WEEKLY FX OUTLOOK: CAD outperforms as BoC look set for a rate hike this week

CAD began the new month on the front foot, with the currency this week’s outperformer as markets brace themselves for a potential rate rise from the BoC. As such, this saw USD/CAD fall to an 8-month low after making a firm break below 1.30, while 1.29 had also been breached post better than expected Canadian jobs report. OIS markets are now pricing in around 93% chance of a 25bps hike.

GBP: Another central bank attempting to gear up the markets of a potential rate rise has been the BoE with the likes of McCafferty highlighting that the banks tolerance over rising inflation (2.9%) has been wearing thin. However, this failed to prop up the confidence amid the backdrop of poor UK data, with PMI surveys alongside Mfg. and Industrial production figures falling short of analyst expectations. Subsequently, the move above 1.30 failed to hold with GBP/USD back through 1.29.

AUD took a hit as the RBA broke the trend central banks turning hawkish, with the AUDUSD pair trading circa 0.7600. The Reserve Bank flagged issues around employment growth (suggesting that indicators remained mixed), slow wage growth (which remains low, and the RBA believe that it is likely to stay that way for a while) and housing debt ‘outpacing’ incomes. The central bank also reiterated that a rising AUD would complicate any economic adjustment. The RBA’s statement wasn’t all negative, and the central bank was relatively upbeat on business conditions, it highlighted that domestic growth is expected to slowly strengthen, while suggesting that the global economy is picking up.

EUR continued to hover around 1yr highs, a dip middle of last week to the mid 1.13s after ECB Coeure noted that the central bank had not discussed changing policy. However, this was somewhat similar to what Draghi had previously stated with the price action ultimately was pared following a technical break above 0.5% in the German 10Y. Additionally, the ECB minutes failed to provide any pertinent information, with Europe looking to be quiet from a data perspective this week.

JPY made a push to 114 against the greenback largely owing to the BoJ’s utilisation of YCC by announcing that they were to purchase unlimited amount of 10Y JGB’s at a yield of 0.110%. USD/JPY pushed through July’s highs, now looking toward the key triple top (May 8th, 9th and 10th) at 114.31. A break through this could firmly indicate that bulls have once again gained control of the pair.

USD: A fairly muted start to the week last week for the greenback amid the Independence day holiday, while all eyes had been fixed on the NFP report, which was ultimately mixed and as such the USD saw mild support to consolidate above 96.00. This week we have Fed Chair Yellen on the schedule, alongside a host of other Fed speakers, while Friday will see a slew of data from the US, including CPI and U. of Michigan prelims.

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Dollar Index Daily

Daily 21 holding as dynamic resistance and MPP holding as support placing price in a range. Target of MM1 and MM4 are in play. Notice the downward channel. Stoch says up, channel says down, strategy says wait for the breakout to confirm direction.

Dollar Index H4

MM4 marks the top of the previous range on this time frame with quite a lot of support to break through to get to MM1. AS you can see I have trapped price in the current range. With last week's banking holiday volatility was low so I expect to see weekly pivot point targets slightly higher than last week (based on high, low and close for the week) which means I expect to see confluence with our bullish weekly target and MM4 with price opening somewhere near WM3 and our bearish target having confluence with MS1/ MM1. With EURUSD currently at hardcore resistance and GBPUSD making lower lows and lower highs and our daily stoch heading up, I expect to see Dollar strength in the near term.

US10Y Daily

MS1 holding as support with the monthly target just below. Regardless of which support price comes off of, a move higher in 10Y prices (and therefore a move lower in yield) is expected in the near term. The target from MS1 is MR1 and the target from MM1/ MS2 is MPP. That tells us that we need to pay attention to risk sentiment in the market and therefore strength in Yen and Gold. How's that daily stoch - oversold much?

US10Y H4

The market is still bearish and that 21 is still dynamic resistance. A break of the 21 would see price meet up with the 55 and then come back down for a double bottom of inverse head and shoulder pattern and head up to MR1 OR move lower to the monthly target at MM1 or MS2 and then reverse back up to MPP.

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