AUD/CAD – Prime for a Move Below 98 Cents

AUD/CAD – Prime for a Move Below 98 Cents

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AUD/CAD – Prime for a Move Below 98 Cents

We are short AUD/CAD ahead of tonight’s Australian employment report. Thanks to the rise in commodity prices and improvement in risk appetite, AUD was the day’s second best performing currency behind the CAD. However tonight’s employment report could erase the gains in the currency if they show deterioration in the economy. While the retail sector helped offset the losses in mining, Australian mining companies are now on the verge of bankruptcy and we could see thousands of layoffs over the next several months. According to the PMIs, weaker employment conditions were seen in the manufacturing and service sectors in the month of January. This signals that there was very little recovery in the labor market after net job losses in December. Given the importance of job growth, a soft report could trigger a significant reaction in AUD and highlight the contrasts between Australia and Canada’s economies. Crude prices jumped 5% today after Iran said they would support OPEC’s production freeze. While there has been some confusion as to whether “support” equals action, oil traders are simply relieved that the world’s fourth largest holder of oil reserves is willing to cooperate. After 3 years of Western sanctions, Iran is finally able to bring production up to competitive levels and they are on a campaign to increase output by at least a third this year. So it remains to seen how willing they really are to limiting output levels. With OPEC not scheduled to meet again until the summer, these positive headlines should fuel a stronger recovery in oil and in turn the Canadian dollar.

Technically AUD/CAD is trading between 2 important levels. The break below the 50-day SMA is significant in that it also took the currency pair below the 23.6% Fibonacci retracement of the 2008 to 2012 rally and the 50% Fib retracement of the 2012 to 2015 decline. There’s near term support at 0.9775 but for AUD/CAD the most important support is at 0.9715 because that’s where the monthly low and 100-day SMA coverage.

AUDCHF – Prime for a Break

AUDCHF – Prime for a Break

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The Australian dollar is in play this week with a RBA rate decision, retail sales, trade and PMI reports on the calendar. A small group of investors are looking for the RBA to ease and while we do not believe that the economy deteriorated enough to warrant the third rate cut this year, there are many reasons for the Reserve Bank to be dovish. Last night we learned that manufacturing activity slowed significantly and while service sector activity numbers won’t be released until after the RBA meeting, the drop in construction sector activity indicates that the slowdown is not limited to manufacturing. Labor market and inflationary conditions also softened since the last meeting and imports from China plunged. While the RBA will be encouraged by the recent easing from the PBoC and improvement in market indices, China’s response is to slowing growth. We have chosen to sell AUD versus CHF because there is little Swiss Franc risk and more importantly, on a technical basis, the franc appears to be due for a deeper correction.

Technically AUD/CHF is trapped between 2 important moving averages – above we have the 200-day SMA at 72 cents capping gains and below the 100-day SMA hovering just a hair above 70 cents supporting the pair. The RBA rate decision will a trigger a break of one of these moving averages and we believe that support will give, ending the pair down to the October 21st low of 0.6873.

EUR/CAD Prime for a Drop to 1.46

EUR/CAD Prime for a Drop to 1.46

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EUR/CAD Prime for a Drop to 1.46

EUR/CAD was the second worst performing currency today behind EUR/NZD and we believe that further losses are likely. The euro was hit hard by weaker economic data. In Germany retail sales dropped 0.4% against expectations for a 0.2% rise. German unemployment rolls increased 2k and consumer prices in the Eurozone dropped 0.1%. This was the first time that euro area inflation turned negative since March 2015 and despite Bundesbank President Weidmann’s recent comment that deflation has become less of a concern, the drop in inflation at a time when commodity prices are very low raises the risk of low inflation sticking which could revive the talk of additional ECB easing which would add pressure on the currency. CAD on the other hand traded higher for the first time in 9 days on the back of stronger GDP growth. Canada’s economy expanded by 0.3% in the month of July against expectations for a 0.2% rise. On an annualized basis, GDP growth in Canada accelerated to 0.8% from 0.5%. At the same time CAD has become deeply oversold and is due for a stronger recovery.

Technically EUR/CAD trading in a broad channel and it failed at the top of the channel on Tuesday. The bottom of the channel is below 1.48 and we believe that the currency pair will test that point. It could even move lower if Eurozone data continues to weaken and oil prices bottom out. We would not be surprised to see EUR/CAD trading at 1.46.

