Forex Trading: Bulls In Love With Hawks. What’s Next For AUD/JPY, GBP/CAD and USD/CHF?
Market Review: What Happened Last Week
The first half of 2023 is in the books and investor risk sentiment has been very strong thus far this year, thanks to reduced fears of a global recession, a resilient job market, and robust activity in the services sector as the global economy fully reopened after the pandemic.
Fed Chair Jerome Powell and ECB Governor Christine Lagarde reaffirmed their hawkish positions at the ECB Forum on Central Banking in Sintra last week. Powell indicated that two additional rate hikes are likely this year, and Lagarde indicated that the ECB is highly committed to achieving its inflation target. The market is almost fully pricing in a rate hike of 0.25 basis points by both the Fed and the ECB at their respective meetings this month.
Last week, the US economy experienced lower-than-anticipated jobless claims, as well as upward revisions for the third quarter GDP (2% vs. 1.4% previously) and the University of Michigan consumer sentiment for June (64.4 vs. 64.4). The dollar remained unchanged as weaker-than-anticipated personal consumption expenditure inflation tempered some expectations for a rate hike in September. The euro area also witnessed slightly lower-than-expected inflation prints, both on headline and core, according to the preliminary estimates for June.
The Norwegian Krone outperformed all other G10 currencies last week, gaining 1% against the dollar. The NOK was also the strongest G10 currency in June, gaining 4.2% against the USD, followed by the Canadian dollar (CAD), which gained 2.7% against the USD.
The Japanese yen remained the weakest currency as interest rate differentials widened further.
The JPY extended declines against the EUR and the USD last week, by 0.7% and 0.5%, respectively, after BoJ Governor Kazuo Ueda maintained his dovish stance during a panel discussion with the ECB's Lagarde and the Fed's Powell.
Forex Market: What To Expect This Week
In the United States, traders will keep an eye on the following events for the week:
- FOMC meeting minutes on Wednesday: Fed officials will likely confirm the board’s intention to hike twice in 2023.
- US jobs report on Friday: Expected increase of 200 thousand non-farm payrolls in June, lowest since December 2020. Unemployment rate expected to remain unchanged at 3.7% (seven-month high).
- ISM PMI surveys for June (Monday and Thursday): Modest increase in service sector activity but decline in manufacturing output.
- Other data to monitor: May's job openings, factory orders, and foreign trade data; June's ADP employment change and final readings of PMI data from S&P Global.
In the Euro Area, we’ll have the following releases:
- Final June PMI readings: Manufacturing PMI was revised slightly lower on Monday, indicating contraction while the service print on Wednesday is expected to affirm expansion.
- Eurozone retail sales for May on Thursday: Economists predict a small 0.2% monthly increase
- Germany’s balance of trade and factory orders for May: Analysts expect a 0.2% monthly uptick in exports and 1.5% increase in orders.
Other data to follow:
- Reserve Bank of Australia’s interest rate decision: Markets expect a 0.25% hike to 4.35%
Chart Of The Week: Bears Hit Back At The Japanese Yen Last Month
New Trades For The Week
Long AUD/JPY: Opened at 96.33; Take Profit at 102; Stop Loss at 93.70; Risk-reward ratio of 2.1
The Reserve Bank of Australia is expected to hike interest rates by 0.25% to 4.35% on Tuesday, bringing the cost of borrowing to the highest since December 2011.
The RBA recently sounded hawkish saying that the upside risks to the inflation outlook in Australia have increased, and thus they will likely keep the door opened for further rate increases. The rate differential between Australia and Japan will increase as a result.
The 10-year bond yield spread between the two regions is already around 2014 levels at 3.60%, but there is room for this to increase due to the RBA's renewed hawkishness and the BoJ's ongoing dovishness. The AUD/JPY pair appears to be undervalued relative to bond yield differentials, which at their current levels should place the Australian dollar near 100 yen.
After a minor retracement at the end of June, the pair is trying to bounce back, which, from a technical perspective, could lead to the formation of a bullish flag pattern.
