside news…for them to consider that a more immediate reduction in policy support might be warranted'. The meeting summary also states that the BoE thinks the current market pricing of BoE hikes is a bit too soft if the economy lives up to the expectations. Still, markets had expected an even more hawkish Bank of England.

We still expect the BoE to remain on hold for the next 12 months. While we think it is unlikely the BoE will tighten monetary policy in a time of elevated political uncertainty, we think we would need to see substantially slower growth and/or higher unemployment before easing becomes likely again.

Note that the BoE reaction function has changed since the financial crisis: the BoE puts more weight on growth/unemployment relative to inflation (see also a speech by former Monetary Policy Committee member Martin Weale here, 18 July 2016). In our view, the BoE seems to be more worried about slower growth than too-high inflation if this is only temporary.

EUR/GBP remains trapped in the 0.84-0.85 range ahead of the UK election

Despite some hawkish comments on the BoE view on rate hike prospects relative to the market's pricing, EUR/GBP traded higher following the BoE announcement.

As such, there are probably three reasons the EUR/GBP has bounced today.

1. We think many investors expected a tighter voting split, with one or more members joining Forbes' vote in favour of a rate increase.
2. 2. The BoE revised its CPI inflation projection lower, which does not support the case for a rate hike any time soon.
3. The BoE's fairly optimistic outlook for growth is conditioned on the assumption of a smooth Brexit, which remains highly uncertain.

We still expect EUR/GBP to remain trapped in the 0.84-0.85 range ahead of the general election on 8 June.

We target 0.84 in 1M and would still look to sell EUR/GBP (preferably via options) if spot goes up to 0.8550.

Longer term, the outlook for EUR/GBP depends largely on the outcome of the general election.

Too hawkish BoE pricing, in our view

BoE has lowered its CPI inflation projections

The BoE has lowered its CPI inflation projections due mainly to the appreciation of GBP since the latest inflation report in February.

The BoE still expects CPI inflation to move higher, as 'the ef fects of the fall in sterling and rising foreign export prices continue to feed through'.

The BoE says that 'the projected overshoot entirely ref lects' the GBP depreciation since November 2015 and that 'although domestically generated inflation had been rising, it was currently below the level broadly consistent with the inf lation target'.

This supports our view that the BoE will see through higher inflation if it is only temporary due to currency changes. In our view, a trigger for a more hawkish BoE would be higher domestically generated inflation.

BoE expects GDP growth of around 1.75% in coming years

The UK grew 0.3% q/q in Q1, lower than the BoE expected back in February. Note though that the BoE expects this to be revised up.

The BoE expects the economy to grow around 0.4% q/q in coming quarters.

The BoE expects a smooth Brexit.

The BoE expects private consumption growth to recover 'in the latter part of the forecast period as real income picks up', so higher nominal wage growth is an important underlying assumption.

BoE expects unemployment to stabilise at 4.7%

The BoE has lowered its projection for the unemployment rate, as it has lifted its projection for GDP growth.

The BoE now expects the unemployment rate to stabilise around the current level of 4.7%, slightly above the NAIRU estimate of 4.5%, implying there is still slack left in the labour market.

Full report in PDF

GBP/USD - 1.2879

Most recent candlesticks pattern   : N/A

Trend                                 : Near term up

Tenkan-Sen level                 : 1.2898

Kijun-Sen level                    : 1.2901

Ichimoku cloud top              : 1.2952

Ichimoku cloud bottom        : 1.2946

Original strategy :

Sell at 1.2900, Target: 1.2800, Stop: 1.2935

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 1.2900, Target: 1.2800, Stop: 1.2935

Position : -

Target :  -

Stop : -

As cable has dropped below support at 1.2903 (now resistance) on dovish BOE, signaling top is formed at 1.2991 earlier and consolidation with downside bias is seen for further fall to 1.2831 support, break there would add credence to this view and extend the fall from 1.2991 top to 1.2805 and later towards 1.2770 but reckon previous support at 1.2757 would hold from here.

In view of this, we are looking to sell cable on recovery as said resistance at 1.2903 should limit upside and bring another decline. Above 1.2930-35 would risk test of 1.2950-60 but break there is needed to signal low is formed, bring another bounce towards 1.2988-91 resistance but break of 1.2999-00 (1.236 times projection of 1.2109-1.2616 measuring from 1.2365 and psychological resistance) is needed to revive bullishness.

