Loonie extends gains, Yen and Euro seek direction

Forex News and Events:

The week starts with limited risk appetite due to Iraqi situation. The low volatilities and higher energy prices sustain the bearish breakout in USD/CAD this Monday. The JPY crosses are waiting for fresh direction, the focus is on PM Abe’s speech on policy tomorrow. Data-wise, we are heading towards a quiet week, the geopolitical tensions and technicals are likely to drive the FX trading. Released in the morning, the June preliminary PMI readings were soft across the Euro-zone, traders remain sellers on rallies.

PM Abe to define fresh direction

The JPY crosses are quiet this Monday; the less aggressive BoJ and the risk-off environment continue limiting the weakness in Yen. The critical question of the week is whether the PM Abe will be successful to revive the JPY-bears or not?

The BoJ Governor Kuroda anticipates a slowdown in CPI y/y around 1% through the summer before returning to its “upward trend again from the second half of this fiscal year and reach around 2% target around the middle of the current projection period from fiscal 2014 to fiscal 2016, that is, in or around fiscal 2015”. Although temporary, the slowdown in inflation dynamics may hurt the bearish sentiment in Yen, thus increase market appetite for verbal and/or concrete stimulus moving forward. We expect to hear supportive comments from the PM Abe to prevent any damage on his achievements regarding the inflation.

JPY crosses trade in mixed fashion before the PM Abe’s speech on policy due tomorrow. Trend and momentum indicators are flat on USD/JPY chart, the pair remains stuck between 200/50-dma (101.65/102.21). More offers are eyed at 102.60/102.80 (daily Ichimoku cloud top / June 4th high). A clear breakout is needed to talk about fresh short-term direction.

Limited enthusiasm in EUR rallies

The June preliminary PMI readings remained soft across the Euro-zone. French manufacturing and services give signs of faster contraction in June, German activity shows slower recovery. The overall Euro-zone manufacturing PMI fell from 52.2 to 51.9. The big picture suggests the continuation of low inflation in the Euro-zone. Spain and Germany release the June inflation estimates on Friday, Euro-zone consolidated CPI estimate is due in Monday 30th. Despite the positive skewness in short-term technicals, we remain sellers on rallies.

Although the broad based USD weakness give support to EUR/USD, we remain cautious regarding the upside. Besides the loose ECB policy and the IMF’s QE recommendation to fight the Euro-zone deflation, the 10-year UST/Bund spread also suggests a slowdown in positive EUR/USD tendency. In fact, the 10-year UST/Bund spread stand at the highest since mid-1999, we believe that a mid-run correction should ease the upside pressures in EUR/USD.

Follow up with the Loonie

As suspected, the Loonie cleared the critical 1.0800/04 support amid the strong CPI reading and supportive retail sales triggered the anticipated rush into CAD. USD/CAD broke below the 200-dma for the first time since October 2013. This breakout suggests a downshift to 1.0550/1.0800 band (December resistance zone). The higher energy prices and the weak USD should give further support to CAD-longs. Decent option barriers stand at 1.0800 for today expiry. EUR/CAD extends weakness to 1.45654 (lowest since January 7th). Critical support is seen at 1.44102/1.45000 (Jan 6th low & optionality).

Today's Key Issues (time in GMT):

2014-06-23T12:30:00 USD May Chicago Fed Nat Activity Index, exp 0.2, last -0.32
2014-06-23T13:45:00 USD Jun P Markit US Manufacturing PMI, exp 56, last 56.4
2014-06-23T14:00:00 USD May Existing Home Sales, exp 4.73M, last 4.65M
2014-06-23T14:00:00 USD May Existing Home Sales MoM, exp 1.70%, last 1.30%

The Risk Today:

EURUSD EUR/USD made a daily candle with large upper and lower shadows on Friday, reflecting market indecision. Further consolidation is therefore likely. An hourly support lies at 1.3565 (20/06/2014 low, see also the 61.8% retracement), while a key support stands at 1.3503. An hourly resistance is at 1.3644 (19/06/2014 high). A key resistance can be found at 1.3677. In the longer term, the break of the long-term rising wedge (see also the support at 1.3673) indicates a clear deterioration of the technical structure. The long-term downside risk implied by the double-top formation is 1.3379. Key supports can be found at 1.3477 (03/02/2014 low) and 1.3296 (07/11/2013 low).

GBPUSD GBP/USD continues to challenge the major resistance at 1.7043. A bullish bias is favoured as long as the hourly support at 1.6923 (18/06/2014 low) holds. An initial support can be found at 1.6985 (intraday low). In the longer term, a bullish bias is favoured as long as the support at 1.6693 (29/05/2014 low) holds. The persistent buying interest favours an eventual break of the major resistance at 1.7043 (05/08/2009 high). Other resistances can be found at 1.7332 (see the 50% retracement of the 2008 decline) and 1.7447 (11/09/2008 low).

USDJPY USD/JPY is moving sideways despite the proximity of the support implied by the 200 day moving average (around 101.65). Another support lies at 101.43. An hourly resistance lies at 102.36, while a key resistance stands at 103.02. A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. Monitor the support area provided by the 200 day moving average and 100.76 (04/02/2014 low). A major resistance stands at 110.66 (15/08/2008 high).

USDCHF USD/CHF has successfully tested the support at 0.8908 (05/06/2014 low, see also the 38.2% retracement). The bounce has thus far failed to break the resistance implied by the 61.8% retracement at 0.8974. A strong resistance area lies between 0.9012 and 0.9037. Another support stands at 0.8883. From a longer term perspective, the bullish breakout of the key resistance at 0.8953 suggests the end of the large corrective phase that started in July 2012. The long-term upside potential implied by the double-bottom formation is 0.9207. A key resistance stands at 0.9156 (21/01/2014 high).

Resistance and Support: