Don’t forget that you can now follow Forex.com’s research team on Twitter: http://twitter.com/FOREXcom
Risk has sold off yet again today but overall markets remain in fairly tight ranges. EURUSD is still managing to hold onto the key 1.30 handle as we reach lunchtime in the London session. After fairly neutral Spanish regional elections and no major outcome from the EU summit last week the market is looking for the next driver of the single currency. Tomorrow’s FOMC meeting is unlikely to spring any surprises after the announcement of QE3 at the September meeting. This leaves the PMI surveys for October, which are released tomorrow, as the most important near-term event risk for the euro. After declining to their lowest levels since 2009 in recent months, the surprise would be a positive reading. The market expects both the manufacturing and service sector October estimates to be in sub-50 contraction territory for this month, so if we get better than expected readings we could see some upside in EURUSD.
After that the ECB meeting on November 8th and also the regional elections in Catalonia at the end of November are the two key event risks for the single currency. Until then the market seems happy to pick up the euro on dips. There are two key short term support zones including 1.3030 – the 200-hr sma, and also 1.2990 trend line support (see the chart below). If we dip to this level then we believe this could attract some buying interest. From a technical perspective the uptrend does not end until we breach 1.2790 – the top of the daily Ichimoku cloud.
The BOC – dovishness already baked in
While EURUSD seems happy to trade in a low-vol range for the short-term at least, the action could be in USDCAD today. The Bank of Canada announces interest rates at 1400 BST/ 0900 ET. It is expected to leave interest rates on hold at 1%, however it is the statement that will be pivotal and tomorrow’s monetary policy report and press conference from BOC governor Carney. The CAD has declined as Carney’s rhetoric has got more and more dovish in recent weeks. Thus, it may take a surprise rate cut or even more extreme dovish rhetoric from Carney for the CAD to embark on another leg lower. On balance we believe the bigger risk is that the BOC are less dovish than expected. Carney has to walk a fine line between trying to protect the competitiveness of Canada’s exports to its largest trading partner - the US – especially now that the Fed has embarked on QE3; it also needs to be wary of deflationary pressures after annual CPI fell to 1.3% in September from 1.6% the month previously. On the other hand it must also try to avoid being accused of stoking a housing bubble thought to be unsustainable by some.
As we believe a lot of dovishness is already baked into the price of USDCAD we could see 0.9950 – 1.0000 act as a very sticky resistance zone, which is the 200-day sma and also the top of the daily Ichimoku cloud.
Watch the FOMC before embarking on USDJPY longs
The other pair to keep an eye on is USDJPY. This cross has picked up speed this morning and is testing the 80.00 level yet again. We expect this cross to trade in a range over the next week or so until the FOMC and BOJ meetings are out of the way. Relative interest rate differentials will be the biggest drivers of this cross in the coming weeks. If the FOMC remains cautious and supportive of open-ended QE at its meeting tomorrow then we could see USD gains capped. However, after recent weak growth signals in Japan, including the 10% drop in exports last month caused by the stand-off with China over a territorial dispute, then we could see the BOJ pump more stimuli into the economy at its October 30th meeting. Some reports suggest this could be a whopping JPY 20 trillion, which is double the increase from a couple of months ago. If the BOJ is this aggressive next week then we could see USDJPY climb towards 82.00 in the medium term. Support lies at 79.20 then at 78.55 – the top of the daily Ichimoku cloud. 81.10 is capping gains for now.
Today the BOC will be in focus along with Eurozone consumer confidence, which is released at 1500 BST/ 1000 ET, the market expects a decline to -25.9, the lowest level since mid-2009.
One to watch: EURUSD
This chart is still in an uptrend. The ascending triangle pattern suggests that 1.2990 should act as tough support, while 1.3150 remains resistance. As long as this support level holds, we remain constructive on this pair.
Chart 2: USDCAD:
0.9950 – 1.0000 is a stiff resistance zone and if the BOC is less dovish than the market expects over the next two days then we may see USDCAD give up some recent gains.
Kathleen Brooks| Research Director UK EMEA | FOREX.com
23 College Hill | 3rd Floor | London EC4R 2RT
Now you can follow us on Twitter: http://twitter.com/FOREXcom
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan.
For more forex information, go to www.forex.com