GBP/NZD – Gunning for 1.8000?

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This morning’s UK inflation report was hot, fueling expectations for more hawkishness from the Bank of England. The UK government could trigger Article 50 any day now, but until they do, rate hike expectations could drive GBP to 1.25. UK CPI printed at 2.3% versus 2.1% eyed while core reading rose to the key 2.0% level from 1.8% forecast. The core reading is now above the BoE’s target rate and was the real reason for the pound rally, as currency markets begin to price in the possibility of a rate hike.

The New Zealand dollar, on the other hand, could come under selling pressure on the back of the RBNZ rate decision. Since their last meeting in February, consumer spending has fallen, GDP growth slowed, the trade deficit widened while dairy prices declined. There was some strength in the services and manufacturing sectors but with the currency so strong, we don’t think that will be enough to ease the central bank’s concerns.

Therefore GBP/NZD has scope to rise further. The pair has no significant resistance until 1.7800-1.8000 corridor while support comes in at 1.7400

EURJPY – Gunning for 124.00?

EURJPY – Gunning for 124.00?

Boris Schlossberg

The EURJPY trade is starting to show signs of life as the pair makes a sharp bottom off the 118.00. The bounce may be reflecting the “reflation” trade as all the major central banks are now moving away from QE mode into a more normal monetary policy regime.

Today’s ECB presser highlighted the fact that the central bank looking to taper eventually, although Mr. Draghi was quick to note that the ECB saw no signs of any serious inflation in the system just yet and therefore ready to maintain the status quo. Still, the market took his words a tilt to the hawkish side and the euro has remained supported throughout the day.

Meanwhile, USDJPY continues to probe the 115.00 barrier which has acted as cement ceiling for the pair since the start of the year. If tomorrow’s NFPs prove to be as good as forecast the 115.00 figure will likely fall by the wayside and EURJPY could explode towards the 124.00 target.

CAD/JPY Gunning for 100

CAD/JPY Gunning for 100

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CAD/JPY Gunning for 100

After dropping to a low of 91.75 in late January, CAD/JPY staged a dramatic recovery to trade all the way up to 100. The currency pair tested this level 4 times this month and is now itching for a break. While the rise has been largely driven by the turnaround in oil prices, in the long run, it is the improvement in economic data that will keep the Canadian dollar bid. The previous decline in oil prices hit Canada hard and now that prices are stabilizing, we should start to see positive economic surprises. In fact, the Bank of Canada already turned optimistic and is no longer looking to lower interest rates this year. Next week’s Canadian retail sales and consumer price reports will play a large role in determining whether CAD/JPY breaks this key psychological and technical level.

Taking a look at the charts, the last time CAD/JPY closed above 100 was in January but that was coming off a higher level. Back in October CAD/JPY surged from a low of 92.91 to a high above 106 and on the day it broke 100, CAD/JPY came close to testing 101, consolidated the day that followed and then began a powerful move higher. Given the recent consolidation in the pair, we believe that a similar move could occur especially given the tight consolidation right below these levels. If 100 is broken, the next level of resistance will be at 100.85, the 61.8% Fibonacci retracement of the December and January decline. If it fails to break this key level on a closing basis and drops below 99, it is most likely headed back to 98.

AUD/USD – Gunning for Fresh 4 Year Lows?

AUD/USD – Gunning for Fresh 4 Year Lows?

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Fundamentals

The Australian dollar was one of the worst performing currencies today, falling more than 1% versus the greenback ahead of the Reserve Bank of Australia’s monetary policy announcement. The last time we heard from the RBA was on October 7th and at that time, the central bank expressed concerns about the high level of the currency. Considering that A$ was the only currency to appreciate against the greenback in the month of October, this concern would not have eased. In fact, with inflation slowing in the third quarter, employment declining and home loans dropping, the RBA has every reason to sound more dovish, which would not only be negative for the Australian dollar but also put the currency’s 0.8643 four year low at risk. However if most of the statement remains unchanged and the RBA sounds comfortable with recent developments in Australia and China, the 0.8643 low could hold. Aside from the RBA meeting, retail sales and the trade balance could also affect how AUD/USD trades.

Technicals

Taking a look at the monthly chart of AUD/USD, the 4 year low of 0.8643 is looking extremely vulnerable especially after Monday’s big move. However having tested this level on numerous occasions, significantly weaker data or an intensification of concerns about the level of the currency or the global economy could be needed for this level to break in the next 24 hours. Beyond that, the market’s appetite for U.S. and Australian dollars will be key. A break below 0.8643 opens the door for a move down to the 50% Fibonacci retracement of the 2008 to 2011 rally at 0.8550. If this level holds, AUD/USD could trickle back up towards the top of its month long range near 89 cents.

