Although we do not expect much to happen in the way of any significant price action developments on Monday, given the market closure in the US for the 4th of July holiday, overall price action has certainly been quite interesting in recent days. The risk on trade is very much back in vogue, and US equities managed to put in their best performance on the year in the previous week, despite closing lower on the month. A temporary resolution to the Greek debt crisis and some encouraging data out of the US have been helping to bolster risk related assets, with currencies like the Canadian and Australian Dollars outperforming. The Canadian Dollar has been a real attention getter, with the Loonie rallying sharply on the back of the pick-up in risk along with some interest rate hike supportive economic data in the form of higher inflation and better than expected growth readings.
Weekend news on the topic of Greece has been driving some early gains in the Euro on Monday after the EU FinMins agreed on Saturday to a Eur12B aid payment following the passage of the previous week’s austerity legislation. However, there is still room for some reservations with details of a second aid package postponed and EU Juncker commenting that Greece’s sovereignty will be massively limited going forward as a result of these latest measures. Juncker went as far as to compare the Greek situation to the sell off of East German companies in the 1990’s after the fall of communism. Still, the Euro remains well bid, and the latest CFTC data should offer no comfort to USD bulls with speculators reducing their bets against the Greenback to the lowest level since the week of January 11th. When this happened back in January, it marked a definitive medium-term bottom for the US Dollar and could threaten to have the same result again.
Elswehere, Bank of Japan’s Shirakawa was on the wires saying that the global economy was continuing to recover, but at a slower pace than had been anticipated, and that the Japanese economy continued to face downward pressures but was also showing some signs of improvement. On the data front, Australian indicators continued to disappoint, with building approvals and seasonally adjusted retail sales coming in on the softer side of expectation and also in the negative. The antipodean has lost some ground in early Monday trade and could be vulnerable to additional selling pressure as a result with investors potentially becoming more concerned with the mix of weaker economic data and higher interest rates. In our opinion, the weaker local fundamentals, coupled with some disappointing data out of China could very well force a shift in the tide, with the Australian Dollar coming under some more intense pressure over the coming months.
Looking ahead, Swiss retail sales, Eurozone sentix investor confidence, UK construction PMIs and Eurozone producer prices will take center stage in European trade, while Canada industrial product prices is the only notable release due in North American trade. In light of the holiday Monday session, we would not recommend taking any aggressive positions until normal market conditions resume Tuesday. Global equity futures are relatively unchanged, while commodities are mildly bid. We have also been noticing the disconnect between risk on trades and commodities, with gold in particular underperforming despite the risk on environment. At this point, we have a hard time reconciling this development and for the time being would at least like to put it on the radar screens.
ECONOMIC CALENDAR
TECHNICAL OUTLOOK
EUR/USD: At this point, there is the risk for some additional strength over the coming sessions, with the market easily establishing back above 1.4500 and showing no signs of any let up just yet. Overall however, medium-term price action remains quite choppy and we continue to like the idea of selling into rallies in anticipation of a more sizeable pullback below 1.4000. From here, look for a test of the upper Bollinger band by 1.4660 before the possibility of a bearish resumption back down towards 1.4000. Ultimately, only a close back above 1.4700 would negate outlook and give reason for rethink.
USD/JPY: After undergoing a fairly intense drop off from the 85.50 area several days back, the market looks to have finally found some support in the 80.00 area and could be in the process of carving out some form of a base. Look for setbacks to continue to be well supported around 80.00 with only a close back below 79.50 to give reason for concern. From here we see the risks for a fresh upside extension back towards the recent range highs at 85.50 over the coming weeks and the latest break and close back above 81.00 helps to confirm. Look for a test of next key short-term resistance by 82.20 over the coming sessions.
GBP/USD: Although the short-term structure remains bearish, setbacks seem to be well supported in the 1.5900’s for now. However, we classify the latest price action as some bearish consolidation ahead of the next major downside extension with the market now looking to establish back below the 200-Day SMA and extend declines below next key support at 1.5750 further down. In the interim, look for any rallies to be well capped ahead below 1.6250 on a daily close basis. Rallies towards 1.6200 should therefore be used as a selling opportunity.
USD/CHF: Despite the intense downtrend resulting in recently established fresh record lows below 0.8300, short/medium/longer-term technical studies are looking quite stretched to us, and we continue to like the idea of taking shots at buying in anticipation of a major base. The latest break back above the 20-Day SMA is encouraging while a push beyond 0.8550 will ultimately be required to officially relieve immediate downside pressures and accelerate gains. In the interim, look for intraday setbacks to be well supported ahead of 0.8400.
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