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.