EUR/USD - 1.0871

Most recent candlesticks pattern   : N/A

Trend                      : Near term down

Tenkan-Sen level              : 1.0866

Kijun-Sen level                  : 1.0866

Ichimoku cloud top             : 1.0908

Ichimoku cloud bottom      : 1.0880

Original strategy  :

Sell at 1.0930, Target: 1.0820, Stop: 1.0965

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 1.0955, Target: 1.0840, Stop: 1.0990

Position : -

Target :  -

Stop : -

As the single currency has recovered after falling briefly to 1.0839, suggesting consolidation above this level would be seen and corrective bounce to 1.0895-00 is likely, however, reckon upside would be limited to 1.0930-35 and renewed selling interest should emerge around 1.0955-60, bring another decline later. A break of said support at 1.0839 would extend the fall from 1.1025 top for at least a strong retracement of early upmove towards 1.0800 but reckon 1.0770-75 would hold from here.

In view of this, we are looking to sell euro on recovery as 1.0955-60 should limit upside. Above 1.0970 would defer and risk a stronger rebound but a break above resistance at 1.0997 is needed to signal pullback from 1.1025 has ended, bring retest of this level later. 

BOE left the Bank rate unchanged at 0.25% and the QE program at 435B pound. While this had been widely anticipated, BOE's downgrade of GDP growth outlook was disappointing. Policymakers also raised its inflation forecast for this year, warning that rising inflation begins to hurt consumers, but lowered the forecasts for 2018 and 2019. Expectations of a "smooth" Brexit led members to believe that interest rate may need to go up around the time the UK leaves the EU in 2019.

The market viewed the downgrade of GDP growth this year and inflation outlook in 2018 and 2019 as dovish. We were a bit surprised by the 7-1 vote (Kristin Forbes the only dissenter) to maintain the monetary policy status quo. We had expected a more divided committee with one more member joining the rate hike camp.

Consumption growth will be slower in the near term

On the economic outlook, BOE revised lower its GDP growth forecast to +1.9% for this year, from +2% projected in February. It also anticipated that 1Q17 growth would be revised lower to +0.4% q/q.. Yet, GDP growth was revised higher to +1.7% (February: +1.6) for 2018 and to +1.8% (February: +1.7%) for 2019. The quarterly Inflation Report suggested that "consumption growth will be slower in the near term than previously anticipated before recovering in the latter part of the forecast period as real income picks up". The central bank projected wage to grow +3.5% and +3.75% in 2018 and 2019, respeictlvely. As suggested in the statement, "with unemployment falling to its estimated equilibrium rate, wage growth is expected to recover significantly, and the drag from domestic costs to lessen, over the same period".

2018, 2019 CPI forecast revised lower

On inflation, BOE revised higher its CPI forecast to +2.7% from 2.4% for 2017, probably driven by the fall in market rate from February. Inflation forecasts for 2018 and 2019 were, however, revised down to 2.4% (from +2.6%) and to +2.2% (from +2.4%), respectively. Exceeding BOE's target, headline CPI rose to +2.3% in February and steadied at that level in March.

The central bank attributed this phenomenon to sterling's weakness, noting that "the projected overshoot (of the inflation target) entirely reflects the effects of the falls in sterling since late November 2015 on import prices".

Projections hinged on a "smooth" Brexit

The central bank's projections hinged on a "smooth" Brexit prospect. As noted in the statement, the "latest projections there is such a trade-off through most of the forecast period, with a degree of spare capacity and inflation remaining above the 2% target. In the final year of the forecast, however, the output gap closes and inflation rises slightly further above the target. This is conditioned on the assumptions that the adjustment to the United Kingdom's new relationship with the European Union is smooth, and that Bank Rate follows the market-implied path for interest rates".

The BOE has not modeled for a disorderly Brexit. Yet, it stressed that monetary policy would not "prevent either the necessary real adjustments as the U.K. moves towards its new international trading arrangements or the weaker real income growth that's likely to accompany that adjustment over the next few years".

