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USD/CAD to Eye 2018-High on Hawkish FOMC Rate Hike

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Image of USDCAD 2-Hour chart

Fundamental Forecast for Canadian Dollar: Neutral

USD/CAD holds near the monthly-high (1.3067) as the unexpected contraction in Canada Employment dampens bets for an imminent Bank of Canada (BoC) rate-hike, and the pair stands at risk of making a more meaningful run at the 2018-high (1.3125) especially if the Federal Open Market Committee (FOMC) delivers a hawkish rate-hike next week.

All eyes are on the FOMC interest rate decision scheduled for June 13 as the central bank is widely expected to deliver a 25bp rate-hike, and the fresh updates from Chairman Jerome Powell and Co. are likely to influence the near-term outlook for USD/CAD as Fed officials pledge to phase out the forward-guidance for monetary policy.

Image of Fed dot plot

Market participants are likely to turn their attention to the Fed’s longer-run interest rate forecast (dot-plot) as the central bank persistently warns ‘that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate,’ and a material adjustment to reflect a more aggressive hiking-cycle should boost the appeal of the greenback as households and businesses prepare for higher borrowing-costs.

However, recent comments from the FOMC suggest the central bank is in no rush to extend the hiking-cycle as ‘inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term,’ and minor changes in the Summary of Economic Projections (SEP) may drag on the greenback as market participants scale back bets for four rate-hikes in 2018. As a result, ongoing projections for a neutral Fed Funds rate of 2.75% to 3.00% may produce a near-term correction in USD/CAD as it suggests that the FOMC will continue to tolerate above-target price growth for the foreseeable future.

USD/CAD Daily Chart

Image of USDCAD daily chart

Bear in mind, the near-term outlook has become clouded with mixed signals as USD/CAD appears to be stuck in a narrow range, while the Relative Strength Index (RSI) continues to track the bearish formation carried over from earlier this year. With that said, a series of failed attempts to close above the 1.2980 (61.8% retracement) to 1.3030 (50% expansion) region raise the risk for a move towards 1.2830 (38.2% retracement), with a break/close below the state region opening up the 1.2720 (38.2% retracement) to 1.2770 (38.2% expansion). The next downside region of interest comes in around 1.2620 (50% retracement) followed by the overlap around 1.2440 (23.6% expansion) to 1.2510 (78.6% retracement).

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Forex

Demand for Safe Havens Weakens as Market Sentiment Improves

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Safe haven prices, news and analysis:

Confidence is returning to financial markets, lessening the demand for safe-haven assets.

However, the recovery is precarious and they could soon be back in favor.

Check out the IG Client Sentiment data to help you trade profitably.

Market sentiment picks up

Indications that China’s central bank is looking to ease monetary policy are offsetting the continuing concerns about a US-China trade war, lifting market sentiment and prompting investors to move out of safe-haven assets into those seen as more risky and therefore potentially more profitable.

Prices of all the traditional safe-havens, including the Swiss Franc, the Japanese Yen, Gold, US Treasuries and German Bunds, are weakening Wednesday although many hurdles remain, including the possibility that the trade wars could flare up again.

Looking at these individually, USDJPY rose modestly Wednesday after three successive days of falls and the uptrend in the pair remains in place.

USDJPY Price Chart, Daily Timeframe (Year to Date)

Latest USDJPY price chart.

Chart by IG

Similarly, USDCHF is rallying and it too remains in an uptrend.

USDCHF Price Chart, Daily Timeframe (Year to Date)

Latest USDCHF price chart.

Chart by IG

The price of Gold continues to fall and is now down from a high of $1,365.36 per ounce on April 11 to $1,272.17 although any return of risk aversion would slow its decline. The yield on the benchmark US Treasury note – which moves inversely to its price – has increased from a low of 2.77% on May 29 to 2.90% and the yield on the 10-year German Bund is up from 0.255% to 0.367% over the same period.

You can click this link to discover more about which assets are currently risky and which are safe havens.

Resources to help you trade the forex markets

Whether you are a new or an experienced trader, at DailyFX we have many resources to help you: analytical and educational webinars hosted several times per day, trading guides to help you improve your trading performance, and one specifically for those who are new to forex. You can learn how to trade like an expert by reading our guide to the Traits of Successful Traders.

— Written by Martin Essex, Analyst and Editor

Feel free to contact me via the comments section below, via email at martin.essex@ig.com or on Twitter @MartinSEssex



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Most Asian Shares Rise, Sentiment Better. ASX 200 Tests Breakout

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Asian Stocks Talking Points:

  • Most Asian shares recover as trade war worries settled down, anti-risk Yen fell
  • Next, markets eye a central bank panel with commentary from important officials
  • ASX 200 is testing a breakout, opening the door to a resumption of its uptrend

Just getting started trading equities? See our beginners’ guide for FX traders to learn how you can apply this in your strategy!

