USD/CAD Headed Below 1.28

USD/CAD Headed Below 1.28

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USD/CAD Headed Below 1.28

The Canadian dollar soared today on the back of the Bank of Canada’s monetary policy announcement. Although interest rates were left unchanged, the BoC made a u-turn in their statement by dropping the reference to being “cautious on rates” and removing the language that pertains to the need for “monetary policy accommodation.” With inflation “likely to be a bit higher in the near term,” and activity “a little stronger than projected,” the BoC expects “solid wage growth” to contribute “positively to housing and consumer demand.” We believe that the Canadian dollar will continue to benefit from this shift in sentiment, leading to further profit taking in USD/CAD.

On a technical basis, USD/CAD has fallen below the first standard deviation Bollinger Band. Although there’s some support at the 20-day SMA near 1.2850, we believe that USD/CAD will fall to at least 1.2790, the 38.2% Fibonacci retracement of the 2018 rally and the first standard deviation Bollinger Band and most likely to the May low near 1.2725.

USD/CAD – Will it Break 1.28?

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USD/CAD – Will it Break 1.28?

The best performing currency this past week was the Canadian dollar, which rose more than 1.5% against the greenback. This move drove USD/CAD from a high of 1.3125 down to a low of 1.2825. The loonie’s gains were sparked by a sharp rebound in oil prices, stronger Canadian data and reports that the Trump administration dropped its demand that all vehicles made in Canada for export contain at least 50% U.S. content. According to Friday’s reports, Consumer price growth accelerated significantly in the month of February with the year over year rate rising to 2.2% from 1.7%. Retail sales growth overall fell short of expectations but excluding autos, demand rose more than expected by 0.9%. This bodes well for next week’s January GDP report, which should show growth strengthening at the start of the year.

On a fundamental and technical basis, USD/CAD appears positioned for a move below 1.28. Technically, it closed the day below the 20-day SMA for the first time in 7 weeks. 1.2800, the March 12 low is a natural support level but the decline should extend further as primary support hovers closer to 1.27. This is where the 100-day SMA, 23.6% fib retracement of the 2016 to 2017 decline and the 38.2% Fib retracement of 2011 to 2016 rally converge.

GBP/USD – Fade 1.28

GBP/USD – Fade 1.28

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The clock is ticking in the U.K. Theresa May has about a week to prevent her government from falling apart. In her speech this past week, the Queen set a one week deadline for the House of Commons vote and if May doesn’t strike a deal with the Democratic Unionist Party by then and loses the vote, she could be forced out of power. This catastrophic outcome would create major political uncertainty that could send GBP/USD back down to 1.26. Although the Tories are optimistic, the DUP is pushing back hard with the party refusing to answer May’s calls for 36 hours and demanding GBP 2 billion for Northern Ireland’s infrastructure and healthcare programs. Apparently they even held “secret talks” with the Labour and Liberal Democrats to pressure May into accepting their demands. Chances are she will cave to the DUP just as she is beginning to cave to the European Union on Brexit talks. With no major U.K. economic reports scheduled for release in the coming week (GDP is generally not revised), Brexit negotiations, the House of Commons Vote and DUP coalition talks will drive sterling trade. Although GBP dropped to 2 month lows after Mark Carney speech this past week – he said it is not the right time for a rate hike, it bounced back quickly on hawkish comments from BoE Chief Economist Haldane. Carney is worried about Brexit uncertainty and wage growth but Haldane believes that a hike would only offset part of August stimulus. Although he did not vote for a rate hike, his close alignment with the 3 members who voted for immediate tightening earlier this month leads investors to wonder who else could be pondering a hike. In the meantime, the political stakes are high and the level uncertainty leads us to believe that GBP will resume its slide back to 1.26 as political troubles often translate to economic ones especially as Brexit and a hung Parliament makes it difficult for the UK economy to grow enough to warrant a rate hike this year.

Technically, GBP/USD bounced off the 100-day SMA this week but as long as it holds below the spike highs near 1.2830, the downtrend remains intact. We like selling between 1.2750 and 1.2800, where the 20-day SMA and 23.6% Fib retracement of October to May rally lie.

GBP/CHF Headed for 1.28

GBP/CHF Headed for 1.28

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GBP/CHF Headed for 1.28

Now that we know U.K. policymakers are skeptical about the rise in inflation, all signs point to a top for the British pound. Going into this week’s rate decision, many investors believed that the central bank would upgrade its growth and inflation forecasts with Carney recognizing the improvements in the economy. Some even hoped there would be 2 dissents in favor of higher rates but instead, the Bank of England lowered its 2017 GDP forecast and attributed the entire recent pickup in inflation to the weak currency. In his speech, Carney focused on the weakness of household spending and GDP and emphasized that domestic costs and wages remain subdued. The central bank did recognize some of the improvements in the economy but they didn’t want to sound overly optimistic because everything hinges on a smooth Brexit – something very few have confidence in. Sterling remains in focus in the coming week with inflation, employment and retail sales scheduled for release. While we expect most of these reports to surprise to the upside, GBP could still trickle lower as these reports won’t change the central bank’s dovish bias. We like selling GBP vs. the Swiss Franc because USD/CHF is struggling to extend its gains after this past week strong rally. USD/CHF soared after the French election as investors unwound their Le Pen hedge.

Technically, GBP/CHF has fallen below 1.3000 and now appears poised to test the 20-day SMA at 1.2830. Of course we need to see 1.29, the December high broken before that happens but if this level is breached, GBP/CHF should slip as low as 1.2830. If it rallies back above 1.3025, then new 8 month highs are likely.