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The Loon ruffles some feathers

UK politics continues to be the main narrative with the usual conversations around President Trump providing the background fodder. However, the Bank of Canada did more than ruffle a few feathers with some unexpected hawkish rhetoric

Canadian Dollar

Carolyn Wilkins, Senior Deputy Governor of the Bank of Canada signalled that Canadian interest rates have bottomed and the next policy shift will likely be higher came like a bolt from the blue. Her guidance caught more than a few traders off guard as the Loonie rallied hard and fast from 1.3470 to 1.3310 during the NY session.

British Pound

Sterling traded in bedraggled fashion overnight as there remain no protective legislative measures in place engulfing the markets in a cloud of uncertainty.While GBP near term direction will continue to be driven by the post-election fallout, but the prospects for the Pound look increasingly gloomy as the possibility of another Tory leadership vacuum enters the picture at precisely the wrong time for the UK.

Japanese Yen

USDJPY fell below the psychological 110 level on the back of falling US yields as the markets bore witness to an acute bout of risk aversion with the NASDAQ correction moving into day two. However, with the FOMC this week it is unlikely yields will press much lower and we should expect the USDJPY make a minor comeback

Euro

EURUSD remains exceptionally stable although the political fallout in the UK. The market appears content to look past whatever dovish interpretation gleaned from last week’s ECB, given few catalysts I suspect the EURUSD to remain mired within the current ranges ahead of the FOMC.

Australian Dollar

The Aussie dollar remains very resilient although the Australia May NAB business confidence slid to 7 versus 13 prior and business conditions fell 12 versus 13 previous.

The commodity block is trading on a positive note riding the Canadian dollar coattails after the BOC signalled a probable shift in monetary guidance.What’s at play here is the notion that central bankers, in general, may not want to fall behind hind the curve more so if inflation pressures see a resurgence. Perhaps some of this argument may be rubbing off locally and supporting the AUD

A quick look at the USD/CAD chart shows how seriously the market took a hint from Bank of Canada senior deputy Wilkins today. The loonie was the top performer while the pound lagged. Australian business confidence is due later. The Premium video below dissects the technical and fundamental forces underpinning the British pound, inlcuding our GBP trades.

Any time a central banker's comment leads to a 150 pip fall in a currency it's serious but when it leads to a six-week low, a break of the 100-day moving average and a break of the 200-dma, it's especially notable.

That's what happened after Wilkins said the BOC is rethinking whether the 50 basis points in rate cuts since 2015 is still needed. She painted an upbeat picture of the economy that was already evident after GDP rose at a 3.7% annualized pace in Q1 and the economy added 54.5K jobs in May. Wilkins was almost unequivocal in her praise for an economy where she said signs of growth are broadening.

The implied probability of a hike by year-end rose to 58% from 29% on her comments. That kind of swing is rare and underscores the downside for USD/CAD. In addition, note that longs in the pair a sliver away from record extremes and are surely feeling uncomfortable.

Another place where central bankers have been feeling upbeat is Australia. The RBA last week brushed aside a soft Q1 and one of the reasons is upbeat consumer and business sentiment. We will get the next look at 0130 GMT when NAB releases its business confidence data for May. The prior reading was +13.

USD/JPY has edged higher at the start of the week. In Monday's North American session, the pair is trading at the 110 line. On the release front, Japanese Core Machinery Orders declined for the first time in three months, with a reading of -3.1%. This was much weaker than the forecast of +0.6%. Japanese PPI gained 2.1%, shy of the forecast of 2.2%. Later in the day, Japan releases BSI Manufacturing Index, with an estimate of 1.1 points. On Tuesday, Japan releases PPI, with the markets braced for a flat reading of 0.0%.

The Japanese economy has shown some improvement in the first quarter, but Final GDP was a major disappointment. First quarter GDP was revised downwards to 0.3%, compared to 0.5% in the preliminary GDP report. At the same time, the economy has posted growth for five consecutive quarters – the first time that has occurred in over 10 years. Japan has benefited from a stronger global economy, notably the manufacturing and export sectors. However, domestic consumption remains sluggish, and household spending contracted 1.4% on year in April. The Bank of Japan will hold a policy meeting on Thursday, and is expected to maintain its ultra-loose monetary stance in order to prop up inflation and domestic demand. Given that the economy has strengthened, policymakers may be looking to exit current policy, and analysts will be looking for nuances in BoJ language (in the rate statement or BoJ Governor Haruhiko Kuroda's press conference) which could point to a more hawkish monetary stance. If the central bank does hint at a tighter policy, the yen could gain ground.

