Canadian Dollar In Trouble: Where To Next?

Apr 05, 1:09 pm
Poloz_BOC_PMI_Canadian dollar

Stephen S. Poloz, Governor of the Bank of Canada. Image via Bank of Canada

The Canadian Dollar has weakened sharply over this year and is now starting to break lower once again from recent consolidation against the US Dollar. This trend is likely to extend over the coming weeks as the Bank of Canada is widely expected to retain a cautious tone despite upside data surprises.

Indeed, if oil continues to reverse lower this will put further pressure on CAD and give the BOC greater reason to highlight caution in their outlook, although oil prices have not been a dominant driver of CAD over recent weeks.

BOC on Watch

The strongest factor influencing USDCAD at the moment remains the dovish stance of the BOC. The central bank has put a clear emphasis on the fact that the Canadian economy is at a different stage in the cycle to the US, in an effort to cap hawkish CAD rate expectations. Governor Poloz commented in a recent speech that he is more concerned about downside risks and that raising rates ahead of time would be highly likely to cause a recession.

Given the recent string of upside data surprises in the Canadian economy, this is an interesting view. When questioned about signs of improvement in the economy Poloz replied that “it would be off to forget about all those downside risks just because a couple of data points came in a little better than expected.  This sentiment is likely to be reiterated in the upcoming BOC meeting on April 12th.

Inflation rose to 2.1% year on year in January, moving up from 1.5% previously which marked the highest monthly gain since October 2014, bringing inflation above the bank’s 2% target.

GDP growth has also been trending higher printing 1.9% in the fourth quarter of 2016, marking the third consecutive quarter of expansion.

Ahead of the April 12th BOC meeting traders will be looking to labour market data due on April 7th though it is unlikely that a positive reading there will be enough to change the BOC’s view that slack remains evident in the economy.

Significant Change in Positioning

Looking at positioning data shows a clear shift in sentiment among institutional players. Having been net long since the start of the year, there was a sea-change in positioning two weeks ago where long positions were totally reversed in the biggest CAD positioning change on record. The market is now net short CAD with plenty of scope to increase.

Technical Perspective

The technical picture for USDCAD highlights the lack of direction in the market that frustrated CAD long positions. For now, the price is grinding higher in a bullish channel which found resistance at the 50% retracement of the decline from 2016 highs.  Focus remains on the upside with a break of the 1.3580s level needed to pave the way for a fresh leg higher. Once broken, bulls will be looking for a retest of the level to provide support for further upside. The first target on an upside break will be the 61.8% retracement of the move from 2016 high which comes in around bullish channel resistance.

Data on Deck

Friday’s US employment data could provide the catalyst for fresh upside in the pair. Non-Farm payrolls have printed strongly so far this year with the 4-month moving average having turned higher over the last two readings. Another strong reading this time around will reinforce hawkish Fed expectations providing support for USD. The NFP’s are expected to print 177k, down from 235k last time, but the key reading on Friday will be Average hourly earnings – a strong print here will provide the biggest boost for USD. This data is expected to print 2.7%, down from 2.8% last time.

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With over 6 years’ experience analysing currency markets, James is now a well-known industry analyst focusing on price action trading and fundamental drivers. Beginning as a private retail trader, James developed a strong interest in understanding the fundamental aspect of the market before pursuing technical trading capabilities which he now uses to identify opportunities over a short-term horizon. Alongside his market experience, James is also IMC certified having achieved the qualification to help further his understanding not only of the markets but the industry as a whole. James has a strong interest in both fundamentals and technicals and uses both forms of analysis in generating and executing trade ideas, with trades generally lasting from a few hours to a few days.