The near-term trend remains bullish given that the pair formed a golden cross in June and the RSI is rising.
Next resistance is provided by 98.68 (highs from 2022), followed by the psychological 100 level, and then 102.78 (highs from 2014).
We like 102 as a short-term bullish target, with a stop at 94 and a risk-reward ratio of 2.6.
Short GBP/CAD: Opened at 1.6805; Take Profit at 102; Stop Loss at 93.70; Risk-reward ratio of 2.7
The British pound has had a strong first half of the year, as a UK recession has been avoided and the BoE has aggressively raised interest rates.
We believe the positive momentum surrounding the pound has likely peaked, while the strength of the Canadian dollar is rising.
The summer is traditionally a favorable time for fossil fuels such as oil and natural gas, and this seasonality can benefit commodity-backed currencies like CAD.
This week is light on data for both countries, but CAD bulls may begin to warm up ahead of the Bank of Canada's meeting on July 12, when the market anticipates a rate hike of 0.25% to 5%. The Bank of Canada will likely adopt a hawkish stance in response to the Fed's resumption of aggressive rhetoric.
Technically, the GBP/CAD pair is in a downtrend and has recently broken below its 50-day moving average. Lower highs and lower lows are also visible in the RSI.
A bearish move to 1.65 or slightly lower is possible, as this level coincides with a key support zone defined by the lower channel line and the 61.8% Fibonacci retracement from the 2022 high-to-low range. We like this region as a potential near-term target for GBP/CAD, with a stop placed just above the 23.6% Fibonacci level at 1.694.
Long USD/CHF: Opened At 0.90; Take profit at 0.93; Stop Loss at 0.8870; Risk-reward ratio of 2.5
In the past three weeks, the USD/CHF pair has oscillated back and forth around the 50-day moving average, but on Monday it is screening some more convincing attempts to break above it.
The early May bullish RSI divergence signal was effectively acted upon until bears reappeared in June, causing a pullback for the pair.
We believe that the bullish momentum has improved slightly over the past few sessions, as the pair has been trading on an ascending trendline and the RSI has crossed the 50 level once more.
If USD/CHF manages to close today's trading session at or above 0.9020, it will surpass two-week highs and likely propel bulls to new heights.
We favor 0.93 as a potential near-term bullish target, as it coincides with the 200-day moving average and 78.6% of the retracement from the low to high of 2022.
If USD/CHF breaks below the upward trendline, the stop can be placed 100 pips below current levels.
Open trades from past weeks:
- Short GBP/USD: Opened on June 26 at 1.2727; Take Profit at 1.233; Stop Loss at 1.29; P&L current +0.4%.
- Long USD/SEK: Opened on 10.71; TP at 11.30; SL at 10.5; P&L +1.5%.
- Short EUR/CAD: Opened at 1.4340; TP at 1.372; SL at 1.458; P&L -0.8%.
- Long CHF/JPY: Opened on June 19 at 158.58; TP at 171.62; SL at 152.5; P&L +2%.
- Short NZD/CAD: Opened on June 19 at 0.8205; TP 0.79; SL 0.8320; P&L +0.8%
- Long USD/MXN: Opened on June 12 at 17.30; TP 18.50; SL 16.45; P&L -1.1%.
- Short NZD/USD: Opened on June 12 at 0.6142; TP 0.59; SL 0.62.5; P&L -0.1%.
- Long CAD/CHF: Opened on June 12 at 0.6776; TP 0.7055; SL 0.6650; P&L +0.2%.
- Short EUR/NOK: Opened on June 5 at 11.7969; TP 11.25; SL 12; P&L +0.9%.
- Short XAG/USD: Opened on May 16, at $23.88; TP $22; SL $24.9; P&L +4.9%.
- Long WTI spot: Opened on May 16 at $70.8; TP $80; SL $66.3; P&L +0.5%
- Long EUR/JPY: Opened on May 8, at 149.16, TP 160; SL 142; P&L +5.7%.
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