The Federal Reserve will meet on Wednesday, and the markets have priced in a rate hike, which would be the second increase in 2017. The likelihood continues to hover around the 90% level, so it would be a shock if the Fed did not make a move. However, an additional rate hike seems much less likely in the third quarter, with the CME forecasting the odds of a September move at just 26%. The markets are skeptical about another rate hike in the second half, unless the political situation in Washington shows signs of stabilizing. The Trump administration remains in damage control mode, as it's difficult to assess the damage from the dramatic evidence of ex-FBI director James Comey. With dark clouds hovering above the White House, the Fed and the markets have serious concerns with regard to Trump's ability to move forward with his economic agenda.

3 positions were entered last week with total profit of 210 points and the positions are listed below.
 

 2 Jun : GBP/JPY - Short at 143.65, exited at 141.65 (+ 200 points)
 2 Jun : EUR/GBP - Short at 0.8735, exited at 0.8725 (+ 10 points)
 9 Jun : USD/CAD - Short at 1.3500,

|                 AUD          EUR/JPY           EUR/GBP         CAD          GBP         GBPJPY
Jan             - 15             -275                - 35            -120
Feb           + 140            -17                  - 40             +11
Mar            - 20            +115                +132           - 19
Apr             + 30                                  - 40           +120                              + 45
May                             - 55                  +100          - 60               -65             -60         
Jun            + 1                                    + 10                                                +200
Jul            
Aug          
Sep              
Oct           
Nov         
Dec                                                                                                                                               
Y-T-D        + 136           - 232               +127            + 98             -65            +185

6 positions were entered among all 4 currency pairs with total profit of 65 points and the positions are listed below:

 1 Jun : EUR/USD - Long at 1.1205, exited at 1.1235 (+ 30 points)
 8 Jun : EUR/USD - Long at 1.1240, exited at 1.1210 (- 30 points)
 8 Jun : USD/JPY - Short at 110.20, exited at 110.55 (- 35 points)
 9 Jun : GBP/USD - Short at 1.2760, exited at 1.2660 (+ 100 points)
 9 Jun : USD/CHF - Short at 0.9720,
12 Jun : EUR/USD - Short at 1.1230,

|                 JPY             EUR             CHF            GBP

Jan          + 167             - 85              - 10            + 50
Feb          + 200            +150             +93            - 59
Mar              -23              -70               -23            - 35
Apr             + 65            + 93             + 50            - 40
May            - 65             - 35             + 100          -175
Jun            - 35                 0                                + 100
Jul           
Aug         
Sep             
Oct         
Nov        
Dec                                                                                               
Y-T-D       + 308            + 48               +210           -149     

USD/CHF - 0.9691

Most recent candlesticks pattern : N/A

Trend                                    : Near term down

Tenkan-Sen level                  : 0.9683

Kijun-Sen level                    : 0.9692

Ichimoku cloud top                 : 0.9697

Ichimoku cloud bottom              : 0.9677

Original strategy :

Sold at 0.9720, Target: 0.9620, Stop: 0.9720

Position : - Short at 0.9720

Target :  - 0.9620

Stop : - 0.9720

New strategy  :

Hold short entered at 0.9720, Target: 0.9620, Stop: 0.9720

Position : - Short at 0.9720

Target :  - 0.9620

Stop : - 0.9720

Although dollar staged a strong rebound from last week’s low of 0.9613 to 0.9728 (last week’s high), the subsequent retreat has retained our bearishness and consolidation with mild downside bias remains for weakness to 0.9657 support, however, break of 0.9640 is needed to signal the rebound from 0.9613 has ended, bring retest of this level first. A break below this level would extend recent decline to 0.9600-05 (50% projection of 1.0100-0.9692 measuring from 0.9808) later.

In view of this, we are holding on to our short position entered at 0.9720. Above said resistance at 0.9728 would abort and signal a temporary low has been formed at 0.9613 last week instead, bring a stronger rebound to 0.9761 resistance but price should falter below resistance at 0.9808.

