Chart of the Day USDCAD
Pivotal Decision Point USDCAD
CAD ended last week on a soft note, with spot trading around 1.33 as of writing. After a brief and minor rally on the back of better than forecast January Canadian jobs data. While the US NFP data also surprised positively, the “beat” in terms of the Canadian data was arguably more impressive in headline terms. Under the hood, the report suggested strong public sector hiring drove job gains while hours worked eased, supporting soft growth prospects even as Markit and Ivey PMI surveys reflected stronger activity in January.
Still, the Bank of Canada (BoC) rate cut expectations fell (5% chance of a March cut reflected in the OIS curve now) and market pricing continues to reflect stronger confidence in Fed rate easing relative to the BoC over the coming 12 months. Overall the market has been dominated by coronavirus concerns and renewed worries emerging from the weekend have supported the USD and pressured commodity FX disproportionately within the G10 universe (note the CAD is correlating more closely with WTI than spreads).
While the market is preoccupied with the fallout from the Wuhan virus outbreak, the CAD has little chance of rallying. But there are some positives to note beyond still CAD supportive short-term spreads. Speculative sentiment remains constructive, IMM data suggest, and that early calendar year strength in the USD is not uncommon, this year’s USD gains so far are more or less in keeping with the historic, average performance of the USD. USD “seasonal” strength may be peaking but does persist through Feb and Mar before reversing more forcefully in Apr typically.
Note also that USDCAD is diverging more significantly from Fair Value versus the medium term Volume Weighted Average Price (1.3180 currently), reflecting the USD’s virus risk premium. This will correct as virus concerns fade; when that will happen is hard to predict, however, it would seem that there is little upside potential in the USD from current levels.
From a technical and trading perspective,the USDCAD is testing pivotal range resistance the 1.33/1.3350 area has contained upside attempts three times since the middle of last year. A breach of this area would likely see market sentiment turn increasingly bullish, just as prices test the weekly trendline for the third time which should contain the upside. I will be watching the market reaction to the test of offers and stops above the 1.34 level watching for a rejection and subsequent close below the near term volume weighted average price to initiate short exposure looking for a move back to test bids towards 1.32
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Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 75% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!