NEWS / Foreign Exchange

CAD Still Favored

US Housing starts fell 2.1% to 1.474 mln from a revised 1.506 mln (previous was 1.528 mln). The figure was barely higher than the consensus forecast of 1.472 mln. Building permits rose 3.0% to 1.501 mln, higher than consensus forecast of 1.47 mln. It is difficult to draw an optimistic conclusion from the rise in building permits considering this was not only the first increase in 11 months but it also followed a 10-year low reached in April.

Today??™s report does not alter the mixed picture of US housing and sends the focus to next week??™s reports of new and existing home sales. The dollar reaction will largely be in function of the performance in US stocks, which is expected to be neutral considering the mixed showing of today??™s reports.

We expect the Canadian dollar to post further gains versus the Aussie and the US dollar to make a temporary retreat that would later attract fresh buying.

Canadian CPI not low enough

The Canadian dollar strengthens across the board after the May CPI data showed a slowdown that may not be sufficient to prevent the Bank of Canada from raising rates next month. The annual core CPI slowed to 2.2% y/y from 2.5%, weaker than expectations of 2.3%, while the headline figure seen unchanged was unchanged at 2.2%. Both figures stand above the central bank??™s 2.0% target.

While USDCAD dropped from 1.0715 to 1.0665, we expect further declines in AUDCAD. The 4-hour chart below shows a clear bearish engulfing pattern that calls up interim support at 0.90, followed by extended losses at 0.8985??”the 38% retracement of the 0.8884-0.9048 rise. Upside capped at 0.9020, with stops advised at 0.9030. Wednesday??™s release of Canada ??™s leading indicators index (expected up 0.5% from 0.4%) and Thursday??™s release of Canadian retail sales (seen up 1.1% from 1.9%) will be key in determining hopes for a July rate hike.

USDJPY sees temporary decline to 123.30 before rebound

We expect USDJY to extend today??™s retreat towards the 123.30s, which may deteriorate near the 123.20, at which point the Japanese currency will be seen attracting fresh selling, giving the pair fresh impetus towards 123.70. Rising political uncertainty in Japan and sluggish consumer demand should keep the Bank of Japan from raising rates before August. This makes the Japanese currency vulnerable to renewed selling during periodic gains arising from worries of US housing slump.

To read this report in its completion, please submit the required information in the link here.