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.

EURUSD – Fade 1.07

EURUSD – Fade 1.07

Chart Of The Day

President Trump jawboned the U.S. dollar this afternoon sending EUR/USD sharply higher. In an interview on CNBC, Trump said the dollar is getting too strong because “people have confidence in me.” The market latched onto these words but we think his comment about U.S. rates and China’s currency manipulation are far more important. He confirmed that the Treasury would not be labeling China a currency manipulator in their upcoming report because it would hurt talks on North Korea but he also indicated that he likes a low interest rate policy. Considering that the Treasury is “very close” to filling the open seats at the Fed according to Mnuchin, chances are he’ll be nominating doves, which is the only legitimate reason for the dollar’s low volatility fall. Its not the first time that President Trump criticized the strong dollar but when coupled with his plans to bring in more doves, it created the perfect catalyst for a late day slide in the greenback. Will these losses last? Probably not. While the dollar could extend a bit lower, the upcoming Easter holidays could encourage profit taking on short dollar positions. We like buying dollars against the euro ahead of next weekend’s French election because according to the 1st round Opinionway French election poll, Le Pen has a marginal lead over Macron. Recent terrorist attacks makes her anti-terrorism, anti-immigration stance more attractive and investors are getting jittery. So while the EUR/USD traded sharply higher today, we think the gains won’t last as French election volatility hits euro trade.

Technically, EUR/USD loves to gravitate to round numbers so we could see the currency pair extend to 1.07. We’ve set our sell order right underneath the 20-day SMA which currently hovers near 1.0715. If EUR/USD rejects that level, we could easily see a move back down to 1.06

AUD/NZD Breakout – Trade or Fade?

AUD/NZD Breakout – Trade or Fade?

Chart Of The Day

AUD/NZD Breakout – Trade or Fade?

The Australian dollar traded sharply higher today but the New Zealand dollar underperformed leading to a 1% rise in AUD/NZD. There was no news to explain the divergence outside of yesterday’s marginal drop in dairy prices. We still believe that if one of these central banks were to ease after Brexit, it would sooner be the RBA than the RBNZ. Both currencies represent great yield plays but Australia is still mired in political uncertainty and suffer greater from a weaker Chinese economy / currency. Australia provides hard commodities to China, which will be cut first when the economy slows whereas New Zealand provides soft commodities such as milk and meat that will see growing demand as the country shifts from an export to consumption based economy. For all of these reasons we don’t believe that AUD/NZD deserves today’s strong gains and would not be surprised to see a pullback before the end of the week.

Technically the July low of 1.0383 is support in AUD/NZD. The top of the recent range is at today’s high of 1.0550. If AUD/NZD breaks above this level in a meaningful way, it should squeeze to 1.0600 and find resistance below the 50-day SMA at 1.0630. That’s where we see this move stopping. A pullback should take the pair back to 1.0425 and possible even the July low.

Fade USD/CAD Rally

Fade USD/CAD Rally

Chart Of The Day

Fade USD/CAD Rally

Wild swings were seen in USD/CAD today, which broke below 1.2900 and hit a 5-month low before recovering quickly and aggressively to end the day near 1.3000. The intraday reversal in the currency pair caught everyone by surprise because there was no news or catalyst. Canada’s economy grew 2 times faster than anticipated in the month of January and this helped lift year over year GDP growth to 1.5% from 0.6%. Oil prices also edged higher while the U.S.-Canadian 2 year yield spread moved in favor of losses in USD/CAD. Policymakers don’t appear alarmed with the rise in the loonie with Bank of Canada Deputy Governor Patteron even citing loonie weakness as a source of strength for exports this morning. As such, we believe that the latest USD/CAD rally should be faded as the pair is likely to make another run for its 5 month lows.

Technically, as long as USD/CAD remains below 1.32, the downtrend is intact. In fact as long as it holds below its former support level of 1.3000, the next stop should be the October low near 1.2830.

AUD/USD – 9 Day Fade?

AUD/USD – 9 Day Fade?

Chart Of The Day

AUD/USD – 9 Day Fade?

9 Trading days have past without a down day for AUD/USD. This is the longest stretch of gains for the currency pair in 2 years and the last time it occurred in October 2013, the move extended for 11 days before AUD/USD had a down day and even then there was one more push before the currency pair topped out. So while fading a 9 day move in AUD/USD is tempting, it should only be done ahead of or on the back of data AND if you believe Australian/Chinese or U.S. data will be negative for the pair. The Australian dollar is in play this week. The currency has been performing well because manufacturing activity accelerated, retail sales increased and most importantly gold and iron ore prices turned higher. Higher interest rates or carry currencies are also in demand as the U.S. dollar weakens. However recent developments in commodity prices along with Australian/Chinese data makes the outlook for AUD challenging. Next week’s Chinese trade balance and Australian employment numbers should go a long way in setting expectations for Chinese/Australian growth. In the short span of 7 trading days, AUD/USD climbed from below 70 cents to above 73 cents. Not only is this a very strong move, a reversal or turnaround is likely if these economic reports are weak.

Technically, there is a double bottom in place in AUD/USD. Resistance in AUD/USD is at near the August highs of 0.7450. We expect the currency pair to extend to that level. A firm close above 75 cents would be needed to open the door for a move up to 0.77 cents. Support is at 0.7215, a former support turned resistance and now back to support level (see chart).

Dollar Fade? Forex Daily Technicals 09.13.13

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