USD/CAD was unable to retake the 1.02 handle in two attempts earlier in the week and has once again turned lower. The conditions are now right for further USD/CAD declines and likely a new low.

The move higher in the USD touched off the upper Bollinger Band but was unable to close at that level. With risk appetite looking strong and the potential for a huge bailout for Greece, we think Canada’s currency stands to gain.

The RSI shows absolutely no oversold conditions in the U.S. dollar. Our first target is the cycle low at 0.9936. That will likely be tested in Friday’s session or on Monday. We will be trading this with a very tight stop at 1.01. A rally above there will most likely lead to a third test at 1.02.

We couldn’t help but notice the resilience of gold over the past two sessions. No matter if stocks were going higher or lower, gold was edging up. It was even able to break above resistance at 1167.50 to trace out a new high.

The first test for gold will be if it can close above 1167.50. It has failed in two attempts. We are encouraged, however, because there hasn’t been a strong rejection. Instead, gold has been able to hover around 1160. It also should be noted that gold is making new highs against the euro.

We see this set-up as potentially very bullish. The top of the channel also co-incides with $1200 and we think that is a likely target in the near term. A drop below $1145 would nullify our bullishness. We are also encouraged that the RSI is not in particularily overbought territory. We would consider holding any longs until it hits 80.

The euro began to unravel yesterday when S&P’s actions hit the wires. First, Portugal’s credit rating was cut (to A-/A-2 with a negative outlook. Second, S&P cut Greece’s sovereign credit rating to junk status, a three notch downgrade, with a negative outlook to go along with an expectation of almost no economic growth through 2016.

We might see some initial consolidation after the violent breakdown in the euro but the technical path downward has been reassured. The euro is in deep trouble with no foreseeable way out. Any bounce is going to be sold heavily by macro traders. Following the pack is the only way to play euro trades.

We see the risk of a sharp, short-covering rally as minimal. Even a catalyst such as a huge bailout of Greece will only serve as a selling opportunity. The market is going beat up the euro until it bleeds. At some point, the market will start to stabilize by moving sideways but that is the best case scenario in the short term.

Greek 2-year notes are yielding 18%! There is remarkable strain here and the situation will eventually spread. For those who are not already in a euro short position, look for selling opportunities. But for those who already hold them, hang on or add.

What was most surprising in today’s market action was not the size of the fall in the euro, but that the euro managed to gain against several currencies.

Looking over our charts over the past week we noticed the impressive performance of NZD/JPY.

The New Zealand dollar was the best performer in the forex market last week as it gained 3.4% against the yen. The NZD found a bid after stronger-than-expected first quarter inflation and building hawkish expectations for the upcoming RBNZ meeting on April 29.

Economists expect no change in the benchmark lending rate but they may signal growing worries about inflation and higher rates to come.

Meanwhile, the JPY broke down against the CAD last week and is now in danger of breaking through strong resistance in USD/JPY. The longer-term technical picture against the NZD isn’t as bullish, however, so a pullback is possible. We will be keeping a close eye on 68.60, which we see as a pivot.

A chain of events has led to the powerful selloff in EUR/USD and the pair has fallen to the lowest since May 2009.

The moves were kicked off as the European Commission revealed that Greece’s deficit, at 13.6% of GBP, is worse than originally reported and could be further revised down by 0.5 percentage points. The euro then bounced on reports that Greece could ask for a short-term loan while details of a bailout package are worked out, in a so-called “bridge loan.” Then, the selling resumed when Moody’s cut Greece’s sovereign ratings to A3 from A2 and placed it on review for further possible downgrade.

Now, with the G20 upcoming, there is speculation that the body could increase pressure for some sort of action. It seems as though the bond market is pushing the agenda with yields on 10-year Greek bonds surging to 8.70%, compared with 3.04% for comparable German bunds.

There is also talk of panic selling in euros as stop losses are blown out. The technical picture points to continued losses.

