15-Jun-2020

1) EUR/USD – Bears Will Get More Aggressive Below 1.1200 Levels
2) CAD/JPY Bearish Bias
3) EUR/USD Profit Taking Continues
4) USD To Be Supported Amid Continued Risk Aversion

1) EUR/USD – Bears Will Get More Aggressive Below 1.1200 Levels

Earlier EUR/USD was heading towards the north side where bulls were leading in the game and marked high of 1.1421 level which was a fresh high of 3 months but after arriving at key resistance level bulls could not sustain and last week we have seen some reversal price action and bears took the pair at 1.1211 level on Friday itself.

Well, the current selloff is a correction (profit booking) or trend reversal, the way bears got charges from the resistance zone it seems like it’s trend reversal signal and we got a weekly closing at 1.1254 with a reversal pattern on the weekly chart.

We are continuously buying the pair from 1.0700 in our previous reports and booking the profit at every 200 pips in our recent report we mentioned to buy at 1.1100 level and our targets were 1.1300 and 1.1500 level where our first target achieved like a cake walk and second missed by 79 pips, but anyways it was an awesome call. Now it seems like bears are leading in the game and taking the charge, so if today pair goes below 1.1200 level we may see further selloff till 1.1050 at least.

On 4 hourly charts, we can see that pair has breached the uptrend line which was the last hope for the bulls and now bears are trading and sustaining below the uptrend line which is providing us trend reversal signals. The parabolic red dots are occurring above the candles which are providing a bearish signal. Odds are in favor of bears and intraday bias remains bearish on the pair as long as 1.1400 levels remain intact on a closing basis. Pair already trading below all the major and minor EMA lines on H4 chart which is favoring the bears. A bearish crossover on the MACD indicator is the recent development on the daily chart and RSI is also favoring the bears.

2) CAD/JPY Bearish Bias

CADJPY has been weakening recently on a number of factors. Last week there was a sharp fall in global equity markets. This was due to both profit-taking, after a disappointing Fed meeting, as well as the return of COVID-fears. A number of US states are reporting record increases in COVID-19 cases.

This negative sentiment has weighed on the commodity currencies (AUD, NZD, and CAD). Furthermore, remember that CAD is an export economy and that oil markets heavily impact the movement of CAD.

Over the last few weeks the run-up in oil has been impressive) but the run has now come to an end recently on a number of factors:

Falling demand on COVID-19 second waves fears. The IEA has said that CoVID-19 is causing the biggest decline in global energy investment in history and investment in energy across the world is to drop by 20% or by $400 USD this year vs. the previous forecast of 2% growth.

Recent OPEC+ production cuts extension is not enough to keep prices afloat in the face of falling demand

Finally, last week on June 09, the IEA cut 2020 world oil demand by 120K BPD to 8.34mln bpd which is a further decline in demand showing that the COVID-19 induced slowdown is continuing.

All of the above further weaken the Canadian dollar as oil is one of its major exports. This is a medium-term case for ongoing CAD weakness.

Here is a reminder of why the prospect of a second wave of COVID-19 is a concern that markets keep in the back of the mind. The Spanish flu’s second wave was far worse than it’s first by around 5 times.

3) EUR/USD Profit Taking Continues

USD trading initially showed no clear pattern last Friday but in the end the dollar got the benefit of the doubt. The dollar maintained Thursday’s gain quite easily even as sentiment on risk wasn’t that bad. EUR/USD tried to hold north of the 1.13 barrier, but EUR/USD longs finally threw in the towel. The pair closed the day at 1.1256 (from 1.1299 on Thursday). Interest rate differentials at longer maturities widened in favour of the dollar. Data including a better than expected U. Michigan consumer confidence again had little impact on USD trading. USD/JPY also was rather well bid and closed at 107.38 (from 106.87).

This morning, sentiment on Asian markets is again turning risk-off. Investors are pondering the potential economic consequences of a new outbreaks of corona in China and a rise in cases in some parts of the US. China May production and retail sales data were marginally lower than expected but confirm the scenario of a cautious rebound. Even so, sentiment remains fragile. The yuan weakens modestly (USD/CNY 7.09 area). The Aussie dollar is holding up quite well (low 0.68 area). USD/JPY slipped to the low 107 area. EUR/USD hovers in the mid 1.1250 area.

Today’s eco data are second tier with the Empire manufacturing survey exception to the rule. However, global sentiment will be the main driver for global FX trading. (US) equity futures show steep losses as investors fear a flaring up of the corona pandemic. US social unrest is a factor of uncertainty too, but at least for now it doesn’t really hurt the dollar.

Last week, a solid, three week-long EUR/USD rally ran into resistance with finally some modest profit taking. The dollar again attracts some safe have flows and euro longs maybe turned a bit more cautious ahead of this week’s EU summit as European politicians still have to agree on the structure of a EU recovery fund. EUR/USD is testing first ST support at 1.1240/60. A return below 1.1157 (38% retr) would question the EUR/USD uptrend, but we don’t expect that to happen.

EUR/GBP developed an indecisive, erratic trading pattern in the upper 0.89 area on Friday. Today, UK PM Johnson and top EU officials will hold a call on the state of the Brexit talks. Real progress is unlikely but both parties will look for path to revive the talks. EUR/GBP regains the 0.90 barrier and rest of the 0.9055 ST top might be on the cards.

4) USD To Be Supported Amid Continued Risk Aversion

The main event today is UK PM Boris Johnson meeting European Commission President Ursula von der Leyen and European Council President Charles Michel to discuss the way forward in Brexit negotiations ahead of the 1 July deadline. We are sceptical that the two sides will find a breakthrough in the deadlocked negotiations especially on a possible extension of the transition period, which expires at the end of the year. This extension needs to be agreed upon before 1 July if the two sides should be able to extend the transition period at a later stage in the fall.

Later today, watch out for the Empire Manufacturing PMI for June, which will give the first reading of manufacturing activity for the US economy this month.

Early tomorrow morning Bank of Japan will release its decision. We do not expect much action at its policy meeting on Tuesday. Bank of Japan has already scaled its purchasing limits up significantly and this week the government submitted a second supplementary budget to parliament to support small firms and help the economy back on its feet.

This week a host of Fed speakers will shed light on how they expect the US economy to evolve – watch out for Mr. Powell’s speech on Friday. In Europe, Bank of England meets on Thursday and EU Heads of States will discuss the EU recovery fund on Friday.

With the virus scare as of last week (US major indices down 5-7% on Thursday), we are opening up the week on the back footing as well. Overnight, US equity futures are down some 1-1.5% and commodity currencies such as the Australian dollar and NOK are down some 0.5%, thus continuing the downward trend as of last week. Similar moves are seen in commodity prices.

Several US states continue to report a pick-up in coronavirus cases and this is likely the main reason why markets are opening this week with heightened risk aversion. In our view, the bar for turning to lockdowns again seems very high, though. Not least in the US, where there is strong opposition to this. Nonetheless, there are also reports of China seeing a new (but still small) outbreak in Beijing.

Indeed, if this driver continues to be at the forefront of markets’ attention, we may likely see further retracement of the recent month’s positive risk sentiment and e.g. a stronger broad USD. EUR/USD will likely head lower as well with SEK and NOK also challenged by this.

Chinese activity data showed a continued but slow recovery in May. Though a recovery remains in progress and monetary support is well in place, the actual spending, production and investment data continue to come in at what is historically quite weak growth rates, although the direction continues to support an ongoing recovery.