USD/JPY - 113.75

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 113.85

Kijun-Sen level                  : 113.92

Ichimoku cloud top             : 113.94

Ichimoku cloud bottom      : 113.36

Original strategy  :

Buy at 113.40, Target: 114.45, Stop: 113.05

Position :  -

Target :  -

Stop : -

New strategy  :

Buy at 113.15, Target: 114.25, Stop: 112.80

Position :  -

Target :  -

Stop : -

As the greenback has retreated after marginal rise to 114.37, suggesting minor consolidation below this level would be seen and pullback to the lower Kumo (now at 113.36) is likely, however, still reckon previous resistance at 113.05 (now support) would contain downside and bring another rise later to 114.50-55 (100% projection of 108.13-111.78 measuring from 110.87) but overbought condition should limit upside to 114.75-80 and price should falter below 115.00.

In view of this, would not chase this rise here and would be prudent to buy dollar on pullback as 113.15-20 should contain downside. A firm break below previous resistance at 112.99-05 would defer and suggest top is formed, bring correction of recent upmove to 112.65-70 but reckon support at 112.39 would remain intact. 

EUR/GBP - 0.8435

 
Recent wave: Major double three (A)-(B)-(C)-(X)-(A)-(B)-(C) is unfolding and 2nd (A) has possibly ended at 0.6936.

Trend: Near term down

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

 
Despite falling to 0.8384 yesterday, the subsequent rebound has retained our view that further consolidation would be seen and recovery to 0.8455-60 cannot be ruled out, however, reckon upside would be limited to 0.8490 and resistance at 0.8509 would hold from here, bring further choppy trading. Above resistance at 0.8509 would bring test of another previous resistance at 0.8531 but only break of this level would add credence to our view that a temporary low has been formed at 0.8312 last month and extend the rebound from there for retracement of recent decline to 0.8550

On the downside, below said support at 0.8384 would extend weakness to support at 0.8351 but break there is needed to signal the rebound from 0.8312 low has ended at 0.8531 and bring further fall towards this support at 0.8312 which is likely to hold from here. As near term outlook is still mixed, would be prudent to stand aside for now.

Our preferred count is that, after forming a major top at 0.9805 (wave V), (A)-(B)-(C) correction is unfolding with (A) leg ended at 0.8400 (A: 0.8637, B: 0.9491 and 5-waver C ended at 0.8400. Wave (B) has ended at 0.9413 and impulsive wave (C) has either ended at 0.8067 or may extend one more fall to 0.8000 before prospect of another rally. Current breach of indicated resistance at 0.9043 confirms our view that the (C) leg has ended and bring stronger rebound towards 0.9150/54, then towards 0.9240/50.

USD/CAD - 1.3727

 
Recent wave: Only wave v of c has ended at 0.9407 and wave C of major A-B-C correction is underway for headway to 1.4700

Trend:  Near term up

 
Original strategy       :

Buy at 1.3570, Target: 1.3770, Stop: 1.3510

Position: -

Target:  -

Stop: -

 
New strategy             :

Buy at 1.3570, Target: 1.3770, Stop: 1.3510

Position: -

Target:  -

Stop:-

Although the greenback rebounded after holding above support at 1.3642, break of last week’s high at 1.3794 is needed to confirm recent upmove has resumed and extend further gain to 1.3840-50 but overbought condition should prevent sharp move beyond 1.3890-00 and price should falter below 1.3950. If said resistance continues to hold, then further consolidation is in store and another corrective fall to 1.3642 cannot be ruled out, however, reckon downside would be limited to 1.3570 and bring another rise later.

In view of this, would not chase this rise here and would be prudent to buy again on pullback as 1.3570 should limit downside and bring another rise later. Below 1.3530 would abort and suggest a temporary top is formed, bring retracement of recent upmove to 1.3500 and later towards 1.3450-60 but support at 1.3411 should remain intact, bring another upmove later.

To recap, wave B from 1.3066 is unfolding as an a-b-c and is sub-divided as a: 1.2192, b: 1.2716 and wave c is a 5-waver with i: 1.1983, ii: 1.2506, extended wave iii with minor iii at 1.0206, wave iv ended at 1.0781 and wave v as well as wave iii has ended at 0.9931, hence the subsequent choppy trading is the wave iv which is unfolding as (a)-(b)-(c) with (a) leg of iv ended at 1.0854, followed by (b) leg at 1.0108 and (c) leg as well as the wave iv ended at 1.0674. The wave v is sub-divided by minor wave (i): 0.9980, (ii): 1.0374, (iii): 0.9446, (iv): 0.9913 and (v) as well as v has possibly ended at 0.9407, therefore, consolidation with upside bias is seen for major correction, indicated target at 1.3700 and 1.4000 had been met and further gain to 1.4700 would be seen later.