Looking at the Loonie, cross-eyed 17May16


Looking at the loonie, cross-eyed

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US dollar gains on CPI
  • Firm oil prices underpin Canadian dollar
  • Canadian dollar supported by cross currency demand

A bit of rise and shine in oil has helped keep the Canadian dollar solid. Photo: iStock

By Michael O’Neill

The Canadian dollar has been trapped within a 1.2500-1.3000 trading band since April 8 with only a brief and minor foray outside that range and today’s US data didn’t do anything to change that. The major Canadian dollar positives — neutral central bank and rising oil prices — are fairly balanced against the negatives of mixed to weak economic outlook and the CAD/US interest-rate outlook.

That leaves the Canadian dollar technical outlook against the majors to help provide direction.

EURCAD: EURCAD has been in a ragged downtrend since January which remains intact while prices remain below the 1.4860-70 area. The intraday uptrend from the April low of 1.4140 ended with the move below the 1.4680-1.400 zone. Since then, EURCAD has consolidated within a 1.4540-1.4670 range. A break below 1.4540 would target 1.4400 and then 1.4200. A move above 1.4660 would lead back to 1.4800.

Direction: modestly bearish-conviction low.

EURCAD 4-hour chart

Source: Saxo Bank

GBPCAD: GBPCAD snapped a long-term uptrend that began in April 2013 with the move below 1.9450 in February. The decline was steep and found a floor in the 1.8000-50 area. The subsequent GBPCAD rally remains intact while trading above 1.8530. It is currently bumping up against resistance in the 1.8750-75 area which if broken, will extend gains to 1.9060. A move below 1.8630 suggests additional 1.8500-1.8775 consolidation.

Direction: bullish-conviction low due to Brexit influences

GBPCAD 4-hour chart

Source: Saxo Bank

CADJPY: CADJPY made a new 2016 high of 88.80 on April 27 and then plunged to 82.35 by May 6, recouping nearly 60% of the entire 2016 range in about a week. The rally from 82.35 has stalled twice in the 85.20-50 area but while trading above the 84.10-30 zone, remains in an uptrend. A move above 85.50 targets 87.20 while a move below 83.70 suggests a return to 82.70

Direction: bullish-conviction low

CADJPY 4 hour-with Fibonacci retracement levels

Source: Saxo Bank

AUDCAD: AUDCAD has declined steadily since the middle of April and the downtrend remains intact while trading below the 0.9520-50 zone. The minor uptrend from the overnight low will be broken on a move through 0.9430, opening the door to a revisit with the May low of 0.9350 and then 0.9100. A break above 0.9550 would negate the downtrend and lead back to 0.9780.

Direction: bearish-conviction medium

AUDCAD 4-hour chart

Source: Saxo Bank

Cross Canada demand favours Canadian dollar

The short-term technical outlook on the major Canadian dollar crosses suggest that USDCAD gains arising from an increase in expectations of higher US interest rates will be tempered by Canadian dollar demand.

There are some fundamental reasons that support a modestly stronger Canadian dollar.

1) The Canadian dollar is benefiting from higher oil prices and a positive outlook for additional gains.

2) An improving US economy is generally good for the Canadian economy due to an increase in exports.

3) The benefits to the Canadian economy from the federal fiscal stimulus programs have not worked themselves into the current data.

It won’t be a one-way ride

A major impediment to additional Canadian dollar gains can be found in positioning. The latest Commitments of Traders report showed Canadian dollar long positions growing in contrast to the US dollar positioning increasing against the other majors.

Sure the data is a week old but it is still a valid guide. Arguably, a lot of these positions have been established on the back of the rising crude prices. The first sign that oil has found a top could send all these CAD bulls to the exit, at the same time, and that move would be nasty.

USDCAD and Oil -hourly chart

Source: Saxo Bank

— Edited by Martin O’Rourke

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Author: Loonieviews

In the past 30+ years, I have been an FX interbank market making trader, a high performing FX and Derivatives Sales person, creator of simple and complex risk mitigation strategies and a manager of high performance FX teams. The Trade of the Day is a culmination of that experience. Retail FX traders have access to a well-crafted and carefully researched FX trade strategy designed to generate FX profits while mitigating losses.

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