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Highlights:

• USD/CAD technical strategy: short with trailing stop moved to 1.2945, not holding above
• USD/CAD has broken below the 1.618% Fib extension (1.2895) on a hawkish BoC hike
• IGCS Highlight: USD/CAD pullback may be in the works, but trend remains lower

Ladies and gentlemen, you may have just witnessed your first hawkish hike of the post-great financial crisis (GFC) era. In short, a hawkish hike is one where the central bank warns the market that they’re hiking and not looking for additional ways to support the economy through the hiking cycle (as the Fed has done). On Wednesday, the Bank of Canada raised rates for the first time in seven years from 0.5% to 0.75%, and the market is now pricing in a hike in Q4 2017.

When parsing through Bank of Canada governor Stephen Poloz’s comments, the most hawkish appear to be their belief that the output gap (potential GDP – actual GDP) will be closed by the end of the year. Typically, central banks will engage in monetary policy easing in accordance to an output gap and tighten with potential GDP is less than actual GDP. The risk going into the BoC rate announcement was a dovish hike given that a pricing in of a hike was firm, but the BoC surprised, and the CAD has strengthened aggressively as USD/CAD moves lower (see chart below).

Now, all eyes will be on Oil. USD/CAD has fallen from 1.3793 by 7.3% to 1.27871, the 78.6% retracement of the May 2016 to 2017 high. If Oil ( a key export for Canada) can rise, the output gap would close faster, and an even more hawkish BoC could be in order. While Crude Oil has a lot of headwinds, a turning of that market could lead CAD to soon become the engine of the FX market. For traders looking for a reversal, the first trigger that one is unfolding would be a daily close above this week’s high of 1.2945.

Either way, it’s safe to say that the darling of EMFX is MXN and the G10’s honor goes to Canada at the beginning of H2 2017. I think you would have come up empty in trying to find someone on November 9 (when Trump’s presidency was announced) that believed the USD would be a sandwich that is surrounded by the two strongest global currencies.

Recommended Reading: Crude Oil Price Forecast: Watch WTI Price Action Near This Zone

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Weekly USD/CAD Chart: The breakdown continues as CAD remains strong like a Bull

Chart Created by Tyler Yell, CMT

USD/CAD Insight from IG Client Positioning: USD/CAD pullback may be in the works

The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.

USDCAD: Retail trader data shows 66.6% of traders are net-long with the ratio of traders long to short at 2.0 to 1. In fact, traders have remained net-long since Jun 07 when USDCAD traded near 1.3481; price has moved 4.9% lower since then. The number of traders net-long is 6.3% lower than yesterday and 11.1% lower from last week, while the number of traders net-short is 15.1% higher than yesterday and 19.1% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDCAD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current USDCAD price trend may soon reverse higher despite the fact traders remain net-long.(Emphasis mine)

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Written by Tyler Yell, CMT, Currency Analyst Trading Instructor for DailyFX.com

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