The Forex Trading Week Ahead

07/16/2012 6:00 am EST

Focus: FOREX

The staff of Forex.com highlight important news and technical events currency traders will be monitoring this week.

It is a relatively light week for economic data out of Europe this week, and therefore markets will be paying close attention to ongoing developments of recent measures to contain the region’s debt crisis.

Details continue to emerge regarding Spain’s sought-after bailout package. Last week’s announcement raised hopes that the first €30 billion of aid for Spanish banks will be provided this month.

At the government level, Spain was given an extra year to reach its budget deficit target. Spanish ten-year yields have declined after spending time above the 7% level, and will be closely monitored as Spain sells bills on Tuesday and bonds on Thursday. A renewed flare-up in yields may put added pressure on the EUR.

The European Stability Mechanism (ESM), Europe’s permanent rescue fund, will also be in focus as it goes through the ratification process. Of note, Italy’s parliament will vote on the ESM this coming Thursday. The debate in Germany regarding the constitutionality of the ESM persists, and though progress can be a positive for the euro, the overall firepower of the fund continues to raise concerns.

The German ZEW survey for July is likely to be the main economic release in the week ahead, which also sees the release of EZ June CPI (expected to remain at 2.4% year-over-year) and May trade balance (anticipated to narrow to a surplus of €5 billion from €6.2 billion). The risk is for an unexpected drop in CPI, which could spark increased speculation of further rate cuts by the ECB.

Germany’s sentiment indicator, which showed a negative print last month for the first time since January, may weaken further, indicating a deteriorating outlook which could weigh further on the common currency. The euro has pushed lower against most of the majors and looks set for further declines. We maintain the view that the path of least resistance is to the downside and favor selling rallies in EUR/USD.

Bank of Canada to Hold
On Tuesday, July 17, the Bank of Canada will meet to decide on monetary policy and announce interest rates. We expect the bank to keep rates steady at 1%.

As this is largely anticipated by market participants, the key focus will be on the tone of the accompanying policy statement. Despite a better than expected June employment report, which showed a surprising tick lower in the unemployment rate and improvements in housing activity, we expect the bank to soften its hawkish tone.

Since the last rate announcement early in June, data has showed CPI slow by more than expected to 1.2% year-over-year in May, and the June Ivey PMI fell below the 50 threshold for the first time since July 2011, an indication of contraction. Activity in the US economy—which is closely tied to that of Canada—has deteriorated of late, and is likely to be of concern to the BoC.

Slowing global demand, an escalation in the EU crisis, and a dovish response by major central banks are externalities which may cause the BoC to soften its hawkish tone. Furthermore, the Bank’s Monetary Policy Report will be released on Wednesday, and may show the bank revise lower its economic forecasts, as we have seen done by official institutions in the US and around the world.

A more dovish tone by the Bank of Canada would likely weigh on the Loonie as the bank shifts away from its tightening bias. With USD/CAD currently facing support around the base of the daily Ichimoku cloud, which is around 1.0125, there is the potential for a rebound in the pair. The key level to the upside is the daily Tenkan line and top of the cloud, which converges around the 1.0230/40 level.

Also of note, the 30-day rolling correlation (based on a daily percentage change) between USD/CAD and crude oil has reached the lowest level in over five years this week, and currently stands at -0.84. This suggests that fluctuations in oil prices have had a strong inverse relationship with the USD/CAD pair.

Paying Attention to Intermarket Analysis…
With markets being as volatile as they’ve been over the past few weeks, intermarket analysis has never been more important. For those of you unaware of what we’re referring to, intermarket analysis is the study of several markets at once, such as stocks, bonds, commodities, and currencies, rather than each one in isolation. Thus, it may help trader’s pinpoint market reversals or confirm a trend earlier based upon their respective price movements.

With that said, below we have highlighted a few of these markets to keep an eye on in the current trading environment. Should the technical levels in the noted markets below get breached (higher or lower), then be on alert for a similar movement in many of the high beta currencies—AUD, NZD, CAD—as well as the perceived safe havens, USD and JPY.

Dollar Index: Technical developments earlier this week suggested the greenback’s gains could continue, as it broke above the key 83.50 level, which saw the convergence of the August 2010 & June 2012 highs. However, the later pullback warrants close attention, as the break above the aforementioned highs was not confirmed by the daily Relative Strength Index (RSI)—thus, forming a potential bearish divergence with price.

This could set up a potential test of the 82.70-90 area next week, and ideally this should prove supportive. Yet if it gives way, a move toward the January prior highs, around 81.75, could ensue.

EUR/USD: Since the beginning of July, the euro’s technical outlook has decidedly shifted to the downside, as witnessed by the formation of lower highs and lower lows (definition of a downtrend).

One of the major decisive blows for the single currency came this week, when it broke below the June low, around 1.2285/90, to a new 2-year low. That said, nothing moves in a straight line, and corrections, as witnessed today, should be expected.

The next key resistance levels to watch early next week are: 1.2285/90 (June low), 1.2330/35 (this week’s high), and 1.2365, which is the 38.2% retracement of the most recent decline. On the other hand, should the downtrend resume, then keep an eye on these critical levels: 1.2150/60 (June 29, 2010 low and this week’s low), 1.2135 (the 50% retracement of the all-time highs and lows since the euro’s inception), and lastly the psychological/option/barrier-related 1.2000 level.

By the staff at Forex.com.

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