- USD stages recovery as Fed rhetoric lifts June rate-hike prospects
- Easing of Brexit fears could spell further near-term GBP recovery
- CHF weakest vs euro since Jan 2015 revaluation, look to long USDCHF on dips
- Bulls will look to stay long USDCAD as long as it stays well above 1.3000
- Spot traders could look to fade EURGBP rallies into 0.7700 area for try below 0.7600
- Options traders might set long EURGBP put spreads or long GBPJPY call spreads
- Traders will look to buy AUDCAD dips for a try back toward 0.9600-0.9700 zone
Hawkish noises from the Fed lifted expectations of a June rate hike and stoked a powerful USD
rally that could face consolidation next week. Image: iStock
By John J Hardy
This week saw a deepening US dollar recovery as Fed rhetoric has clearly upgraded the risk of a June rate hike, provided there's no notable deterioration in the data. The risk for USD bulls near term is simply consolidation and the long wait until the next key US data points at the end of May (PCE inflation on May 31) and early June (June 3 nonfarm payrolls/earnings and ISM non-manufacturing) as the Fed is clearly data-dependent.
Other themes next week could include a further near-term sterling recovery ahead of the uncertain outcome of the UK's June 23 referendum on the future of its European Union membership and a focus on the Canadian dollar after a notable weakening in the loonie this week and around next Wednesday’s Bank of Canada meeting.
Long USDCHF on dips
The Swiss franc is looking to close at its weakest level against the euro (on a weekly closing basis) since the January 2015 franc revaluation triggered by the Swiss National Bank abandoning the ceiling versus the euro. Some of the franc's recent weakness may be due to the apparent odds of a Brexit falling (according to the latest polls), which could in turn be easing systemic concerns related to the euro and in general removing any safe-haven bid from the franc. Another possible source of franc weakness is the renewed focus on Fed rate hikes, as the rate spread between the USD and CHF is expanding again after this week's hawkish Fed speakers. This last week, the USDCHF pair broke free of the 0.9800/50 area resistance and appears ready to challenge parity and beyond.
Trading stance: Bulls will look to scoop up dips back to the 0.9850/00 zone for a fresh rally aimed at a break above parity in the weeks ahead for an eventual try toward the multi-year highs above 1.0300.
This is a repeat trading theme from last week as the pair engineered a significant break above 1.3000 this week that leaves further room toward the next major resistance above 1.3300 – the 38.2% Fibonacci of the huge selloff from the 1.46+ highs comes in around 1.3310 and the 200-day moving average is just above 1.3350.
Trading stance: Bulls will look to stay long as long as the pair remains well north of 1.3000 for a try toward 1.3300 and higher in the wake of the Wednesday BoC meeting.
Short EURGBP/long GBPJPY via options
The last week was a watershed for anticipation surrounding the UK's June 23 Brexit referendum as UK polls, by telephone or online, suggesting a weakening of the "Leave" vote, a theme that could still see some adjustment higher in the sterling exchange rate on top of the recent rally, particularly against the euro, yen and the Swiss franc. Traders looking to avoid the volatility in the spot market can trade options that expire before the referendum voting day.
Trading stance: Spot traders might look to fade EURGBP rallies into the 0.7700 area for a try below 0.7600, while options traders looking to express a bullish GBP view might look to establish long EURGBP put spreads and/or long GBPJPY call spreads (extra volatility potential for JPY around this weekend’s G7 summit) with 2.5 to 1 or better reward/risk ratio and expiry the week before the June 23 referendum.
The Canadian dollar should get plenty of attention next week around the Bank of Canada meeting mid-week, which could catch the market off guard if the bank decides to warn on the exchange rate risks or waxes dovish on Canada’s structural challenges. There is added risk to CAD of energy markets finally faciing more headwinds on the strong USD theme as well. In Australia, meanwhile, the economic calendar is relatively barren of event risks. This is mostly a trading theme geared to mean reversion of recent developments, where AUD has perhaps taken excess punishment from hot money flows and CAD could receive more negative attention next week,
Trading stance: Traders will look to buy dips in the wake of Friday’s Canada data for a try back toward the 0.9600-0.9700 zone, adjusting trade size to ensure appropriate risk/reward.
Opinion polls show support for the anti-EU camp fading somewhat in the UK,
soothing Brexit fears and allowing the GBP to rally. Photo: iStock
— Edited by John Acher