Normalcy Returns to Currency Markets

A sense of normalcy has returned to the Forex desks this morning as the final round of the French elections had the expected results. While this morning’s currency movements have been rather subdued, most of the early fanfare was about pre-positioning on risk trades if anything else, as EURJPY traded 124.55 USDJPY 113.10. And while US equity futures opened a touch higher, the overhang from last week’s oil price action is still too fresh in investors’ minds to press higher into uncharted territory this morning.

European equity markets had a bounce in their step heading into the weekend and we expect this positivity to hold near term. I suspect the bigger question for the Forex market will be the interest rate markets reaction to the Macron victory and how the ECB views the current landscape. After round one of the French elections, ECB previously acknowledged that political risks are petering out and data releases remain stable, but Draghi is still unwilling to tack too far off their charted course. Until there’s a definitive change in the ECB stance, the EURUSD upside momentum could struggle. Markets need some hint of policy convergence from the ECB to kick the long EUR trade into high gear.

Friday’s US non-farm payroll data did little to excite the Dollar bulls. While the headline print came in above consensus, a despondent wage growth component has weighed on dollar sentiment. However, headline data is very consistent with the Federal Reserve Board’s message, as the strong labour market paves the way for a June interest rate hike.

In China, we have key trade data coming out today. This print will be closely monitored as concerns ratchet higher over China’s tightening of financial conditions. Over the weekend, it was reported that Chinese FX reserves rose for a third straight month, which is more than markets had expected. FX reserves rose USD21bn to 3.03tn in April vs. consensus expectations of 3.02tn. The Yuan has been incredibly stable this year’s the US dollar ascent has tempered and capital outflows are receding.

WTI

I guess the big question for commodity traders is what next for oil prices? I think one takeaway from Friday’s oil price tumble was the lack of panic in the equity market. That, despite the significant drop in equity sector stocks, in general, major indices remained relatively composed and the currency market, as a whole, behaved in a contained manner.

The near-term outlook is clouded as a mix of bargain hunters play au contraire. The catalyst that triggered the wave of negativity on Friday, the global supply gut, is real and showing little signs of shrinking. Clearly, OPEC is unable to turn the oil markets upside down as they’re done in the past. While we may have seen the worst of the near move, the supply concerns are still with us and WTI will struggle to regain the $50.00 mark near term, despite a possible extension of OPEC production cuts at month’s end.

Australian Dollar

The Aussie is still feeling the overhang from the latest commodity unwind, which is weighing on any upward momentum. Until base metals show signs of convincingly reversing higher, I expect the Aussie bulls to remain very defensive. In this equation, China will be the force majeure, as the market is still deeply concerned with mainland’s weaker economic data in the face of rising domestic interest rates.

On the plus side for risk, there has been little contagion from last week’s oil price plummet, as the global equity market remained buoyant.

In early trade, the Aussie has breached the .7400 handle on very disappointing Australian Building approvals for March coming in at -13.4 % vs -4% expected

Japanese Yen

With much of the French election storyline priced in this morning, USDJPY bounces above 113.0 on risk appear to be unwinding, as the markets pivot back to last Friday’s weaker than expected average hourly wages component of NFP. However, much of this morning reversal has much to do with the unwinding this morning of the EURJPY trade, which topped near 124.50 in early trade.

Euro

There are no real surprises this morning as the markets had priced in this outcome. Now dealers will pivot back to the ECB expectations while taking profit on the long EURUSD, as there was little follow through on EURUSD topside this morning.

Well that's that. There will be no Trump or Brexit moment in France and stability inside the Eurozone remains.

Not to mention stability of EUR/USD.

Here are the results as of this morning:

Yes, Emmanuel Macron has pulled off an extraordinary election victory!

Just one year ago, his political party didn't even exist. Now with Macron at the helm, they're governing France. A truly amazing story.

Le Pen's National Front, while offering right leaning change, is still seen as ‘toxic' in the eyes of many French voters, even those on the right. This reputation proved too much in convincing the mainstream.

But lessons will be learned and by beating out the two historically established parties, this shows that the appetite for right wing change is still alive and well.

Taking a look at the Euro, the EUR/USD triangle broke out to the upside on a gap-up, but was quickly smashed back down as soon as the market opened.

EUR/USD Daily:

Zooming in and we can see how quickly the gap was filled:

EUR/USD 15 Minute:

It's always hard to predict whether this is going to be one of those times, but with EUR/USD rallying as hard as it did following the first round, this was a huge buy the rumour, sell the fact trade.

We have our horizontal range support/resistance levels in place. How do you think it's going to react off them from here?

