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USD/CAD has taken quite a plunge in the aftermath of the upbeat U.S. jobs report on Friday, and continues to break key support levels, looking increasingly bearish.

The pair is now at levels not seen since mid-August, and rapidly recuperating some of the gains from recent weeks. At this stage, the momentum is clearly south, and with both the U.S. and Canada closed for Labour Day, the technicals are firmly in control of the pair. Look for Tuesday’s Bank of Canada rate decision for more direction. Not everyone is convinced the central bank will hike rates, so a hike should weaken the pair even further.

Hourly candles of CAD/JPY are coming into a triangle formation, with both ascending and descending trend lines ruling the pair, which suggests a sharp break in either direction could be imminent.

The Canadian dollar is one of those currencies which generally outperforms the USD on better than expected U.S. data. For this reason, CAD/JPY is a good pair to trade nonfarm payrolls on, because the pip movements are likely to be more pronounced than in USD/JPY, and the direction, identical. If payrolls come in better than expected, look for the pair to head higher. The reverse is also true. Movements could be aggravated once the triangle breaks.

NZD/USD is the day’s top performer, playing catch-up after the solid gains in the Australian dollar on Wednesday. The interesting things here is that the 50-hour moving average (green) is about to pass the 100-hour average (blue) suggesting that more bullishness could be in the cards. Lookout, however. The RSI at 67 is nearly at overbought levels (at or above 70).

As with the Aussie dollar, much of the day’s trading will revolve around positioning for nonfarm payrolls from the U.S. on Friday. These days, upbeat economic data for the U.S. strengthens the kiwi dollar, and vice-versa.

EUR/USD is making a comeback on news that Spain is indeed successfully bringing down its budget deficit. The news gave the pair some much needed support after breaking out of a triangle formation on the downside, having been sandwiched between ascending and descending trend lines. The break was a bearish signal for the pair. Meanwhile, the RSI is back at neutral levels after having falling into oversold territory earlier today.  

Today’s economic data from the U.S. is likely to be critical for the pair. In theory, EUR/USD should rally on the back of weaker than expected consumer confidence and manufacturing activity from the Chicago PMI. Also look to the FOMC minutes for clues as to how willing the Fed is to stimulate the economy further. If so, EUR/USD should move higher.

USD/JPY spiked on news that the BOJ governor had been recalled to an emergency meeting in Japan, but declined sharply when the central bank failed to present stronger measures to weaken the yen. Having already broken the first two Fibonacci support levels (green lines), and the 50-hour moving average (blue), the momentum is back on the downside. The RSI at 38 is not yet low enough for the pair to be technically oversold (at or below 30).

Traders are likely to continue riding the downward momentum and once again test the governments and Bank of Japan’s resolve. The fundamentals and technicals continue to point to more weakness.

Having firmly broke out of the triangle formation from the ascending and descending trend lines, USD/JPY is now range bound between 84.26 and 84.88. A break above the short term trend will be necessary to determine the next direction point. That being said there is pressure to the upside given the strong comments from the government on Friday morning.

USD/JPY traders would do well to pay attention to what the government says. If Japan intervenes to weaken the yen, expect USD/JPY to take a big jump. In the short term, the U.S. GDP and comments from Fed Chairman Ben Bernanke are important. Remember that whatever is bad for the U.S. economy will pressure USD/JPY lower, and vice-versa.

The U.S. dollar has made four big moves higher in the past four days. In the process, USD/CAD has risen above downtrend resistance and the mid-July highs. At the moment, the USD is overbought so we would advise waiting for a down day to establish long positions.

The RSI, at 68.42 is nearing the same levels as the spike high in May and if recent history proves correct, we will likely see a move lower (possibly back to as low as 1.04) before we see a renewed push higher.

Fundamentally, there is a similar story about to play out. The Bank of Canada meets September 6 and the market is pricing in a 45% chance of an interest rate hike. We expect that economic worries and market jitters will force the Bank of Canada to reconsider raising rates. At the moment, 100% of economists survey expect the BoC to raise rates. With recent Canadian economic data trending lower and no inflation worries, the BoC is likely to change course. Alternatively, they make hike rates by 25 basis points but make it clear that there will be no further rate hikes. In either case, the Canadian dollar will weaken (and USD/CAD will rally).

We expect to see 1.13 at some point before the end of the year.

Australia is in focus today after the results of national elections showed the ruling Labor Party performing worse than expected. The election is still too close to call, the Labor Party leads a Liberal-National coalition 72-70 but five seats are too close to call. Independents have won four seats and with at least 76 seats needed to form majority government, the two main parties are now scrambling to secure support from independents.

The initial reaction to the election was to sell AUD but that later reversed and AUD/USD is back to about flat on the session. There’s a cliché that election uncertainty is a negative for a currency but the market has learned from the experience in the UK. Tight elections and “hung parliaments” are rarely as negative as media scare-mongerers make them out to be.

Technically, the indications are clear. A huge reversal appears underway with the 50-day and 100-day moving averages providing support. It’s hard to be bearish with the hourly chart consistently heading higher and closing the gap formed at the open. There is no resistance until 0.9017 but keep an eye on the RSI.