EUR/USD Gunning for 2014 Lows

EUR/USD Gunning for 2014 Lows

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Fundamentals

The 1.35 level is very significant for the EUR/USD. Despite numerous attempts to test this level over the past 8 months, EUR/USD only closed below 1.35 on one occasion and that was on January 31st. If we look back all the way back to September, we see even more instances where the currency pair tested and failed to break 1.35 in a meaningful way. The only time that a sustained break occurred was after the European Central Bank surprised with a 25bp rate cut in November and while the sell-off extended to 1.33, less than 2 weeks later, EUR/USD was trading back above 1.35. So now that we are once again within 30 pips of this key level, many traders are wondering if 1.35 will hold. On a fundamental basis disappointing Eurozone data and a faster decline in European yields drove the sell-off in EUR/USD. The region’s trade surplus rose to 15.3B from 15.2B in May, which was less than expected and yesterday, the Eurozone ZEW survey dropped to its lowest level in 11 months. While Treasury yields declined today, the 1.6bp drop in 10-year yields paled in comparison to the 2.1bp drop in French yields, 2.7bp drop in Italian yields and 5bp decline in Spanish yields. However it is important to recognize that there are also fundamental reasons why the euro refuses to break 1.35. The Eurozone has a massive current account surplus, U.S. yields are still in a downtrend and the currency is benefitting from reserve diversification. Therefore without a significant rally in U.S. yields or a strong signal from the ECB that further easing is imminent a move below 1.35 could be fake-out instead of a breakout. Eventually 1.35 will give way but that may not happen until the fall when the Fed ends Quantitative Easing and shares its exit strategy.

Technicals

From a technical perspective, 1.35 is less significant than the February 3rd low of 1.3477. However taking a look at the chart, today’s decline has taken EUR/USD below trend line support. If the pair breaks its 2014 low of 1.3477, the next stop could be the November low of 1.3295. However if it holds 1.3450 (we’ll give it a bit of flexibility), it could be back into the 1.35 to 1.37 range for the pair.

GBP/USD – Gunning for 1.73?

GBP/USD – Gunning for 1.73?

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Fundamentals

Today, the British pound rose to its strongest level against the U.S. dollar since October 2008. Despite the lack of hawkishness in the Bank of England minutes, more U.K. officials joined the chorus of policymakers hinting of an earlier rise in rates. This morning Ian McCafferty from the BoE said the central bank should not hold back rate hikes for too long and begin raising rates before the output gap is fully closed. With his comments we now count no less than 3 U.K. policymakers (Carney, Weale and McCafferty) as proponents of an earlier rate hike and with more likely to follow, its no surprise to see sterling extend its gains. The question now is whether sterling has enough momentum to hit 1.73. From the perspective of monetary policy divergence, sterling should have enough momentum to climb to its next resistance level, which is near 1.7350, the 50% Fibonacci retracement of the 2007 to 2009 decline. However in order for that to happen, we need a catalyst. There is no major U.K. economic reports scheduled for release next week but Carney will be speaking again on Thursday and the BoE will be publishing their Financial Stability report, which could provide more guidance on how the U.K. government could use fiscal and monetary policy to reduce stimulus. If the central bank successfully convinces the market that they are moving closer to raising rates, sterling could find its way towards 1.73 – but in all likelihood it will be a slow drift higher.

Technicals

The main resistance zone for the GBP/USD is between 1.7040-50. While the currency pair broke through this zone today, it ended the North American trading session right near it, which means that it has not experienced a clean break. Technically, we really need to see GBP/USD close above 1.7050 to open the door for a stronger move to its next resistance level near 1.7350, the 50% Fibonacci retracement of the 2007 to 2009 decline. We think this will happen eventually but if GBP/USD fails to close above 1.7050 in the next 24 hours, a deeper retracement is possible for before a stronger move higher.

EUR/JPY – Gunning for a Break of 140

EUR/JPY – Gunning for a Break of 140

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EUR/JPY – Gunning for a Break of 140

Fundamentals

From a fundamental and technical basis, it should only be a matter of time before EUR/JPY breaks above 140. Considering that the currency pair ended Friday’s session only 10 pips or so away from this level it won’t take a stretch of the imagination to believe that at bare minimum a test and most likely a break of this level will occur. However it is not just the proximity of this level that has us convinced that the currency pair will not only breach 140 but make a run for 141. First and foremost, EUR/JPY is traditionally the quintessential risk on trade, which means that when stocks do well, EUR/JPY should rally. However even though U.S. stocks have climbed to record highs, we have seen a very limited up move in EUR/JPY and a lot of that had to do with ECB uncertainty. Now that euro has survived negative rates, EUR/JPY should be able to trade higher. At the same time, Friday’s non-farm payrolls report supported the recent gains in USD/JPY.

