USDCAD- It’s a correction not a trend change, eh!
Filed in Loonie Views
Canada, Just now 28 March 2014 at 14:32 GMT+0
The FX trading week is coming to a close with a bout of profit taking curtailing this week’s US dollar sell-off in USDJPY and the commodity currencies while EUR and GBP also recouped some losses. This week’s FX moves appeared to be driven by second tier data and geo-political risks but were lacking in a cohesive underlying trend suggesting that it was just noise as traders await next week’s European Central Bank meeting and the US nonfarm payrolls report. And one of the biggest beneficiaries of the directionless market was the Canadian dollar which gained over 2 percent.
The running of the bulls-loonie style
We are over three months away from the annual Running of the Bulls in Pamplona, Spain, nevertheless USDCAD FX traders have enacted a loonie version of the event. USDCAD bulls are stampeding for the exits (or a least trotting rapidly) for no apparent reason. It was barely a week ago that USDCAD appeared to have broken significant resistance in the 1.1225-40 area and after it touched 1.1270 the argument was made that at short term bottom was in place at 1.1160. Short term bottom was an apt description when the US dollar cut through it like a hot knife through butter. The interesting fact about the sell-off is that it is a wholly off-shore move; domestic factors have not played any role.
Putting this week’s move in perspective
To better understand the moves of the past 36 hours, it makes sense to review why USDCAD achieved the 1.1270 peak in the first place. The "Buy USDCAD" trade started to gain popularity in September 2012 when the currency pair was trading at 0.9630. It was around this time that the term "Great White Short" was coined by foreign hedge funds to describe the selling of Canadian equities and bonds in anticipation of a US style housing crash occurring in Canada. The USDCAD uptrend they started remains firmly entrenched today while trading above 1.0570. The other major factor behind the bearish Canadian dollar sentiment was the sharp slowdown in China. China’s annual GDP growth rate peaked at 11.5 percent in 2010 and it is currently 7.7 percent. Last October, the Bank of Canada expressed concern over the country’s low inflation rate and removed the tightening bias from their policy statement. In addition, at that time, Mr. Poloz was only on the job about 4 months and because of his previous role as the president of Export Development Corporation, he was thought to be encouraging a weaker Canadian dollar. The USDCAD rally accelerated right into year end. There were numerous other factors contributing to the bullish US dollar bias including weak economic data and fears that Canada’s growth would greatly lag that of the US. This year kicked off the way the previous year ended-USDCAD was in demand. Meanwhile the Commitment of Traders report and various major bank studies showed short CAD positions to be at high levels and seemingly unconcerned with bouts of Canadian dollar strength. Just last week, the double whammy of the BoC governor reopening the Canadian rate cut debate and the new Fed Chairman appearing to have moved forward the date of a rate hike rejuvenated USDCAD bulls who drove the currency pair to 5 years highs. The USDCAD remained at elevated into last week’s close even as AUDUSD and NZDUSD were rallying.
What has changed
What has changed this week? In Canada-nothing. In fact, there wasn’t even any domestic economic data released yet the loonie is strutting like a peacock in mating season. The reasons for the corrective activity may include:
1) Positioning- Long USDCAD positions are at high levels and momentum has waned
2) Commodity Bloc Flavour- AUDUSD and NZDUSD , both of which were heavily sold, have bounced from their lows and retraced through important resistance levels on an improving economic outlook suggesting that perhaps the loonie would follow suit.
3) Reassessment of the BoC’s policy stance. Perhaps the governors remarks were taken out of context and the important phrase was "neutral is literally neutral, greatly reducing the risk of a rate cut.
4) Month-end, quarter end and pre fixing flows which may have been behind some of the USDCAD selling.
5) Position adjustment ahead of next week’s nonfarm payrolls report.
USDCAD technical outlook
The long term USDCAD technicals are bullish while trading above 1.0580 and the shorter term technicals are bullish while above 1.0980. A break of 1.0980 would get messy and lead to further weakness to 1.0910 and then 1.0840. Intraday, USDCAD is in a modest uptrend above 1.1020 which began at 1.1000. It is testing minor resistance at 1.1050 but needs to break above 1.1080 to negate the short term downtrend from 1.1240.
Chart: USDCAD Daily with intact uptrend’s displayed
It’s a correction-not trend change
Since there doesn’t appear to be one specific catalyst behind the USDCAD plunge I believe that this week’s move is merely corrective (albeit, larger than the recent moves) and unlikely to be sustained. The BoC governor was pretty clear in his speech this week that Canadian economic growth would be slow stating that " we have been in a recovery since 2009, yet economic growth still pales compared to pre-crisis years" Contrast this with expectations for a series of strong US data releases including nonfarm payrolls (forecast 190,000) and the prospect of higher US rates, sooner rather than later. The long term USDCAD uptrend remains intact, guarded by numerous support levels.