Australians head to the polls on August 21 and there will be implications for the Australian dollar.

AUD/USD has fallen in the past two sessions but has made a slight recovery so far on Friday.

The most likely outcome of the election is a slim majority for the incumbent Labor Party in the Lower House. If, however, the Liberal/National Party coaltion pulls out a win, we would see the Australian dollar rally. The coalition says it will scale back the proposed mining tax, something that will encourage more foreign investment and development in Australia. Bookmakers are suggesting a 75% chance of a Labor majority.

The big story will likely be the Senate.   The most likely outcome is that the main parties will split the vote and that the Greens  will holding the balance of power in the Senate. The Greens favour a more punitive mining tax which is something that will hurt AUD. The outcome, however, will be up for prolonged debate.

In forex,a big move normally follows an election, especially when the outcome is uncertain. The 100-day moving average at 0.8840 is critical support. A decline lower points to a further 200-pip fall. The failed rally on Thursday forms a bearish candlestick as well.

Trading around an election can be treacherous. Make sure your stops are in place.

North American markets got a big boost from news that BHP Biliton had proposed a $37 billion takeover of Potash Corp. The takeover suggests corporations are willing to invest and spend, something that has been up for debate. Companies have been hoarding cash, unwilling to hire or invest due to the uncertain economic environment. If the move by BHP is the start of a trend, it will signal growing corporate confidence in the worldwide economy – something that will boost AUD and CAD.

There is a downside bias as USD/CAD consolidates in a wedge formation. A drop below minor support at 1.0305 would point to further losses for the U.S. dollar against its Canadian counterpart.

For the Australian dollar, the candlestick patterns are bullish in the short-term but a buy signal won’t be confirmed until 0.9081 is breached. With Asian markets risk averse at the moment, there may be good value in establishing longs if AUD/USD drifts toward 0.9000.

Despite its status as a growth currency, the Canadian dollar is holding up relatively well early in this week’s trading. To us, this looks more like a reflection of a slumbering, mid-summer market than any reflection about Canada’s economic strength.

Usually, the Canadian dollar moves in tandem with the Australian and New Zealand dollars but we’re not seeing that today. Instead, USD/CAD is chopping close to unchanged. Typically, when European and North American traders get to their desks, the pair will play catch-up. This is especially the case at this time of year when many traders are on vacation. That makes it a great time for independent traders to front-run the market.

On a daily charting basis, CAD  is carving out a wedge formation. Friday’s bullish hammer reversal candlestick points to further gains but they may be capped at psychological and downtrend resistance at 1.0494 – 1.0500. We feel like this chart is gearing up for a huge move but it may take some time to develop.

The euro is not oversold from a daily perspective but it is approaching some solid support levels that could provide quality buying opportunities.

On Wednesday, the euro’s nearly 300 pip fall against the U.S. dollar was the largest one-day fall since September of 2008. That’s worse than any single day during the European debt crisis. Without doubt, we see the euro moving lower from here in the medium term. In the short-term, however, we are nearing uptrend support and support from the June low of 1.2737.

We could see a further slide close to support on Friday, especially if U.S. retail sales disappoint. But looking to next week, there is very little on the data docket to spook the broad market. To us, that skews the risks toward a mild recovery trade. With that in mind, we would look for opportunities to buy the euro at below 1.28 with the expectations that we will see a re-test of 1.30 in the week ahead. If the euro does return to 1.30 we will be quick to take profits and initiate short positions for an eventual fall to new lows.

Risk aversion and the Fed’s announcement of further quantitative easing have pushed USD/JPY down through support to the lowest level in 15 years. Japanese officials expressed concerns in the Asia-Pacific session about the rising yen but that has done nothing to slow the rally. Japanese Finance Minister Noda told reporters in Tokyo that recent moves in the yen have been “a little bit one-sided.” Meanwhile, Japanese Trade Minister Masayuki Naoshima said that deciding on FX interventions is difficult in an interview with Jiji Press. USD/JPY fell as low as 84.73 but was most recently down 47 pips to 84.97. The pair fell as low as 84.83 in November 2009 during the height of the credit crisis but USD/JPY hasn’t traded below since 1995. If the pair can close below 84.83, it will be an extremely bearish signal.

A reason for the weakness in USD/JPY is that U.S. growth in the second quarter may have been far worse than the 2.4% pace that was initially estimated by the Bureau of Economic Analysis. Two surveys private economists show they are expecting more than a full point of revisions. Bloomberg has just released a survey suggesting growth will be revised to 1.2% but it’s based on just four responses. Similarly, Dow Jones has a listed consensus at +1.3% (it’s unclear how many were surveyed). After four quarters of contraction, the U.S. economy grew at a pace of 1.6% in Q4 2009 followed by quarterly readings of 5.0%, 3.7% and the most-recent 2.4% rate. It appears that growth is stalling as government stimulus fades. With momentum clearly slowing, more questions will arise about the possibility of negative growth and recession. Slower-than-expected inventory builds are a large part of the downgrade. Today’s unexpectedly large U.S. trade deficit for June will also hurt. One notable market watcher is saying today that growth could be revised to as low as +0.5%.