Technicals

Taking a look at the daily chart of EUR/JPY, the currency pair has been in turn mode since the end of last month and with the latest rally, it has now entered the Buy Zone according to our Double Bollinger Bands. A break of 140 would take the currency pair well above the 38.2% Fibonacci retracement of the December to February decline and psychologically significant resistance level. If that occurs, there’s no major resistance until 141. However if EUR/JPY fails at current levels, a drop back down to its 3 month low of 138 becomes likely.

GBP/JPY – Gunning for April Highs?

GBP/JPY – Gunning for April Highs?

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Fundamentals

With GBP/USD hovering near 4 year highs and USD/JPY quietly inching upwards, GBP/JPY rose to its strongest level in 2 weeks. The currency pair is in play with the Bank of England minutes and UK retail sales scheduled for release this week. While there’s greater downside than upside risk from sterling, the real risk doesn’t come until retail sales on Friday because the central bank minutes aren’t expected to show any significant changes in the central bank’s outlook. So instead, the market’s appetite for dollars will play a bigger role in how GBPJPY trades in the front of the week. USD/JPY is closing in on 103 and if this level is broken, GBP/JPY could find itself testing its April highs.

Technicals

Higher highs and higher lows in GBP/JPY point to further upside potential. Now that the currency pair has cleared 172, there is no major resistance until the April high of 173.16. If GBP/JPY starts to slip and drops below 171.45, losses could extend down to 171.00.

NZD/JPY – Gunning for 90?

NZD/JPY – Gunning for 90?

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Fundamentals

NZD/JPY rose to a fresh 6-year high on Friday and we think the move could continue in the coming week. While there aren’t any major economic reports scheduled for release from New Zealand, there are many pieces of data that could affect how NZD/JPY trades. There has been widespread speculation that the Chinese government could increase stimulus in response to weaker Chinese data. If China’s PMI reports surprise to the downside, this speculation could gain momentum, providing additional support to the New Zealand dollar. At the same time, we have an exceptionally busy week for the JPY with Japan poised to raise the sales tax for the first time in 17 years. US non-farm payrolls are also scheduled for release and this report along with the leading indicators for payrolls will affect the market’s demand for USD/JPY, having direct impact on NZD/JPY. Since we are looking for payroll growth to accelerate, it is yet another reason why we believe NZD/JPY will test and break 90 in the coming week.

Technicals

We have to turn to the monthly chart of NZD/JPY to find resistance. There is no major resistance until the psychologically significant 90 level and above that the 2007 high of 97.77. The daily charts show the closest level of support at 86.35.

GBP/CAD – Gunning for Fresh 4 Year Highs?

GBP/CAD – Gunning for Fresh 4 Year Highs?

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Fundamentals

GBP/CAD is in play over the next 24 hours because both countries have retail sales reports scheduled for release and there is a very good chance that one will be strong and the other weak, leading to a big directional move in the currency. Starting with the U.K., we have a number of reasons to believe that the retail sales report could surprise to the upside. Earlier this month, the British Retail Consortium reported the strongest increase in consumer demand in more than 2.5 years. The BRC retail sales monitor rose a whopping 3.9% in January, which compares to a 0.4% increase the previous month. Despite the rise in the unemployment rate, jobless claims dropped more than expected while average weekly earnings increased at a faster pace – both of which have positive implications for consumer demand. Confidence also improved significantly, rounding out our reasons for expecting an upside surprise in retail sales on Friday. In contrast, there’s a significant risk of a downside surprise in Canadian retail sales. Wholesale sales fell a whopping 1.4% in the month of December and unfortunately in our experience, this report has a strong correlation with the broader retail sales release. Economists are looking for a soft number and expect retail sales to fall by 0.4%. With job growth and manufacturing activity slowing in December, would not be surprised if retail sales dropped more than 0.4%, which would trigger a sharp sell-off in the CAD. Stronger spending in the U.K. and weaker spending in Canada could drive GBP/CAD to fresh 4-year highs.

Technicals

The recent rally in GBP/CAD has taken the currency pair within a whisker of its year to date high at 1.8560. This level capped gains in the pair for the past 2 month and if GBP/CAD finally musters the strength to break above this rate, there is some near term resistance at 1.8600 but beyond this level there is no major resistance until 1.90. If the currency pair fails at current levels, there is a very good chance it could drop back down to 1.82.