France elected Emmanuel Macron President with a larger-than-anticipated margin on Sunday and the euro opened above 1.1000. The euro was also the best performer last week while the yen lagged. CFTC positions showed narrowing GBP shorts. After closing our EURUSD long at a profit on Friday, we opened a new long ahead of today's elections, while sticking with the cable long from 2 weeks ago.

With most votes counted, Macron leads the election with more than 64% compared to 36% for Le Pen. His victory underscores how markets and many commentators failed to understand France. It's also a reminder that while the political sands are shifting globally, the regional differences are profound.

His win was no surprise although email leaks late Friday added some angst. There was always the minute risk of a shock win for Le Pen but more than anything, the reason for the small euro climb at the open was that the margin of victory exceeded the 60-40% anticipated.

At times like this, markets often focus on the message from the incoming President but we believe Le Pen's comments are more profound. She said her party must reinvent itself and there is talk that will start with a new name. But more important was a hint of what's to come from her father, who was the former partly leader. He said her message was undermined by threats to quit the euro and EU.

If he's right (and if he's reading the political mood correctly) then populist voices across Europe might begin to redirect their energy away from the euro and more towards immigration or economic nationalism. That will leave the currency far less vulnerable in future elections. In the short term, it's a better potential reason to buy the euro than Macron's win alone.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -2K vs -21K prior GBP -81K vs -91K prior JPY -23 vs -27K prior CHF -18K vs -17K prior CAD -48K vs -43K prior AUD +43K vs +43K prior NZD -12K vs -15K prior

The market continued to pile into Canadian shorts through Tuesday but the sharp retracement on Friday and bounce in oil prices showed the danger of joining in a crowded trade. Meanwhile, the exodus from cable shorts continues as it flirts with 1.30.

USDCHF: The pair closed lower the past week leaving risk of more declines on the cards in the new week. On the downside, support lies at the 0.9800 level. A turn below here will open the door for more weakness towards the 0.9750 level and then the 0.9700 level. Its daily RSI is bearish and pointing lower suggesting further weakness. On the upside, resistance resides at the 0.9950 level where a break will clear the way for more strength to occur towards the 1.0000 level. Further out, resistance comes in at the 1.0050 level. All in all, USDCHF faces further weakness risk in the new week.

Euro surged broadly last week and led European majors higher on expectation that pro-EU centrist Emmanuel Macron will have an easy win in French presidential election this Sunday. Traders seemed to have ignored the news about hacking attack on Macron's campaign. With 20 pt lead over EU-sceptic far-right Marine Le Pen, there should be enough safety margin for Macron. The focus is now on the reactions in that markets on the results during the initial part of next week. As Macron's win should be well priced into the markets, there is prospect of a setback in Euro after the facts. However, judging from the strength in European indices, it's believed that there is solid underlying optimism in the European economy. And, strategy could indeed be "buy-pull-back" rather that "sell-on-news".

CAC acclerated to 9 year high

French CAC 40 surged strongly to close at 5432.40 last week, up 203.85 pts for the week, or 3.9%, at the highest level in more than 9 years. The strength is even more impressive comparing e to the close at 5059.20 two Fridays ago, just before the first round of election. CAC is clearly staying in medium term up trend holding well above rising 55 day EMA. Momentum was also strong as seen in the upside acceleration in daily MACD. Overbought condition in daily RSI could limit upside potential in near term. But as long as 5261.73 support holds, the up trend is still in health state to extend higher.

DAX hits record too

German DAX also jumped to record high at 12716.89, up 281.1 pts, or 2.2%. Similar to CAC, it's in healthy medium term up trend, staying solidly above rising 55 day EMA. Overbought condition in daily RSI could limit upside in near term. But overall, the in dice is expected to extend the record run ahead.

Euro solid against Swiss, Yen, Aussie and Loonie

Against other major currencies, Euro's strength is admittedly uncertain against Sterling as seen in EUR/GBP. EUR/USD's rise from 1.0339 are still viewed as a corrective move. However, the common currency has been solid against others and showed sign of further strength in crosses.

EUR/CHF's recent rise indicates medium term bottoming at 1.0629 after defending 38.2% retracement of 0.9771 to 1.1198 at 1.0653 again. And the long term correction from 1.1198 should have finished too. We'd looking at a firm break of 1.0897 resistance in near term to finally establish medium term momentum.

The picture in EUR/JPY is even clearer with the correction from 124.08 completed with three waves down to 114.84. Impulsive nature of the rise from 114.84 affirmed the view that it's resuming whole rise from 109.03. 124.08 level might provide some resistance initial. But we'd expect a break there to 126.09 key resistance at least. There is prospect of extending the rally to 100% projection of 109.03 to 124.08 from 114.84 at 129.89.

