What will happen to the USD as other central banks begin normalization? Click here to see our latest forecastsand find out what trades are developing in this new environment!
Key Takeaways:
- USD/CAD technical strategy: short with trailing stop moved to 1.2701, not holding above
- USD/CAD has tagged the 2.618% Fib extension (1.24925) on another expected BoC hike in Oct.
- IGCS Highlight: USD/CAD increase in longs to favor further downside (trend continuation)
To open the week, USD/CAD has traded to a fresh 14-month low as markets are anticipating an increasingly hawking BoC. Thanks to the Federal Reserve rate announcement this week, traders will not have to guess where the Fed stands regarding upcoming tightening for long. The Fed rate announcement on Wednesday is not expected to bring any surprises (or hikes for that matter) but may provide an indication that the Fed will begin the unwinding of their $4.5T balance sheet to a more normal level given the economic stabilization after the Great Financial Crisis.
Learn what you need to know about the Fed Balance Sheet unwind here
The sharp strengthening since May has been blamed and will continue to be blamed on the disparity between how the Bank of Canada looks to tighten monetary policy while the Fed may be less aggressive due to a weakening economic and inflation picture in the US. As of late July, the market is now pricing in a ~70% chance of an October hike by the Bank of Canada while the market is pricing in a 48% chance of another hike in 2017 by the Fed in December.
The Canadian dollar has strengthened against the USD in a nearly straight line and is stronger vs. the USD by 3.5% since BoC raised rates for the first time in 7-years in mid-July.
The key target in focus is the early May 2016 low of 1.2461. However, if you look at the chart below, you can see that that May ’16 low was reached after a ~2,200 pip decline in nearly four months. If we’re about to see a similar breakdown as in H1 2016, I will anticipate a move to target a minimum 1.2332, and if the trend does not stall there, we could be making a move sub-1.200. A break above the July 20 high of 1.2640 would be the first indication of a retracement in the trend, and I would not want to hold a short trade above 1.2701 for fear of a snap back retracement to 1.29/30.
Recommended Reading: US Dollar To 13-Month Low, Oil Price Suffers on Rising OPEC Supply
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Daily USD/CAD Chart: The CAD is looking like a runaway train on stable oil and data uptick
Chart Created by Tyler Yell, CMT
USD/CAD Insight from IG Client Positioning: Increase in long positions favors further downside
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 74.6% of traders are net-long with the ratio of traders long to short at 2.94 to 1. In fact, traders have remained net-long since Jun 07 when USDCAD traded near 1.34954; price has moved 7.3% lower since then. The number of traders net-long is 3.6% higher than yesterday and 3.6% higher from last week, while the number of traders net-short is 6.5% higher than yesterday and 8.6% lower 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. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USDCAD trading bias.(Emphasis mine)
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Written by Tyler Yell, CMT, Currency Analyst Trading Instructor for DailyFX.com
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