The next major support level isn’t until 1.2896 and that certainly is a major low as it represents the correction low in April last year. There is talk about some support at 1.3150 and there will be psychological support at 1.30.

Overall, however, the situation is negative and we don’t expect any major euro rally. Sell any bounce.

The euro fell below the April 9 low of 0.8706 today on growing concerns about the indebtedness of Greece, Portugal and Spain. Now, a continued to fall to the January low of 0.8601 looks likely.

There is some support at the 100-week moving average at 0.8656 but the market is clearly favouring the GBP over the EUR.

Fundamentally, there is reason to like this trade as well. The market now seems to have come to terms with a hung Parliament in the UK and past history has shown that the GBP can still rally in such a situation. Now, the focus has moved to a growing inflation problem in the UK. With the consumer price index over 3% in the UK and still showing signs of momentum it is highly likely that the BOE will raise interest rates before the ECB (or the Fed for that matter).

With the concerns continuing to mount about Greece and Portugal, the euro is in bad shape. Debt spreads rose to a record high of 522 basis points in Greece today and even a rescue package may only prove a brief respite. It seems the market is now also targetting Portugal, where spreads also hit a record high today.

Expect this pair to fall to at least 0.8400 but exit the trade if the downtrending channel is pierced on the upside.

We have to give ourselves a big pat on the back for yesterday’s call on CAD/JPY. It was the best trade in the forex market over the past day as it rallied 237 pips.

Here is the updated chart:

There is nothing not to like about this chart. The sell off on Friday is followed by a perfect morning star formation with a close above Friday’s open. Moreover, the move higher stalled just at the former support line. We said yesterday that our initial target was 93.50 and the market topped out at 93.60 before pulling back.

The catalyst for the move higher in CAD was a hawkish Bank of Canada statement. We foreshadowed this in yesterday’s note. Here is what the BOC said about its conditional committment to keep rates low until the end of Q2: “The need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus.” 

For the yen, the catalyst for the slump was the positive tone in equity markets. Stocks worldwide have rallied about 1%.

Now that we’ve taken up plenty of space lauding our efforts (we wish they all went this perfectly) the question is, where do we go from here?

We continue to like long CAD positions. The absolute best time to buy a currency is when a central bank embarks on a tightening cycle. Here we are at the very precipice of what could be a long-term move higher in interest rates.

In the short-term, however, the situation might be stretched. We will definitely be holding long positions but looking to add on any weakness for a move to our target of 100. The market is struggling at the aforementioned trend resistance and we may see some consolidation down to 92.80. That would be our initial buy point. We would cover on a move down to 92.50 because that would target 92.05. If we do see a move to the low 92s, we will be adding agressively.

Friday’s washout in CAD/JPY sent the pair down to key support. Today’ we traded below that support level early in teh session but later rallied to close higher. The rebound coincided with significant support, including the top of 80-90 range that was in place from June 2008 to mid-March 2010. It also touched off the 38.2% fibonacci retracement level of the rally we have seen since late February.

This chart looks very positive to us, as long as it stays above 90.00. That leaves a downside of 107 pips. On the upside, we see the potential for the chart to rally to 100 with 93.50 as an initial target.

The major risk in the next day is the Bank of Canada decision. We believe this chart is incorporating the hawkish bias we expect from the BOC. Policymakers in Canada have committed to keeping rates low until the end of the second quarter but with June fast approaching, we expect the Bank of Canada to show the first indications that it will embark on a rate-hiking cycle starting in July.

The risk is that the Bank of Canada emphasizes that it wants to continue to keep interest rates low. In that case, CAD/JPY could fall very quickly and we would want to exit the trade and re-evaluate.

The election drama in the UK ramped up after Thursday’s debate among the leaders of the three main parties. the stakes have been raised for the May 6 election after a strong performance in last week’s debate propelled the third place Liberal Democrats into contention. a UK Sunday Times poll showed Liberal Democrats’ support rising 11 percentage points to 29%, the Conservatives down 7 pp to 33% and Labour down 2 pp to 30%.