EUR/AUD's strong rally and firm break of 1.4721 resistance also confirms trend reversal. That is, the correction from 1.6587 has completed at 1.3624 after defending 1.3671 key support level. Further rally should be seen to 61.8% retracement of 1.6587 to 1.3624 at 1.5455.

EUR/CAD's strong rise last week should also confirm completion of the correction from 1.6103, with three waves down to 1.3782. Further rally should be seen through 1.5279 resistance to retest 1.6103 in medium term.

EUR/GBP to look into BoE Super Thursday

EUR/GBP stayed in right range last week and it's uncertain whether the corrective move from 0.9304 is still heading lower. But the direction should be determined in the coming weeks. BoE will have another Super Thursday this. The pound was first lifted this year as one MPC member Kristin Forbes voted for a rate hike in BoE policy meeting. Sterling was then given another boost after Prime Minister called for a snap election on June 8, ahead of formal Brexit negotiation with EU. Market's eyes will be on the updated economic projections to be published in the quarterly inflation report. In particular, any updated inflation forecasts would give the Pound a boost.

Dollar to shy from spotlight

Dollar is not having a very clear direction for now. Weakness in the dollar index was mainly due to Euro's strength and that was some what countered by weakness in yen. Fed's policy path for the year is clear. Markets are pricing in more than 70% chance of a rate hike in June. Fed is expected to raise interest rates a total of three times this year and then start shrinking the balance sheet. Last week's FOMC statement and non-farm payroll provided little change to such expectation. The greenback would likely shy away from spotlight in near term.

Buy EUR/JPY and EUR/AUD on dips

Regarding trading strategy, we were somewhat correct in calling for buying GBP/JPY and USD/CAD last week. But our strategies were too conservative and with the orders not filled. We'd cancel the strategies first. Instead, we'll look for opportunity to buy Euro on dip this week is there is a "sell-on-news" pull back. We'd firstly buy EUR/JPY at 121.60, close to 4 hour 55 EMA, with a stop at 120.50, below 120.60 support. Secondly, we'll also buy EUR/AUD at 1.4660, above 1.4649 support, with stop at 1.4430, below 1.4442 support.

USD/CAD Weekly Outlook

USD/CAD surged to as high as 1.3793 last week but lost momentum ahead of 1.3838 fibonacci level. Choppy rise from 1.2460 is seen as a corrective move. We'd stay cautious on topping at around 1.3838. Focus will also be on 1.3534 resistance turned support. Break there will indicate reversal.

Initial bias in USD/CAD is neutral this week for consolidation first. In case of another rise, we'll be cautious on topping at around 1.3838 fibonacci level. Meanwhile, consider bearish divergence condition in 4 hour MACD, break of 1.3534 support will argue that rise from 1.2968 is already completed. In such case, intraday bias will be turned back to the downside for 1.3222 support.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The first leg has completed at 1.2460. Rise from 1.2460 is seen as the second leg and would end at around 61.8% retracement of 1.4689 to 1.2460 at 1.3838. Break of 1.3222 should indicate the start of the third leg while further break of 1.2968 should confirm. Nonetheless, sustained trading above 1.3838 would pave the way to retest 1.4689 high.

In the longer term picture, rise from 0.9056 (2007 low) is viewed as a long term up trend. It's taking a breath after hitting 1.4689. But such rise expected to resume later to test 1.6196 down the road.

EUR/USD's rise resumed last week and reached as high as 1.0999 last week. Further rise would be seen to 1.1058 projection level. But we maintain that rise from 1.0339 is a corrective move. Hence, we'd expect strong resistance around 1.1058 to limit upside to bring near term reversal.

Initial bias in EUR/USD remains on the upside this week. Current rally would be seen to 100% projection of 1.0339 to 1.0828 from 1.0569 at 1.1058. At this point, rise from 1.0339 is still seen as a corrective move. Hence we'd expect strong resistance from 1.1058 projection to limit upside and bring near term reversal. On the downside, break of 1.0874 support will turn bias back to the downside for 1.0569 support first.

In the bigger picture, as long as 1.1298 key resistance holds, whole down trend from 1.6039 (2008 high) is still expected to continue. Break of 1.0339 low will send EUR/USD through parity to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. However, considering bullish convergence condition in weekly MACD, break of 1.1298 will indicate long term reversal.

In the long term picture, the down trend from 1.6039 (2008 high) is still in progress and there is no clear sign of completion. We'd expect more downside towards 0.8223 (2000 low) as long as 1.1298 resistance holds. However, firm break of 1.1298 should now confirm long term reversal.

