Market overview; what’s to watch? - BMO Capital Markets

By FXstreet.com | Updated June 10, 2014 AAA

FXStreet (Guatemala) - Stephen Gallo, European Head of Currency Strategy at BMO Capital highlights key pairs and current conditions.

Key Quotes:

"Moderate but persistent EUR weakness was the main characteristic of the London morning. A break below 139.00 in EUR/JPY appeared to trigger stops in that pair, and that set the ball rolling towards the 1.3550 area in EUR/USD, where we have seen a bit better support."

"Rate differentials are partially to blame, with US yields rising all morning and the US 10yr breaking yesterday’s high above 2.62%. However, we also believe the shift towards a stronger CNY by PBoC is a very important culprit for EUR weakness, as expectations for USD-to-EUR reserve recycling have fallen."

"USD/CAD was weaker and nearly touched 1.0890 support early during the London morning, but a material chunk of that weakness in the pair appeared to be in part driven by EUR/CAD downside, particularly with US yields rather well supported. In other words, the extent of isolated USD weakness behind the move in USD/CAD appears to have been rather limited."

"With very little on the North American data calendars, USD/CAD players will once again be watching EUR/CAD, and softness in that pair does look like it’s going to make USD/CAD struggle to obtain 1.0950 in the immediate future. However, our short-term ‘fair value’ for USD/CAD is up at 1.0960 and rate differentials are still in the USD’s favour. Any USD/CAD downside below 1.0890 should therefore be a buying opportunity."

"PBoC fixed the mid-point lower again, but relative to expectations, the aggressiveness of the move was little bit less than during the previous two sessions. The mid-point fell to 6.1451, down 34 pips from Monday, prompting further USD/CNH selling."

"However, corporate demand for USDs helped prevent a test of 6.2100 today. In addition to squeezing complacent USD/CNH longs, PBoC has also provided some decent chunks of USD liquidity to Chinese corporates, and that is largely how we’re still reading this shift to a stronger CNY bias in the fix."

"PBoC has no doubt moved to cap CNY weakness in the last few sessions, but the need to prevent more capital outflows also suggests that the banking system is already rather vulnerable to more of that type of flow. We now look for the 6.1900-6.2050 range to act as a base, and we fear that a build up of new CNH/CNY longs in that range by speculators will result in yet another PBoC-induced squeeze at a later date."

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