The Week Ahead: Risk Seeker

Sentiment remains bullish on risk-sensitive assets

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USDCAD Battered by Risk Rally

Hopes of recovery have reached a new high bolstered by vaccine headlines, second reopening across Europe, and unwavering government aid. This bullish fever in risky assets continues to be detrimental to the greenback.

In contrast, its Canadian counterpart reaps the benefit of increased risk appetite and higher oil prices. Additionally, the expectation that the Bank of Canada may maintain its current policy is another tailwind for the loonie.

Following a bearish break below 1.2970, the pair is tumbling towards 1.27s, the trough from early 2018. Any rebound is likely to meet stiff selling pressure along 1.3000.

GBPCHF on Thin Ice as No-Deal Looms

The Sterling has repeatedly tested last June’s high as Brexit headlines ebbed and flowed. Traders are unlikely to commit beyond the 5-month long trading range unless there is a substantial catalyst.

The UK is under pressure this week to secure a deal if the government wants to have it ratified in Parliament by the end of the year. As France threatens to veto a ‘bad deal’ in regards to fishing rights, the margin for compromise seems rather limited.

A last-minute breakthrough would lift the pound above 1.2200 with a surge in momentum. Failing that, the current downside bias would prevail and trigger a sell-off into 1.16s.

EURNZD Lifts Ahead of ECB Meeting

The single currency rallied across the board as the bloc emerged from a second lockdown before Christmas. Ongoing sell-off of the US dollar and vaccine-fuelled optimism may have helped the euro fare better. More importantly, investors are repositioning in anticipation of new ECB actions this week.

The central bank is expected to support devastated economies and cement market confidence, probably by extending liquidity and its timeframe. An assertive ECB may actually back the euro in its bounce off the psychological support of 1.7000. On the upside, 1.7550 is a major resistance that short-term bulls need to be aware of.

AUDJPY Climbs on Weak Japanese Outlook

Improving risk sentiment and a weak Japanese economy favor the Australian dollar. Japan’s latest inflation has remained soft, at 0% well below the Bank of Japan’s target of 2%.

The economy’s recovery could stay fragile for an extended period of time as markets forecast an 8.1% GDP contraction for Q3. Signs of actual stagnation could keep the yen underwater as traders follow the uptrend of a more dynamic Aussie.

The pair is pushing towards last September’s high of 78.20, and a bullish breakout may trigger an extended rally. On the downside, 76.50 is the immediate support level in case of a retracement.

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