The market attempted to guage the impact of the poll on Friday but a rally and later selloff were both wiped away, leaving an indecisive doji star pattern. Such a pattern is a precursor to volatiliy and can signify a reversal. The latest polls confirmed the worst fears with the Liberal Democrats surging and a hung Parliament growing much more likely.

The gap lower at the open today completes a bearish evening star pattern that will be confirmed by a close below 1.5378. In fact, the 1.5378 level will be critical as it also represents the mid-March high. Uptrend support lies just below that level at 1.5363.

A close below those levels would be bearish, targetting 1.5150. It may even lead to a re-test of the 1.4787 lows.

With the three parties in a virtual dead heat, the GBP has slumped. The market will be trying to judge if the move to the Liberal Democrats has staying power or is just a passing fancy.

The coast is clear for GBP/USD to continue higher as fundamental and technical indicators point to an extension of the recent rally.

Fundamentally, it’s looking increasingly likely that the Conservatives will secure a majority victory in the May 6 election. Today’s poll of swing electoral districts showed the Conservatives with a convincing lead. Moreover, the market seems to be shifting its gaze away from the debt problems in the UK in light of data showing economic improvement, especially in exports.

Technically, this has all been reflected in the price action of GBP/USD.

The pattern is very similar to EUR/USD but is showing more conviction to the upside. There is a double-bottom at 1.4787 from March 1 and March 27. The neckline at 1.5378 was broken last week and we have gone back and retested it successfully. The measured target of the double bottom is 1.5969, which corresponds nicely with the 200-day moving average (red). Before that level can be reached, there are several technical hurdles to overcome. The most formidable will be the late February top at 1.5815.

Overall, we think this trade sets up nicely and we also like the fact that there has been good volatiliy in this pair and that looks set to continue.

The New Zealand dollar traded slightly lower in a quiet day of forex trading today. The technical outlook remains lower as long as downtrend resistance remains unbroken. The outlook overall is partly constructive, however, due to Monday’s jump higher above resistance.

At the start of the week, the NZD rallied above resistance at 0.7177 but it wasn’t able to sustain the rally and closed well-below resistance and was lower on the session. Once again today, the NZD attempted to rally but it closed at a relatively unchanged level, generating a doji star pattern.

Though we can’t ignore the bullish breakout, we see the overall move as bearish, especially given the downtrend that has been in place since October.

The pound sterling started the week off strong by rallying to a six-week high of 1.5489 but it has been unable to hold its gains and has faded to 1.5368.

The double-bottom at 1.4787 followed by today’s breakout certainly appears bullish but we are cautious of the potential for a reversal in light of the quick reversal today. One thing the bullish side has on its case is the low volume implied by the stock market. There was hardly any volume in stocks today, and if the same is inferred in forex, perhaps the reversal is less important.

The takeaway is that price action is bullish for cable but there should be some short-term caution. The double bottom targets 1.60 but perhaps the 50% fibonacci retracement at 1.5630 or the 61.8% target at 1.5820 are more realistic targets.

Greece got its lifeline on the weekend in the form of 45 billion euros from the European Union and International Monetary Fund. It’s a staggering amount of cash that will be lent at about 5% for three years. Greece does not yet want to take the cash and instead will try to tap the market in the hope that the EU/IMF backstop will bring down borrowing costs.

Overall, the value of the loans is much higher than the 10-20 billion euros the market was expecting and the interest rate is about as expected. In the short-term (this week) this should calm European nerves and boost the euro. The market is massively short euros and this is sure-fire catalyst to spark a short-term rally.

Technically, the picture is clear.

We have a long-term downtrend that has been broken after a clear double-bottom formation. The measured target of the double bottom is 1.3912, which is above resistance at 1.3816 but below the early-Feb high of 1.4025.

We don’t think the market will have a huge rebound because there are still lingering fiscal problems in Spain, Ireland and Portugal that must be solved. Moreover, downtrends rarely reverse. They usually first experience a period of sideways movement. Given that, we expect to see and range-trade develop between 1.35 and 1.40.

