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USD/CAD: a pause in advance
Yesterday the greenback added almost 100 pips trading versus its Canadian counterpart. However, the bulls didn’t manage to push USD/CAD above resistance in the 1.0300 zone and the pair posted the day’s minimum at 1.0261.
Note that both technical and fundamental picture for the pair still looks positive, so US dollar may resume its advance after some consolidation.
The pair has gained 4.2% this month. Canada’s 10-year bond yield dropped to the lowest level since at least 1989 at 1.770%.
US currency strengthened due to several factors: global risk aversion, declining commodity prices and the speculation that the odds of the Bank of Canada interest-rate increase decreased.
Analysts at TD Securities think that USD/CAD may strengthen to 1.04/06 before USD-bears finally reemerge. Strategists at National Bank of Canada recommend buying the pair above 1.0320.
As always with the pair USD/CAS, much depends on US and Canada’s data. Watch US unemployment claims and US GDP data today and Canada’s GBP and US NFP release tomorrow.
Analysts expect the U.S. non-farm payrolls to increase by 152K. However, in April the labor market didn’t fulfill expectations rising only by 115K, far below the 172K consensus forecast. The March unemployment rate is predicted to remain unchanged at 8.1%. The unemployment declined to 8.1% in April from 8.2% in March, despite lower NFP job gains.
Chart. Daily USD/CAD
Danske Bank: trading GBP/USD
Analysts at Danske Bank recommend going short on GBP/USD, entering the trade at $1.5540, targeting at $1.5410 and with a stop at $1.5615.
On Thursday British pound strengthens against the greenback after yesterday’s sharp fall. The sterling is supported by M&A talks (Britain’s Logica could be bought for 1.7 billion pounds by Canada’s CGI) and by positive UK economic data (GfK consumer confidence index and housing prices went up).
However, the cross still trades in a downward channel and is close to a 4-month minimum at $1.5233. According to specialists, the sterling will continue a downward movement after a short-term correction. The bank points out that British economy is affected by the euro zone’s debt crisis. Moreover, the pair’s looking oversold with RSI index below 30.
Support for the pair lies at $1.5440, $1.5400 and $1.5365, while resistance – at $1.5510, $1.5550 and $1.5600.
Chart. H4 GBP/USD
Bearish outlook for EUR/CAD
The single currency hit yesterday 2-year minimum versus Canadian dollar in the 1.2730 area. Today the pair USD/CAD has managed to recover a bit, though it got constrained by the resistance of this week’s downtrend.
According to analysts at Rabobank, the loonie will suffer from euro zone’s debt turmoil and slow rebound of the US economy. Strategists are bearish on the cross in the long term. If the pair makes a sustainable break below the 1.2761 (2011 minimum), it will get vulnerable for a decline to 1.2500.
Specialists at Danske Bank also remain bearish on EUR/CAD, but forecast a short-term correction. They recommend selling the pair at 1.2850, targeting at 1.2640 and stopping at 1.2940.
According to analysts at TD Securities, there is no strong support for the cross until 1.2455 (2010 minimum).
Chart. Daily EUR/CAD
Spain’s in danger, markets are worrying
While there are slight signals of optimism in Greece (according to new surveys, Greek parties are likely to form a pro-bailout coalition in June), market attention has switched to Spain and its troublesome banking sector.
On Wednesday Span’s 10-year bond yields reached 6.7% approaching the critical 7% mark at which Greece and Ireland were forced to ask for financial help. Main Spanish stock index IBEX lost 28%, while the nation’s unemployment is almost at 25%,
Spanish authorities confirm that the situation is critical. According to them, financial needs for the next few weeks are satisfied after the nation’s government has issued more than half bonds planned for 2012. The comment doesn’t sound inspiring at all.
The European Commission offered direct aid from a euro-zone rescue fund to recapitalize distressed banks and proposed giving Spain additional time to meet a 3% budget deficit target.
The EC officials also underlined that they would like to know Spain’s restructuring plans for recently nationalized Bankia as soon as possible: beyond all question, the domestic solution of the country’s bank crisis without a bailout is preferable. Spanish government promised to provide Bankia with 23.5 billion euro, but still hasn’t provided any information on where the funds will come from.
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June 1: currencies & economic background
The summer has begun in the risk-off mode. Chinese manufacturing PMI disappointed: official figures were down from 53.3 in April to 50.4 in May (that still means expansion, but the critical 50 level is getting closer), while HSBC index dipped from 49.3 to 48.4 vs. 48.7 expected.
US dollar gained versus the majority of its peers as a safe haven with the Dollar Index (DXY) reaching 21-month maximum. Even USD/JPY is trading on the upside as investors went long due to potential intervention, but got only the usual verbal commitments from the Japanese Ministry of Finance, so the pair has already erased some of its advance.
Euro’s attempt to interrupt the long decline against the greenback ended in red yesterday. EUR/USD has been steadily renewing 2-year minimum this week: today is set at $1.2323. Australian and New Zealand currencies are set to complete 5-week declines against the dollar as Asian stocks fell. The MSCI Asia Pacific Index of shares lost 0.9%.
In Europe it’s all about politics. The markets are waiting for the results of Irish referendum on the fiscal pact – Ireland is the only country to put the EU plan to a public vote. Although the polls indicate that the legislation will be ratified, one can’t eliminate the possibility of unpleasant surprises taking into account the fact that Irish voters rejected 2 previous referendums. The results will be announced tonight. In addition, the ECB is pushing Germany to give up its opposition to direct euro-area aid for struggling banks.