Euro – Prime for a Breakout

Euro – Prime for a Breakout

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Euro – Prime for a Breakout

With Eurozone Finance Ministers meeting again to talk about Greece on Monday, the EUR/USD is prime for a breakout. In the next 2 weeks Greece has to decide if they want to request an extension to their bailout program because if they don’t, it will expire at the end of the month. The ongoing negotiations between Greece and her creditors are driving euro traders crazy. One day of progress is followed by another day of setbacks. This back and forth is keeping euro traders on their toes and EUR/USD in a range. While some economists believe that the risk of a Grexit increases with each passing day, it’s a risky trade because the chance is low and euro short positions are overstretched. However the payoff would be huge because a Greek withdrawal from the Eurozone would immediately set expectations for other countries leaving and eventually the dissolution of the euro. If this were to occur, EUR/USD would break through 1.10 quickly on its way towards parity. We believe that in the next 2 weeks, Greece will ask for an extension and that is where the trading opportunity lies. If you share our view, there are 2 ways to trade the EUR/USD – buy euros on a dip if the currency pair comes into the 1.1250 to 1.1350 range or on a break of 1.1450, which should not occur unless there is clear progress in the talks.

Taking a look at the daily chart EUR/USD is definitely prime for breakout and it looks like it’s testing the top of its range with an upside breakout likely. If your dollar breaks one 1.1450 the next resistance is 1.15 followed by 1.1640. If your dollar brakes below 1.1270 the next support will be the 61.8% Fibonacci retracement of the 2000 to 2007 uptrend at 1.1220.

EUR/AUD – Prime for a Breakout

EUR/AUD – Prime for a Breakout

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Fundamentals

Ahead of Friday’s U.S. non-farm payrolls report, we have only one set of orders on in EUR/AUD. The reason is because the dollar pairs could be subject to unusually large volatility when the payrolls report is released whereas the crosses, especially the ones where both the counter and base are high beta currencies trade primarily on relative growth. Given today’s dovish comments from ECB President Draghi, the euro should underperform AUD, which is still holding near its 4 month highs with today’s decline. From a purely fundamental, relative growth perspective, we believe EUR/AUD will break support and not resistance. However dovishness alone may not always been enough to drive the euro lower because of the region’s massive current account surplus. At the same time, data has been soft from Australia, giving traders a reason to bail out of the currency. So while we expect EUR/AUD to break out of its consolidation soon, the direction of the breakout is murky enough for us to lay out buy and sell orders in the pair.

Technicals

For the past week, EUR/AUD has been trading in a tight 200 pip range between 1.48 and 1.50. Resistance is created by the 50% Fibonacci retracement of the November to January rally while the 61.8% Fib retracement of the same move support losses. If EUR/AUD breaks above 1.50, there is no major resistance until 1.5150. If it breaks 1.48, 1.4730 will be near term support followed by more significant support at 1.46.

EUR/JPY Prime for a Break of 136-138 Range

EUR/JPY Prime for a Break of 136-138 Range

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Fundamentals

With the European Central Bank meeting tomorrow, EUR is in play. EUR/JPY in particular has been confined within a narrow 200 pip range for the past 3 days between 136 and 138, making the currency pair prime for a breakout. Central bank rate decisions are the perfect catalyst for big moves even if the ECB does not change interest rates. Every month the head of the ECB delivers a press conference where he provides his latest economic and monetary policy outlooks. Mario Draghi’s comments almost always move the euro as traders express their enthusiasm or disappointment with the central bank’s views. EUR/JPY’s reaction to Draghi will depend on whether he acknowledges the recent economic improvements in the economy or ignores them again. Having only strengthened their forward guidance last month, the central bank will be wary of sounding overly optimistic and risk driving rates higher. The odds favor EUR/JPY negative comments from the ECB but most market participants expect the central bank to be dovish so any hint of optimism could send EUR/JPY sharply higher.

Technicals

Based on our Double Bollinger Bands, EUR/JPY is deep in sell-zone territory. This means that further losses are likely as long as the currency pair holds below the first standard deviation Bollinger Band at 138.55. If this level is broken, EUR/JPY could extend to 140. On the downside, 136 is near term support for the currency and if breaks this level, there is no major support until 134.