The Big Picture

• Currency movements becoming less correlated Yesterday’s trading was notable for two reasons: the size of the moves and the fact that they were so mixed. The dollar appreciated significantly (=over 0.1%) against EUR, NZD, CHF and SEK, while weakening a similar amount against CAD, NOK, JPY and AUD. It looks as if correlation among currencies is lessening. Perhaps the market is leaving behind the “risk-on, risk-off” paradigm that previously held sway and instead currencies are moving more on idiosyncratic domestic factors. If so, that offers much more opportunities for traders to analyze the market and invest based on their views on individual countries and currencies rather than an overall global view.

• The Bank of Canada’s statement following its meeting yesterday showed a less optimistic view towards the global and Canadian economies and less urgency to tighten rates. CAD initially weakened on the news, but then recovered and traded stronger after BoC Gov. Poloz refrained from commenting on the currency during his press conference following the meeting. Nonetheless, I view this move as simply a short-term profit-taking after the recent spike and expect CAD to weaken further going forward.

• Although the BoC admitted that inflation has hit their 2% target earlier than expected, they said it was due to “temporary factors,” such as higher energy prices and the weakening of the CAD, not due to any change in economic fundamentals. They predicted inflation would “fluctuate around 2%” for the next two years, which implies that they have no need to tighten policy during that time. Meanwhile, their assessment of the economy was definitely more negative than it was just last month as they said “…economic activity in Canada is now projected to be a little weaker than previously forecast.” Significantly, they added that “the Bank still expects that the lower Canadian dollar and a projected strengthening in global demand will lead to a pickup in Canadian exports and business investment and, eventually, a more sustainable growth track.” In other words, the recovery still depends on a weak CAD. With the recovery depending on a weak currency to promote exports, I would expect them to maintain their neutral bias, particularly as they do not see higher inflation as a significant risk, and that any major strengthening in the exchange rate will be met by verbal intervention. All told I view the statement as dovish and generally bullish for USD/CAD.

• Yesterday’s US data was largely favorable. Industrial production in June rose less than expected, but the NAHB housing market index was substantially higher than forecast (and once again over the 50 level that signifies expansion). Meanwhile the Beige Book, published ahead of the July 29-30 FOMC meeting, said that economic conditions and labor markets improved across the country, with only two districts reporting a slightly slower pace of growth since May. Wage pressures remained modest and price pressures were "generally contained.” The news is likely to reassure the FOMC that its core scenario of gradual recovery without inflationary pressures is coming to pass and that they are on the right track. It should be generally USD-positive.

• Fed Chair Janet Yellen’s second day of testimony to Congress added little to what we already know about FOMC thinking.

• Today: A relatively quiet day on the data front. Eurozone’s final CPI for June will most likely confirm the initial estimate of +0.5% yoy.

• From the US, we get the housing starts and building permits for June. Both figures are forecast to have increased. Initial jobless claims for the week ended July 12 are expected to have increased slightly to 310k from 304k. This would bring the 4wk moving average to 311k, not much of a change from 312k previously. The Philadelphia Fed business activity index for July is anticipated to have declined.

• We have three speakers on Thursday’s agenda. In the European day, we have Bank of England Executive Director for resolution Andrew Gracie and Deputy Governor for financial stability Jon Cunliffe. In the US, St. Louis Fed President James Bullard speaks.

The Market

EUR/USD continues lower

• EUR/USD extended its decline on Wednesday, after falling below the 1.3580 (R1) barrier, the lower boundary of the recent sideways path it’s been trading recently. The short-term bias remains to the downside in my view and I still expect the rate to challenge the psychological zone of 1.3500 (S1). The MACD remains below both its zero and trigger lines, designating the negative momentum of the price action, but the RSI is pointing up and seems ready to exit its oversold zone. Taking this into account, I cannot rule out some consolidation or a small bounce before selling pressure comes back into the game. On the daily chart, the 50-day moving average is getting closer to the 200-day moving average and a bearish cross in the near future would be an additional negative sign. My opinion is that we should wait to see if the bears are strong enough to overcome the 1.3500-1.3475 zone before expecting larger bearish extensions in the future.

• Support: 1.3500 (S1), 1.3475 (S2), 1.3400 (S3)

• Resistance: 1.3580 (R1), 1.3650 (R2), 1.3700 (R3)

USD/JPY finds resistance at the 200-period MA

• USD/JPY moved lower yesterday after finding resistance at the 200-period moving average, slightly below our resistance level of 101.85 (R1). At the time of writing, the rate is heading towards the support zone of 101.40 (S1), where a decisive dip would signal that the upside corrective wave is completed and could drive the battle towards the lows of 101.10 (S2) or near the lower boundary of the purple downside channel. The RSI fell back below its 50 level, while the MACD shows signs of topping and seems ready to move below its signal line. This amplifies the case for the continuation of the decline. The pair is trading within the purple downside channel and as a result, the overall short-term path remains to the downside.

• Support: 101.40 (S1), 101.10 (S2), 100.80 (S3)

• Resistance: 101.85 (R1), 102.25 (R2), 102.65 (R3

EUR/GBP below 0.7900

• EUR/GBP plunged after finding resistance at 0.7980 (R2). The rate fell below the previous low of 0.7915 (support turned into resistance) but it was stopped at 0.7890 (S1). A clear violation of that barrier could trigger further bearish extensions perhaps towards the next support at 0.7830 (S2). Zooming on the 1-hour chart, I can see positive divergence between our hourly momentum studies and the price action, thus an upside corrective wave is likely before the continuation of the decline. Nevertheless, as long as the pair is trading below both the moving averages and below the blue downtrend line drawn from back the 11th of April, I consider the overall outlook to be to the downside.

• Support: 0.7890 (S1), 0.7830 (S2), 0.7760 (S3)

• Resistance: 0.7915 (R1), 0.7980 (R2), 0.8030 (R3)

Gold rebounds from 1293

• Gold rebounded from the support of 1293 (S1), the 50% retracement level of the 5th June – 10th of July advance, and during the early European morning, seems ready to challenge the 200-period moving average and strong zone of 1305-10 as a resistance this time. Although the overall short-term outlook remains to the downside, I would remain flat today, since a move above 1310 (R2) could be a first sign that the recent plunge was just a 50% retracement level of the 5th June – 10th of July up move and could target the hurdle of 1325 (R3). On the downside, only a move below 1293 (S1) would confirm a forthcoming lower low.

• Support: 1293 (S1), 1285 (S2), 1265 (S3)

• Resistance: 1305 (R1), 1310 (R2), 1325 (R3)

WTI testing the downtrend line

• WTI moved significantly higher on Wednesday, confirming the positive divergence between the RSI and the price action. WTI is now at a critical point, testing the blue downtrend line and as long as we do not see a violation, the downtrend remains intact. However, I would maintain my neutral stance, since I would like to see a move below 101.10 (S1) before expecting another dip towards 99.00 (S2). On the other hand, a clear move above 101.70 (R1) could signal the violation of the blue downtrend line and perhaps target the 103.05 (R2) zone. Relying on our momentum studies does not seem such a good idea for now, since the MACD lies above its trigger line and is pointing up, while the RSI, although above 50, is pointing down.

• Support: 101.10 (S1), 99.00 (S2), 98.00 (S3)

• Resistance: 101.70 (R1), 103.05 (R2), 104.60 (R3)

BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS

MARKETS SUMMARY