EUR/USD: Overshoot & Set To Correct S/T; Wider Range Ahead – BTMU

BTMU FX Strategy Research notes that there are a number of short-term metrics that suggest EUR/USD has overshot and therefore could correct over the short-term.

“There is the added element of increased volatility risk due to the potential lack of liquidity in the early part of next week due to US Independence Day on Tuesday. .

FOMC minutes will be released on 5th July from the June meeting when the fed funds rate was hiked. ECB Chief Economist Peter Praet will speak on Tuesday and his comments may be important following Draghi’s comments this week. We lean toward a bearish bias on the basis that the move this week may have overshot,” BTMU argues. 

In line with this view, BTMU holds a bearish bias on EUR/USD next week but has widened out the range to 1.1150-1.1600 to highlight the risk that momentum could take this move further still in the week ahead and equally, there is scope for a notable correction back the other way.

Source: BTMU Research

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CAD: The Loonie Takes Flight; What's The Trade? – SocGen

Societe Generale FX Strategy Research notes that the hawkish commentary from Bank of Canada officials this month has taken the FX market by storm.

“The signal from the BoC is very clear, and a rate hike is imminent, if not in the July meeting, then in September. A full economic update will be released with the BoC’s monetary policy report after the 12 July meeting,” SocGen argues. 

“We had maintained that the Canadian dollar is undervalued, and we had previously expected USD/CAD to trade to 1.30 by early 2018. That target level has now been reached, and the medium-term outlook for the CAD has turned more much bullish given the BoC’s hawkish shift. The loonie’s undervaluation should support further appreciation. Our technical strategist has pointed to USD/CAD 1.25 as the target once support at 1.30 is broken, as is likely in coming weeks,” SocGen adds. 

What’s the trade?

Perhaps more interesting from a relative viewpoint is to go short NZD/CAD following its failure to break through 0.98 earlier this month. A decline to NZD/CAD 0.92 by year-end seems to be in the cards now. A rally in crude oil prices towards year-end would be an added benefit to the loonie, ” SocGen advises.

Source: Societe Generale Cross Asset Research

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GBP: Supported N-Term But Further Upside Likely Limited; Where To Target? – ANZ

ANZ FX Strategy Research notes that GBP continues to show signs of stabilizing against the backdrop of an improvement in the UK current account deficit.  

“The sharp spike in inflation (2.9% y/y) has raised the debate over whether or not interest rates may need to rise.

Sterling may benefit from some near term weakness in the USD, but we view the upside as limited,” ANZ argues.

ANZ targets GBP/USD at 1.32 in Q3 before resuming weakness towards 1.127 by year-end.

Source: ANZ, eFXnews™

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USD/JPY drifting higher – Forecast July 3-7

Dollar/yen drifted to the upside, as the Bank of Japan was left alone as the most dovish central bank. Has the downtrend channel been broken for good? We are still within the wider range: 108.10 to 114.30, but higher.

This is a new format of the outlook and feedback is welcome. We cover the top fundamental news and outlook, a technical analysis on the daily chart and finally sentiment for the pair moving forward.

USD/JPY fundamental movers

Central bankers and Trump care

The highly anticipated speech by Janet Yellen did not result in anything related to monetary policy. However, some of her colleagues expressed concerns about slowing inflation. This included Williams and Harker. Fischer, No. 2 at the Fed, and also Yellen, did mention that stock valuations are somewhat “rich”, but that did not stop the stock markets.

Also, the BOJ’s governor spoke up in the ECB’s conference in Portugal. He stood out by not being optimistic: Carney, Draghi, and Poloz were all optimistic.

On the political front, Trump’s health care bill was retracted by Senate Republicans after they failed to muster support. This setback implies a delay in tax reform that the dollar wants to see. However, it may also be temporary.

Busy start to July, Q3, and H2

The upcoming week opens the second half of the year and it’s with a bang. We have a full build up to the US Non-Farm Payrolls, with a small break for the 4th of July festivities.  And, the Fed releases its meeting minutes, which may be somewhat less optimistic than the statement. 

See all the main events in the Forex Weekly Outlook[1]

In Japan, the Tankan indicators are worth mentioning: these are released on Sunday at 23:50 GMT. However, as usual, the US indicators will drive the pair more than anything else.

Key news updates for USD/JPY

Updates:

USD/JPY Technical Analysis

The pair is now trading in a higher range. The bottom is 112.20 that worked as resistance in April and May. It is very closely backed up by 111.80 that served as resistance in the past. The top is 113, a round number that was also the bottom when the pair traded at a higher range.

Further resistance is at 113.60 which served as resistance in the past. The cycle high of 114.30 is a strong level of resistance, the highest since March. Further above, 115 and 115.35 are notable.

Looking down, 110.70 was a separator of ranges in June and remains important. 109.60 was a gap line in late April, a gap that was never closed.

In June, the pair found support several times at 109.10 and this also works as support. Further below, the cycle low of 108.10 is of high importance. Looking lower, we are back to levels seen in November, but the door is basically open to 105.

Downtrend Channel

As the chart shows, the pair is experiencing lower highs and lower lows, forming a downtrend channel since the end of May. The lower highs are more significant than the lows.

USD/JPY Daily Chart

USD/JPY Sentiment

I am neutral on USD/JPY

While the Federal Reserve is more dovish than the perceived hawkishness seen in the recent rate decision, the BOJ is not less dovish.

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Forex Weekly Outlook – July 3-7 2017

The US dollar and the Japanese yen were on the back foot as optimism gripped markets Will the party continue? The first week of the second half features a full build up to the all-important Non-Farm Payrolls as well as other top-tier figures. Here are the highlights for the upcoming week.

Some say we have seen a watershed week when many central banks expressed optimism and hawkishness. Draghi talked about reflation[1] and a removal of stimulus, sending EUR/USD to the highest in a year[2]. Carney changed his mind[3] after only one week and talked about removing stimulus. The Canadian dollar also continued higher[4], enjoying the hawkishness and rising oil. What about the dollar? It suffered some doubts about inflation[5] from various Fed officials. However, it did beat the yen that remains the most dovish central bank out there.

7

  1. Chinese Caixin Manufacturing PMI: Monday, 1:45. China is the world’s No. 2 economy and any changes in its growth have an impact felt all over the world. The independent measure by Caixin provides a forward-looking gauge at the Chinese economy. In the past three months, the indicator fell short of expectations, with a slide to 49.6 in May. Any figure under 50 represents contraction. A similar score is expected now.
  2. US ISM Manufacturing PMI: Monday, 14:00. The US manufacturing sector is relatively small but remains important. Back in May, ISM’s purchasing managers’ index showed steady growth with a score of 54.9 points[6]. This is the first hint towards Friday’s Non-Farm Payrolls.
  3. Australian rate decision: Tuesday, 4:30. The Reserve Bank of Australia kept its interest rate unchanged since lowering it to 1.5% in August last year. No change is expected now. The focus is on the accompanying statement. Given the recent rise in the Aussie, Governor Lowe and his colleagues could try to talk down the currency.
  4. UK Services PMI: Wednesday, 8:30. The UK economy leans heavily towards services. After a few solid months, May saw a drop of this key indicator to 53.8 points[7], representing more tepid growth. It goes hand in hand with the poor growth in the UK economy.
  5. US FOMC Meeting Minutes: Wednesday, 18:00. These are the minutes from the June decision, which resulted in a hawkish hike[8]. Yellen expressed optimism about the economy, jobs and even shrugged off inflation on “one off” figures. Since then, some members have expressed concerns over slowing inflation. Will these concerns be repeated now? It is important to remember that the document is edited until the very last moment. FOMC members know that markets are watching.
  6. US ADP Non-Farm Payrolls: Thursday, 12:15. The report is usually released on Wednesday, but it is delayed due to the 4th of July celebrations. ADP’s report for private sector jobs was very positive in May, showing a leap of 253K jobs[9], far better than expected. However, this was not well correlated with the actual private sector jobs gained according to the official BLS report.
  7. US jobless claims: Thursday, 12:30. The weekly barometer of jobless claims has been stable around 240K in recent weeks. It is a reminder that the number of the jobless is sliding constantly and serves as another minor indicator for the NFP on Friday.
  8. ISM Non-Manufacturing PMI: Thursday, 14:00. The report for the services sector is a very important indicator for the NFP. Contrary to the previous month, this report is released just on time to alter expectations. Back in May, the indicator slid from 57.5 to 56.9[10], still showing robust growth in the biggest sector in America. Watch out for the employment component in the specific content of the jobs report.
  9. Crude Oil Inventories:  Thursday, 14:30. Also here, the report is postponed from Wednesday to Thursday. The amount of stored oil is not falling very fast or at times it is rising. This has kept the pressure on oil prices. Apart from the immediate impact on the Canadian dollar, it has a wider impact on the greenback: there is an inverse correlation between the dollar and oil prices. Lower oil prices could help the dollar.
  10. US Non-Farm Payrolls: Friday, 12:30. The king of forex indicators is with us and wages remain no less important than job growth. Back in May, the report was very disappointing[11], but the Fed raised rates anyway. Only 138K jobs were gained and year over year wage growth advanced by only 2.5%, remaining stuck. While the next rate decision is not accompanied by new forecasts, it could certainly impact the tone of the Fed.
  11. Canadian jobs report Friday, 12:30. Released simultaneously with the US jobs report, Canada can expect better numbers. So far in 2017, the Canadian economy gained more positions than expected and participation is rising. The report for May was a blockbuster one[12]: 54.5K jobs gained. The unemployment rate stood at 6.8%.