For so long, the Australian dollar and New Zealand dollar have traded in near tandem. Now, there has been a huge divergence.

Today, the New Zealand dollar was among the worst-performing currencies while the Australian dollar and Canadian dollar were among the top gainers.

The story is also one of divergence. The Reserve Bank of Australia continues to raise interest rates while the Reserve Bank of New Zealand has held rates unchanged for more than six months.

It’s also clear that New Zealand’s central bank doesn’t want the NZD to appreciate and has made pains to emphasize that its economy isn’t as strong as Australia’s.

Technically, a divergence like the one were are seeing is often a reason to set up trades that benefit from mean reversion. We don’t think that’s the case here. We are emerging from the worst economic crisis in a generation. The recovery has been like a tide that lifts all boats. Now, the market is in a stage where it has grown more discriminating.

So far, the CAD and AUD look like winners. NZD may prove to be a winner as well but so far, it’s lagging and expect the performance of the NZD to continue to reflect that.

The euro continues to get battered on worries about Greece and the pound sterling continues to bounce on hopes for a clear Conservative win in the May 6 election.

Technically, we are seeing a nice channel moving lower on the two hour chart. Above that, there is further resistance from the month-long downtrend.

At one point, we sense a great deal of optimism about Greece. The European Union appeared united and the austerity plan seemed legitimate. That is all starting to change. It’s clear EU leaders can’t work together and Greece continues to find hidden debts.

The bond vigilantes returned today and pushed Greek spreads to a fresh record of 410 basis points above German bunds (10-year). For euro traders, that’s a sell signal of the clearest kind. The Greek story is about to take another leg for the worse and there is no trade but to sell the euro.

The interest rate hike from the Reserve Bank of Australia has led to a solid move higher in AUD/USD today. The rally has broken downtrend resistance that came into force in mid-December and touched of the January and March highs.

The technicals are now bullish and the downtrend should now be support, followed by the shorter-term uptrend and the 200-day moving average. Fundamentally, AUD/USD looks just as good with the RBA sending out hawkish signals. The RBA said: “At this point the market for established dwellings is still characterised by considerable buoyancy”. The comment is a thinly veiled attempt to address worries of a housing bubble. This will continue to remain a concern for the RBA.

Technically, the way is clear until 93.29, which was the January high. After that, a test of the cycle high of 94.02 is possible. It would be no surprise to see AUD rally to parity with the USD in the coming months.

The only fundamental concern we see in the near-term is from China, where officials are nearing a move to hike interest rates or the value of the yuan. Either of these events would trigger a sell-off in AUD.

Ideally, we would like to buy a pullback to 92.40 but there is a risk of missing the move altogether.

CAD/JPY is like a runaway train. It has gone nearly straight upward since the beginning of March. We have been monitoring this and on March 11, with CAD/JPY at 88.42 we wrote that: “We really like CAD/JPY and see 90.00 as a relatively easy target.”

It was an easy target as it rallied to 90 one week later and was never out of the money. After that, however, was when things really got interesting.

Since March 23, CAD/JPY has had only one losing session and has gained nearly 600 pips, creating a parabolic chart.

We know one thing about parabolic charts — you don’t fight them. When a chart is as powerful as CAD/JPY, there is no telling when it will end. There will be analysts who come out and say it’s overbought and say to wait for a pullback. Meanwhile, the market goes higher and higher.

USD/CAD has opened the week on the defensive and is nearing a third test of a key level protecting parity.

USD/CAD has been in a clear downtrend for more than a week after popping above 1.03 on a re-test of the old 1.03-1.07 range. That failure set up a renewed push toward parity. That move failed on April 1 as support in the 1.0066 range held.

The inability to break lower generated some buying interest but the downtrend resistance on the hourly chart kicked in and the sellers took charge early in this week’s session in an indication of what is likely to come.

We are now back just above 1.0060. Expect a wave of sellers to push USD/CAD to parity – and eventually beyond —  if this key level breaks.