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Talking Points:

- USD/JPY Breaks Below 200-Day SMA as Risk Appetite Falters; April-Low in Focus.

- Canadian Dollar Struggles as Ivey PMI Dips; Bearish Sequence in Focus Ahead of Employment Report.

DailyFX Table

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

USD/JPY

109.43

110.53

109.28

102

125

The Japanese Yen has staged a meaningful advance against its U.S. counterpart, with the USD/JPY exchange rate at risk for a further decline as market participants scale back their appetite for risk.

Growing concerns surrounding emerging market economies appear to be weighing on market sentiment as South Africa unexpectedly slips back into recession, while Brazil’s top electoral court digs into the corruption scandal surrounding President Michel Temer, and the weakening outlook for global growth may continue to benefit the Yen as it dampens carry trade interest. At the same time, the U.S. 10-Year yield extends its decline from earlier this month and quickly approaches the 2.1% threshold amid reports China is preparing to boost its holdings of Treasuries, and rising bond prices may drag on the global benchmark equity indices as there appears to be a near-term shift in market behavior.

USD/JPY Daily

USD/JPY Daily Chart

Chart - Created Using Trading View

  • Even though the Federal Open Market Committee (FOMC) is widely expected to deliver a June rate-hike, the lack of momentum to test the topside hurdle around 112.40 (61.8% retracement) to 112.80 (38.2% expansion) shifts the broader outlook for USD/JPY, with the recent developments pointing to a false topside break as it operates back within the downward trend channel from 2016.
  • Failure to preserve the range-bound price action from the previous week opens up the downside targets especially as USD/JPY fails to hold above the 200-Day SMA(110.22); a meaningful test may unfold over the coming daysas the pair quickly approaches the April-low (108.13), which coincides with the Fibonacci overlap around 108.30 (61.8% retracement) to 108.40 (100% expansion).
  • Will also keep a close eye on the Relative Strength Index (RSI) as it comes up against oversold territory, with a break below 30 seen as a bearish trigger; next downside region of interest coming in around 106.60 (38.2% retracement) to 107.20 (61.8% retracement), which largely lines up with channel support.

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Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

USD/CAD

1.3467

1.3487

1.3443

6

44

The Canadian dollar struggles to hold its ground as the Ivey Purchasing Managers Index (PMI) tumbled to 53.8 from 62.4 in April, marking the lowest reading since August 2016, but USD/CAD may continue to carve a near-term series of lower highs & lows as Canada’s Employment report is anticipated to show the economy adding another 15.0K jobs in May. Keep in mind, the broader outlook remains tilted to the upside as the dollar-loonie exchange rate largely preserves the upward trend carried over from 2016, but the pair stands at risk for a larger correction if Fed officials continue to project a terminal fed funds rate close to 3.00%.

Even though inflation continues to run below the 2% target, data prints pointing to stronger growth may heighten the appeal of the loonie as it puts pressure on the Bank of Canada (BoC) to remove the record-low interest rate. Indeed, Governor Stephen Poloz and Co. may adopt an improved tone at the next meeting on July 12 as ‘the Canadian economy’s adjustment to lower oil prices is largely complete,’ and the central bank may start to alter the monetary policy outlook especially as the FOMC shows a greater willingness to unwind its balance sheet.

USD/CAD Daily

USD/CAD Daily Chart

Chart - Created Using Trading View

  • The monthly opening price action casts a bearish outlook for USD/CAD as the pair fails to push back above the Fibonacci overlap around 1.3560 (50% expansion) to 1.3570 (61.8% expansion), with a break/close below the 1.3440 (38.2% expansion) hurdle raising the risk for a more meaningful run at the May-low (1.3388).
  • Nevertheless, the RSI appears to be stuck in a near-term holding pattern, and USD/CAD may merely facing range-bound conditions over the coming days amid the mixed data prints coming out of the Canadian economy; may see the oscillator threaten the bearish formation carried over from the previous month as it largely retains the upward trend from 2016.

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IG Senitment
  • Retail trader data shows 64.3% of traders are net-long USD/JPY with the ratio of traders long to short at 1.8 to 1. In fact, traders have remained net-long since May 17 when USD/JPY traded near 113.64; price has moved 3.7% lower since then. The number of traders net-long is 8.0% higher than yesterday and 18.0% higher from last week, while the number of traders net-short is 9.4% higher than yesterday and 2.1% lower from last week.
  • Retail trader data shows 49.1% of traders are net-long USD/CAD with the ratio of traders short to long at 1.04 to 1. The number of traders net-long is 2.1% lower than yesterday and 7.8% lower from last week, while the number of traders net-short is 0.5% lower than yesterday and 20.1% higher from last week.

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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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