Important data to watch today:
Great Britain: According to forecasts, manufacturing PMI will decrease to 49.7 in May from 50.5 in April, indicating industry contraction and augmenting concerns on the UK economic conditions. Great Britain holds a 10-year bond auction.
Canada: GDP in March may have added 0.3% in March after an unexpected contraction by 0.2% in February.
US: Analysts expect the US non-farm payrolls to increase by 150K. In April the labor market didn’t fulfill expectations rising only by 115K, far below the 172K consensus forecast. The March unemployment rate is predicted to remain unchanged at 8.1%. The ISM manufacturing PMI in May is expected to drop slightly to 54.1 compared with 54.8 in April.
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Key options expiring today
Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).
Here are the key options expiring today:
EUR/USD: $1.2350, $1.2450, $1.2480, $1.2485, $1.2500;
USD/JPY: 78.50 and 79.00;
GBP/USD: $1.5525;
EUR/GBP: 0.8000, 0.8050, 0.8100;
USD/CHF: 0.9725;
EUR/CHF: 1.2050;
AUD/USD: $0.9700, $0.9800.
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NFP is unlikely to bring joy
Today is one of the most exiting regular releases of the month – US Non-farm payrolls.
Previous (April): +115K.
Forecast (May): +151K.
Analysts at Standard Chartered think that the actual reading will come between previous and forecast level, at 130K. In their view, the lack of progress at US labor market reflects more the cautious attitude of business to future than indicates fears about a return to recession.
Analysts at BNP Paribas also think that NFP will show increase of only 110-140K that is below 150-200K level regarded by the Fed as acceptable. The specialists note that such figures will surely increase the odds of monetary easing in the US. However, BNP Paribas notes that this may happen only later in summer: it’s likely that the Fed’s Jackson Hole gathering in August will once again prove a defining moment in the US monetary policy.
Initial jobless claims have recovered after their seasonally adjusted spike higher in April, but they have failed to move below the levels seen in February-March. In addition, ADP employment report released yesterday was lower than expected showing that the number of employed people excluding the farming industry and government rose by 133K in May after increasing by 113K in April (below the forecast of +145K).
USD/JPY slides lower, interventions fears loom
The greenback began today’s trading by rising versus Japanese yen as traders went long in order to get ready to potential intervention of Japanese monetary authorities, but got only the usual verbal commitments from the Japanese Ministry of Finance. As a result, the USD/JPY erased ts advance sliding to 78.10, the minimal level since the middle of February.
On the fundamental part, risk aversion strengthened due to disappointing UK PMI data of 45.9 (vs. 49.8 expected and previous 50.2). US 10-year Treasury yield fell from 1.5713% to 1.5374% – negative factor for USD.
The talk about potential intervention intensifies as US dollar slid yesterday below the 200-day MA. Analysts at Societe Generale think that Japan may act if USD/JPY goes under the 78 yen mark. Experts say there’s an option barrier and buy orders there.
Analysts at Standard Chartered closed USD/JPY longs citing several reasons: the ability of the BOJ to provide support for the pair’s recovery seems less and less feasible, while the markets will stay risk-off amid euro zone’s problems. “The Japanese authorities may well seek to offset this renewed JPY strength through aggressive FX intervention. However, with the BOJ demonstrating continued reluctance to act, it is challenging to suggest when this might occur”.
Chart. Daily USD/JPY
Analysts set targets for EUR decline
The single currency has been trading within downtrend versus its US currency since the beginning of May. The markets are bearish, analysts are bearish… What interests everybody is how deep EUR/USD may fall?
SocGen: sell EUR/USD at $1.2350, stopping at $1.2550 and targeting $1.1800. There’s a risk of short-covering rally, but the risk aversion is so high that euro seems to be the best way to play the short European trade.
ANZ: any acceleration of the decline may bring the pair to $1.1875 (2010 minimum) and even to $1.1760 (2004 spike minimum), $1.1640 (2005 spike minimum) and $1.1215 (61.8% Fibonacci retracement). Euro has to rise above $1.2640 to ensure that a decent consolidation period.
Commerzbank: EUR/USD will find support today in the $1.2336/06 (2008 minimum, 2001-12 uptrend line). If this area is breached, the pair will head down towards $1.2058 (200-month MA) and $1.2000 (psychological level). Resistance for euro lies at $1.2457 (March 2009 minimum), $1.2495, $1.2500 and $1.2625 (January minimum and weekly maximum).
Chart. Monthly EUR/USD
Pound plunged on negative data
Sterling slumped this week versus the greenback losing 400 pips in a decline from $1.5700 to $1.5300. Only a month ago GBP/USD set high at $1.6300. The pair breached $1.3555 (support line connecting 2008 and 2010 minimums).
Today pound was hit by disappointing UK PMI data of 45.9, the lowest level since the depths of the financial crisis in 2009 (vs. 49.8 expected and previous 50.2).
Support lies at $1.5268 (today’s minimum, October 2011 minimum) and $1.5233 (January minimum). 14-day RSI slid to 15 showing that the pair’s decline may have been too rapid and some consolidation may take place. At the same time, downtrend may be expected to continue while pair is trading below resistance at $1.5355.
Chart. Daily GBP/USD