As expected, Asian shares took a breather from yesterday’s aggressive selloff which was sparked by increased trade tensions between the US and China. A lack of updates as traders await further escalation allowed some stock markets to consolidate.

BACKGROUND: A Brief History of Trade Wars, 1900-Present

In Japan, the Nikkei 225 rose more than 0.30 percent by Wednesday afternoon trade. Most of the gains were from the telecommunication services and health care sectors. Chinese shares were held down though with the Shanghai Composite falling about 0.60 percent. Australia’s ASX 200 climbed, pushed higher by financials and information technology. The KOSPI pulled ahead, rising more than one percent.

On the FX side of things, the lull in trade war rhetoric diminished demand for safe havens. The anti-risk Japanese Yen was cautiously lower while the sentiment-linked Australian and New Zealand Dollars appreciated.

From here, aside from updates on tariff retaliations, all eyes will be on a central bank policy panel that takes place in Sintra, Portugal. We will get commentary from Fed’s Jerome Powell, ECB’s Mario Draghi, RBA’s Philip Lowe and BoJ’s Haruhiko Kuroda.

Amidst last week’s monetary policy announcements from the Fed and ECB, speeches from Mr. Powell and Mr. Draghi can arguably have more potential for FX volatility. If the Fed Chair reiterates last week’s hawkish tone while the ECB President sticks to a more dovish one, then we may see some US Dollar gains at the expense of its European counterpart.

ASX 200 Technical Analysis: More Gains Ahead?

On a daily chart, Australia’s ASX 200 was stuck right below immediate horizontal resistance levels as of Tuesday’s close. These are a combination of the January, May and current June highs between 6,158 and 6,149. However, as of today’s cooldown in trade war fears, the index is attempting a push to the upside for a new 2018 high.

This opens the door to more gains in the coming days as the ASX 200 resumes its uptrend from early April. From here, a push above resistance exposes the 50 percent midpoint of the Fibonacci extension at 6,202 followed by the 61.8% level at 6,264. On the other hand, a turn below if resistance holds places the 23.6% extension as the first target at 6,064. Under that, the index faces a near-term rising support channel going back to late-May.

ASX 200 Daily Chart: Breakout on Ebbing Trade War Worries?

ASX 200 and other equities Trading Resources:

— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter



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USD/JPY Could Be Set To Bounce

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JAPANESE YEN TECHNICAL ANALYSIS TALKING POINTS:

  • The Japanese Yen has seen broad gains against its developed market peers
  • However, its overall downtrend remains in place in many cases
  • This week could see it reasserted

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The Japanese Yen has caught a quite strong haven bid this week as trade tensions between China and the US bubble back to the surface of market concerns once again.

Technically speaking however, US/JPY has tested the bottom of a minor uptrend channel which has been in place since May 30. It has survived, just but in any case the broader, longer uptrend which has bounded trade all through the year’s second quarter remains very much in place.

Double Uptrend: US Dollar Vs Japanese Yen Daily Chart.

The Japanese Yen remains under considerable fundamental pressure from widely diverging interest-rate differentials with the US. The Federal Reserve has just raised interest rates once again and seems determined to continue the process for as long as the data allow. The Bank of Japan meanwhile has been forced to watch the modest inflation resurgence seen early this year collapse, taking with it any prospect that its own ultra-loose monetary policy can be unwound anytime soon.

This week’s official Japanese inflation numbers are likely to underscore that weakness and may put the Yen under renewed pressure, provided that no more bad news appears on market radar from the direction of global trade. Another bout of Yen weakness could see USD/JPY back up to its recent highs of 110.74 in quite short order. That said a return to late May’s peaks in the mid 111s seems unlikely unless some clear resolution to trade difficulties is seen- an unlikely short term prospect.

Reversals for the pair are likely to find support at this week’s 109.49 lows, with the broader channel base of 109.20 waiting below that.

The Japanese Yen’s haven bid has been pretty universal, with the Australian Dollar a particular target. AUD/JPY has been returned to the lows of late May which had not previously been seen since November, 2016.

Under Pressure: Australian Dollar Vs Japanese Yen Daily Chart.

The cross is now skirting 50% Fibonacci retracement of its long climb up from the lows of mid-2016 to the highs of September, 2017. That comes in at JPY81.40 and seems to be failing. A weekly close below that level would probably bring the next, 61.8% retracement into Aussie bear’s sights. That comes in some way below the market at JPY79.54.

Worryingly for Australian Dollar bulls the currency does not yet look notably oversold, judging by the cross’ Relative Strength Index, and it is likely that momentum to the downside has yet to dissipate.

RESOURCES FOR TRADERS

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

— Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!



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