GBP/USD - 1.2655

Most recent candlesticks pattern   : N/A

Trend                                 : Near term down

Tenkan-Sen level                 : 1.2710

Kijun-Sen level                    : 1.2711

Ichimoku cloud top              : 1.2807

Ichimoku cloud bottom        : 1.2753

New strategy  :

Look to sell again higher

Position : -

Target :  -

Stop : -

As the British pound has retreated after faltering below indicated resistance at 1.2780, adding credence to our bearish view that the rebound from 1.2635 has ended at 1.2780 and bearishness remains for retest of said support at 1.2635, however, break there is needed to confirm recent decline has resumed for weakness to 1.2616 (previous resistance turned support) and possibly towards 1.2575-80 but reckon downside would be limited to 1.2550.

In view of this, would not chase this fall here and would be prudent to stand aside for now. Above 1.2710-15 would prolong consolidation and risk recovery to 1.2745-50 but said resistance at 1.2780 should limit upside and bring another decline. Above 1.2780 would defer and risk a stronger rebound to 1.2800-05 but break there is needed to signal a temporary low has been formed, bring further gain to 1.2830-35 but price should falter below 1.2870-75 and bring another decline later.

EUR/USD - 1.1205

Most recent candlesticks pattern   : N/A

Trend                      : Up

Tenkan-Sen level              : 1.1212

Kijun-Sen level                  : 1.1203

Ichimoku cloud top             : 1.1225

Ichimoku cloud bottom      : 1.1200

Original strategy  :

Sold at 1.1230, Target: 1.1130, Stop: 1.1265

Position : - Short at 1.1230

Target :  - 1.1130

Stop : - 1.1265

New strategy  :

Hold short entered at 1.1230, Target: 1.1130, Stop: 1.1240

Position : - Short at 1.1230

Target :  - 1.1130

Stop : - 1.1240

Although the single currency rebounded after falling to 1.1166 on Friday, as price has retreated after faltering below indicated resistance at 1.1237, retaining our view that consolidation below this level would be seen and as long as said resistance holds, bearishness remains for weakness to 1.1180, break there would signal the aforesaid rebound has ended, bring retest of 1.1166 but below there is needed to extend the fall from 1.1285 top for retracement of early upmove to 1.1145-50 and then towards 1.1120, however, support at 1.1109 should hold from here.

In view of this, we are holding on to our short position entered at 1.1230. Only above 1.1265-70 would abort and bring retest of 1.1285, only break there would revive bullishness and confirm recent upmove has resumed and extend further gain to previous chart resistance at 1.1300, break there would encourage for headway to 1.1340-45 and later towards chart point at 1.1366.

USD/JPY - 109.95

Most recent candlesticks pattern   : N/A

Trend                      : Down

Tenkan-Sen level              : 110.04

Kijun-Sen level                  : 110.26

Ichimoku cloud top             : 110.37

Ichimoku cloud bottom      : 110.00

New strategy  :

Stand aside

Position :  -

Target :  -

Stop : -

Although the greenback jumped to as high as 110.81, lack of follow through buying on break of previous resistance at 110.73 and the subsequent retreat suggest consolidation below 110.81 would be seen and pullback to 109.75 cannot be ruled out, however, break of this support is needed to signal top is formed, bring further fall towards 109.38 but only break there would indicate the rebound from 109.11 has ended at 110.81, bring retest of this level later.

On the upside, above 110.50-60 would bring test of 110.81 but break there is needed to signal the erratic rise from 109.11 low is still in progress for further gain to 111.00 and possibly 111.20-30 but price should falter well below resistance at 111.71, bring retreat later. As near term outlook is mixed, would be prudent to stand aside in the meantime.

EURJPY stalled the recent uptrend at 125.80 on May 16. The bias has turned neutral in the near-term.

There is immediate resistance at 124.00. A breach above this level would see a re-test of the 125.80 high and from here bring about a resumption of the uptrend from 114.84 to 125.80. But looking at momentum indicators, there is risk to the downside, with RSI dipping below 50 and MACD sloping down. This reduces the odds for a bounce higher. Immediate support lies at 122.60 and a break below this would expose support at 120.60. Below this, the level at 118.90 comes into view as further support.

For now, the short-term bias is neutral, with the market trapped between 122.60 and 125.80 but the pause in the uptrend could be temporary as the 50-day and 200-day moving averages are positively aligned and the market is above the daily Ichimoku cloud. Only a move below 120.60 would reverse the recent uptrend that has been in place since the rise from the 115 area.