Chart of The Day USDCAD
USDCAD Probable Price Path & Potential Reversal Zone
USD: During the US holiday yesterday, the financial market was closed for one day, and transactions in the foreign exchange market were relatively quiet. The market waits and sees whether the fiscal measures of the new US government can be passed. U.S. 10-year Treasury bills rose nearly 1 basis point to near 1.1% this morning. The former Fed Chairman Yellen, who was nominated to be the Treasury Secretary, attends her Senate hearing today. Yellen’s speech stated that if there is no large-scale fiscal stimulus, the US economy may face a longer recession, and interest rates are currently low, and the government should expand fiscal measures. DXY traded sideways on Monday, as it once again closed the day out flat near the 90.77 region, as markets digested Biden’s fiscal stimulus proposal and Fed Chair Powell’s pushback against bond tapering expectations. The USD weakened against JPY and was little changed against other majors like EUR, GBP and CHF. The focus this week is on President-elect Joe Biden’s inauguration on the 20th January.
Following the post-New Year lull, CFTC data reflected the largest week-to week turn against the dollar since early-Aug 2020 with the USD’s net short reaching its highest mark on record (in dollar terms) at USD35bn on the back of a USD3.7bn increase in favour of the currencies that we track.
CAD: Canada has a busy week ahead of it, there are major data reports on inflation and retail sales as well as the BoC policy decision. The data won’t tell us an awful lot, unfortunately; the focus is less on how the economy ended last year than how tighter lockdown measures will impact growth in early 2021. Markets anticipate a sharp slowdown in domestic growth in Q1. The BoC meeting is not expected to lead to any changes in policy; there has been some talk of a so-called “micro” cut in rates – that is to say a cut of perhaps 10bps. While this option might be in the BoC toolbox, using it would be of questionable value as it will not impact the near-term trajectory of the economy. The street is looking for no change in rates and that perspective is reflected in OIS contracts which reflect expectations for no change in policy from the BoC or the Fed in the next 12 months. The MPR and press conference may be of more interest – for the Bank’s perspective on the outlook and any additional comments on the CAD. Markets doubt the Bank will object too strongly to the CAD’s recent performance, the more so if the USD does push higher in the short run; trends reflect USD weakness, Governor Macklem has conceded previously, while USDCAD is not obviously misaligned, fundamental Fair Value estimate. There is little the Bank can really do about the CAD so it might better to say the least possible on the subject.
Speculative accounts are still not too enthused by the CAD’s performance as they trimmed the currency’s net long by USD197mn to USD950mn; as of mid Dec, investors still maintained a bearish outlook on the CAD (on the basis of CFTC data, at least).
From a technical and trading perspective, the USDCAD is correcting its impulsive move from the 1.26 test early in the year and inline with the broader USD recovery (highlighted in the DXY chart below), the USDCAD looks poised to make a sustained break of the descending trendline resistance through 1.28 en-route to make a test of projected weekly range resistance at 1.29 en-route to test projected monthly range resistance at 1.2950. It is noteworthy that historical seasonal patterns are supportive of the near term bullish thesis (as highlighted in the chart above).
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