USD/JPY's rally from 108.12 extended to as high as 113.04 last week. It formed a temporary top there after hitting channel resistance. But still, we'd holding on to the view that corrective fall from 118.65 could be completed with three waves down to 108.12. Rise from 108.12 is expected resume later through 115.49 resistance.

Initial bias in USD/JPY remains neutral this week for consolidation below 113.04 temporary top. Further rise is still expected as long as 110.86 support holds. Above 113.04 will target 115.49 resistance. Firm break there will resume larger rally from 98.97 to 125.85 high. However, break of 110.86 support will keep USD/JPY inside near term falling channel and will turn bias back to the downside for 108.12 and below to extend the decline from 118.65.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. It's uncertain whether it's completed yet. But in case of another fall, downside should be contained by 61.8% retracement of 75.56 to 125.85 at 94.77 to bring rebound. Meanwhile, break of 115.49 resistance will extend the rise from 98.97 to retest 125.85. Overall, rise from 75.56 is still expected to resume later after the correction from 125.85 completes.

In the long term picture, the rise from 75.56 long term bottom to 125.85 medium term top is viewed as an impulsive move. Price actions from 125.85 are seen as a corrective move which could still extend. But, up trend from 75.56 is expected to resume at a later stage for above 135.20/147.68 resistance zone.

GBP/USD's rally continued last week even though it has been losing upside momentum. Further rise should be seen to 1.3184 projection level. But overall, price actions from 1.1946 are viewed as a corrective pattern. Hence we'd start to look for reversal signal above 1.3184.

Initial bias in GBP/USD is back on the upside this week. Further rally should be seen to 161.8% projection of 1.2108 to 1.2614 from 1.2365 at 1.3184. At this point, price actions from 1.1946 are still interpreted as a correction pattern. Therefore, we'd expect strong resistance below 1.3444 to bring larger down trend resumption. On the downside, break of 1.2830 support will indicate short term topping. In such case, intraday bias will be turned back to the downside for 1.2614 support.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term reversal yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.

In the longer term picture, no change in the view that down trend from 2.1161 is still in progress. Current momentum suggests that the down trend will go deeper than originally expected to 100% projection of 2.1161 to 1.3503 from 1.7190 at 0.9532.

USD/CHF's fall from 1.0107 resumed last week and reached as low as 0.9858. Such decline is seen as part of the corrective pattern from 1.0342. Deeper fall would be seen to 0.9812 in near term. But break of 0.9812 should be brief and such correction should finish after that.

Initial bias in USD/CHF remains on the downside this week for 0.9812 next. Note again that price actions from 1.0342 are seen as a correction. Break of 0.9812 should be brief and we will look for bottoming signal below there. On the upside, break of 0.9956 resistance will suggest that fall from 1.0107 is completed and turn bias back to the upside for this resistance.

In the bigger picture, we're still maintaining that firm break of 1.0342 key resistance is needed to confirm underlying bullish momentum in the pair. However, the corrective nature of the fall from 1.0342 is starting to give the medium term outlook a bullish favor. Hence, in stead of looking for topping signal around 1.0342, we'd now pay closer attention to upside acceleration as USD/CHF approaches this level again.

The long term outlook in USD/CHF stays a bit mixed for the moment. But in case of another medium term fall, we'd expect strong support from 0.9443/9548 support zone. Meanwhile, firm break of 1.0342 will target 38.2% retracement of 1.8305 to 0.7065 at 1.1359.

AUD/USD's fall from 0.7748 last accelerated to as low as 0.7366 last week. Bearish outlook is unchanged and further fall is expected to 0.7144/7158 support zone. However, there is no clear sign of larger down trend resumption yet. Hence we'll be cautious on strong support from0.7144/58 to contain downside and bring rebound.

Initial bias in AUD/USD is neutral this week for consolidation above 0.7366 temporary low. Upside of recovery should be limited below 0.7555 resistance and bring fall resumption. Break of 0.7366 will turn bias back to the downside for 0.7144/7158 support zone. We'll be cautious on bottoming there. On the upside, break of 0.7555 resistance will argue that fall from 0.7748 has completed and will turn bias back to the upside.

In the bigger picture, we're still treating price actions from 0.6826 low as a correction pattern. And, as long as 38.2% retracement of 0.9504 to 0.6826 at 0.7849 holds, long term down trend from 1.1079 is expected to resume sooner or later. Break of 0.6826 low will target 0.6008 key support level. However, firm break of 0.7849 will indicate that rise from 0.6826 is developing into a medium term rebound, rather than a sideway pattern. In such case, stronger rise should be seen to 55 month EMA (now at 0.8115) and above.

In the longer term picture, while the down trend from 1.1079 might extend lower, we're not anticipating a break of 0.6008 (2008 low) yet. We'll look for bottoming above there to reverse the medium term trend.