*All times are GMT

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Fed Favorite inflation figure is down to 1.4% – more USD falls coming?

The Core PCE Price Index is the favoured measure of inflation by the Federal Reserve. It shows that underlying inflationary pressured continue dropping and may contribute to a more dovish tone.

The data for the month of May was no surprise: the PCE follows the CPI, which was already published and also showed a drop[1]. Nevertheless, it is important for FOMC officials to see it in the data they cherish most.

Other figures were mixed: personal spending advanced by 0.4%, better than expected, but on top of a downwards revision. Personal spending increased by 0.1%, as expected, yet at a lower pace than 0.4% seen beforehand.

The revised version of consumer sentiment, which had the last word of the week, saw an upgrade to 95.1 points and provided a sweetener.

USD had a bad week – more to come?

All in all, the US dollar is closing a negative week. It managed to match the yen but saw substantial losses against the euro[2], the pound[3], and also to commodity currencies, with the loonie standing out[4] amid higher oil prices.

The hawkishness of other central bankers exposed some dovishness at the Fed, even if this dovishness does not come from the top.

A new month and a new quarter begin next week, and we’ll get the all-important Non-Farm Payrolls. The dollar will need a salary rise to get some fresh energy. Otherwise, falling inflation and a falling potential for future inflation could push the Fed to abandon its hawkish tone.

Some members are already concerned but we haven’t heard a change of mind from the Fed.

More: Dollar demise: no place to hide, at least for now[5]

Here is the dollar index weekly chart, showing the big fall in the value of the greenback.

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CAD: The Loonie Takes Flight; What’s The Trade? – SocGen

The Canadian GDP report came out as expected and did not stop the Canadian dollar. USD/CAD is firmly under 1.30. What’s next?

Here is their view, courtesy of eFXnews:

Societe Generale FX Strategy Research notes that the hawkish commentary from Bank of Canada officials this month has taken the FX market by storm.

“The signal from the BoC is very clear, and a rate hike is imminent, if not in the July meeting, then in September. A full economic update will be released with the BoC’s monetary policy report after the 12 July meeting,” SocGen argues.

“We had maintained that the Canadian dollar is undervalued, and we had previously expected USD/CAD to trade to 1.30 by early 2018. That target level has now been reached, and the medium-term outlook for the CAD has turned more much bullish given the BoC’s hawkish shift. The loonie’s undervaluation should support further appreciation. Our technical strategist has pointed to USD/CAD 1.25 as the target once support at 1.30 is broken, as is likely in coming weeks,” SocGen adds.

What’s the trade?

Perhaps more interesting from a relative viewpoint is to go short NZD/CAD following its failure to break through 0.98 earlier this month. A decline to NZD/CAD 0.92 by year-end seems to be in the cards now. A rally in crude oil prices towards year-end would be an added benefit to the loonie, ” SocGen advises.

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Preview: US: Core PCE Price Index

Preview: US: Core PCE Price Index

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Preview: EMU: Euro Area Flash Inflation

Preview: EMU: Euro Area Flash Inflation

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EUR: What Has Changed? Where To From Here? – Danske

Danske Bank FX Strategy Research notes that recent ECB communication topped by Draghi’s hawkish speech on Tuesday has let the stimulus exit spirits out of the bottle and this has sent EUR/USD to New Year highs.

“In our view, any attempts by the ECB to plug the bottle from here will most likely only be able to send EUR/USD lower temporarily” Danske adds. 

What has changed?

“While we thought previously that Draghi and co would hesitate in endorsing the Fed’s urge for policy ‘normalisation’, the ECB appears to have joined the Fed in having faith in the Philips curve, i.e. that inflation will pick up eventually. Markets are now pricing in the first 10bp ECB rate hike in the autumn next year which is broadly ‘fair’ in our view.

This in itself suggests limited support to EUR/USD from here from relative rates. However, as the political skies are clearing in the eurozone, a key obstacle for the market to buy the single currency has been removed. Combined with an ECB that will slowly – due to a still subdued inflation outlook – continue to prepare for an eventual exit, this is paving the way for the FX market to continue to correct some of the long-standing undervaluation in EUR/USD,” Danske argues. 

Where to from here?

1- "Overall, we expect to see much more one-sided trading in EUR/USD going forward.

2– We no longer expect any material dip in the cross over the summer,

3- With any dips in the EUR/USD spot likely to prove shallow and short-lived

4- We have upped our 6M forecast to 1.15 to reflect that we believe the higher ranges are here to stay,“ Danske expects.

Source: Danske Bank Research

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