We expect a bounce in USD/JPY in the immediate term but will be looking to sell. We will also sell on a close below 84.83 with an eventual taget of the all-time low at 79.90.

The market is expecting the FOMC to downgrade the assessment of the U.S. economy. It’s probable they will indicated that employment growth is lackluster, consumer spending has disappointed and housing indicators continue to point to another leg lower. The wording will be less explicit but the market will be spooked by any worrisome signals, however slight. The initial reaction will be a slump in the stock market and that will translate into JPY strength.

 
One possibility is that we will see Bernanke’s “unusually uncertain” phrase included in the FOMC statement. The reaction to “unusually uncertain” would be mostly muted with perhaps some JPY and USD strength.

 
Market chatter also centers around what the Fed will do with money invested in mortgage-backed securities that are expiring. Until recently, it was believed the Fed would destroy the money it used to buy the securities but now there is talk they will recycle the dollars and buy Treasuries or further mortgage-backed securities. With inflation unlikely and deflationary fears rising, we fell this step will eventually be taken. We don’t think a program will be announced today but we expect them to emphasize that there is more they are prepared to do if the economy worsens further. We think such an outcome is USD-neutral. If the Fed, however, talks more explicitly about new programs or introduces them, we will see a broad USD selloff. Currencies like AUD, CAD and EUR would be expected to outperform in such a scenario barring a major downgrade in the economic outlook.

One final thing to watch is Kansas City Fed President Thomas Hoenig. He has dissented at the previous four FOMC meetings and is in favour of raising interest rates. We believe he will continue to dissent. The risk is that he will fall in line with other FOMC members on the “extended period” language. This would be a slight USD-negative. Overall, however, we feel the market (and the FOMC) has marginalized Hoenig.

USD/JPY is caught in a channel between 85.01 and 86.44 after trading at a fresh, 9 month low following last Friday’s nonfarm payrolls report for the United States. The pair is coming back up after warning from the Japanese finance minister said that “abrupt” moves in FX were undesirable, but the cross nevertheless remains bearish from a technical standpoint. The RSI near 50 is neither oversold nor overbought.

The consolidation in USD/JPY suggests that this may be some good entry points for traders to short the pair, however the upcoming BOJ rate decisions and FOMC rate decisions later on Tuesday provide some uncertainties. Should the Japanese monetary authorities decide to loosen monetary policy even further to help fight deflation, the yen could weaken, and USD/JPY could move higher. On the flip side, a dovish Fed should weaken the pair (note that the market is pricing in the possibility of more quantitative easing from the FOMC). Fundamentals aside, Friday’s 85.01 is the next support level after which the pair will be free to test the November 84.83, a breach of which will have USD/JPY trading at its lowest levels in 1995.

USD/CAD’s decline has accelerated on the back of yesterday’s upbeat U.S. economic data, and ahead of the national employment report tomorrow. The pair blew through the critical 1.0202 and 1.0135 support levels, and is now free to test the 1.0110 level from April 30 (not shown on the chart). Beyond that, there is support at 1.0011 after which the pair can break below parity. Beware, however, the RSI in the 31.59 level is nearly oversold (defined by falling below 30).  

The broader decline in USD/CAD is clearly intact, but some consolidation in the pair is in order. In the short term, 1.011 could be the level against which the pair will rebound, though on a longer term, we expect USD/CAD to continue falling, particularly if tomorrow’s employment data come in strong again.

As expected, USD/JPY is nearing the critical support level at 84.83 from last November (not shown on this chart), and is consolidating a bit after Finance Minister Yoshihiko Noda ramped up his concerns about the yen’s strength on the economy. Short term support lies at 85.31. The RSI at 36.6 suggest the pair is nearing oversold territory (technically defined as at or below 30).

The descending trend in USD/JPY is not only intact, but also strong today. We expect it is only a matter of time before the pair breaks to levels not seen since the mid 1990s (The next support after the 84.83 mark). In the shorter term, a weak ISM report could weigh further on the currency. Traders are also advised to watch the comments from the Japanese government. If anyone hints at FX interventions, the rebound in USD/JPY could be significant.

As expected, USD/JPY has broken even lower, now trading at its weakest since November 27, 2009’s 84.83. The RSI is near oversold territory, but traders likely have more room to sell the cross. On the flip side, Japanese lawmakers are beginning to express concerns about the value of the yen.

We are starting to reach levels in the yen where lawmakers could begin talking about interventions in the markets. There is no doubt in our mind that traders will attempt to test the policymakers’ resolve about a strong yen, so pay close attention to the headlines, as such talk could cause a rebound in the pair. Otherwise, expect more deterioration in USD/JPY.

USD/CAD has broken an important intraday, ascending trend line, and is quickly turning bearish on the back of some strong performance in global equity markets. The RSI is a bit oversold, but the pair looks likely to continue breaking lower for the time being.

In the absence of any Canadian economic news or data on the docket, we believe the pair will remain subject to the whims of the stock markets, as well as the economic data of the day. Some upbeat manufacturing data from the U.S. is likely to continue driving the pair lower, as well as bearish comments from the Fed Chairman.