Forex snapshot

Despite Friday’s revival of risk sentiment, traders continue to find a reason to favour the US dollar, and this has been borne out well in two major currency pairs today.

USD/JPY currency
Source: Bloomberg

USD/JPY slips below 200-DMA

The yen was carrying all before it on Friday, but since the announcement of US air strikes in Iraq and reports of the withdrawal of Russian troops from the Ukraine border, there has been a recovery in the US dollar.

The week has started quietly for this currency pair but with Japanese GDP on the list for tomorrow, and then a raft of Chinese data on Wednesday, there is room for more volatility to creep back into the course of events.

Last week the Bank of Japan erred on the side of caution in its monetary policy meeting, arguing that the economic outlook remained robust. However, it left the door open to further easing and this has given the dollar some additional support. The view should receive further assistance as GDP data is expected to show a sharp deterioration in economic growth in Japan, slumping to -1.8% from 1.6% in the previous quarter.

On the daily chart we have seen USD/JPY slip below the 200-day moving average once again, but support has come in around the ¥102 level and the 50-DMA has held for now as well.

Thus, a close back above ¥102.30 could signal another move back in the direction of ¥103, the highs from late July, while any drop will need to clear ¥101.50. Even then, the big ¥100 will come into play as it has done throughout 2014.

US dollar holds weight in USD/CAD

The US dollar takes pre-eminence over its Canadian counterpart this week simply by the sheer volume of data from the US. The currency pair remained relatively unaffected by market gyrations on Friday, as US dollar strength held up.

In terms of economic data, US retail sales on Wednesday will be the main event of the week, with growth expected to be 0.2% for July - the same pace as in June. Jobless claims on Thursday are forecast to rise slightly but remain below the 300K mark, thus maintaining the steady downward trend. On Friday 1 August, reading for the Michigan confidence index is expected to hit the 82.5 level from July’s final reading of 81.8.

The rising trendline from the C$1.0630 level has done well to support the currency pair, and while the C$1.10 level (being a round number), will naturally draw attention, it is the C$1.1040 level beyond it that may prove to be more important.

The relative strength index has shifted back out of overbought territory, but nervousness ahead of retail sales could mean that we see another attempt at breaking below the C$1.09 level, which acted as support last week. If this happens the rising 200-DMA should come into play to hold up USD/CAD.

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