Canadian Dollar Likely Topped Against US Dollar, Risks to Downside
Fundamental Forecast for Canadian Dollar: Bearish
US Dollar likely set important bottom versus Canadian Dollar
View our monthly Canadian Dollar exchange rate forecast
The Canadian Dollar may have set an important top against its US namesake on a noteworthy shift in sentiment across forex markets. A week relatively devoid of Canadian economic event risk left the Loonie only modestly lower against the resurgent US Dollar. Yet our proprietary Speculative Sentiment Index showed that the trading crowd may have finally capitulated. According to our data, the majority of retail traders have remained long the US Dollar against the Canadian Dollar since the pair traded at $1.05 in September, 2010. Yet the fact that crowds actually flipped to net-short as of yesterday (May 12) warns of a major sentiment reversal. It will be critical to watch USDCAD price action in what promises to be an exciting week ahead.
A busy week of Canadian economic event risk sets the stage for another important week for the USDCAD as it sees significant swings off of recent multi-year lows. Friday morning promises especially sharp moves with the combination of Canadian Consumer Price Index inflation figures as well as a simultaneous Retail Sales report. Uncertainty surrounding the future of Bank of Canada monetary policy and CAD interest rates may make surprises in CPI data especially market-moving. Overnight Index Swaps currently price in a cumulative 80 basis points of BoC interest rate hikes through the coming 12 months—among the highest of any G10 central bank. Yet core inflation measures remain below the central bank’s official target of 2.0 percent, and any surprises in Friday’s report could force considerable corrections in either direction.
We have frequently argued that the Canadian Dollar was at considerable risk of reversal amidst extremely one-sided positioning against the US Dollar, and the past week of Greenback gains may have been enough to tilt the scales in favor of USDCAD strength. Our SSI data gave contrarian signal to go long the USDCAD as of May 12, and the most recent CFTC Commitment of Traders report shows that large speculators have begun scaling back on their previously-aggressive Canadian Dollar longs (USDCAD short positions). The wildcard remains whether crude oil and broader energy prices can recover and force the highly-correlated CAD higher in kind. Yet early signs of broader financial market deleveraging bode poorly for previously high-flying crude oil futures. We believe Canadian Dollar risks remain to the downside (USDCAD upside) through the coming week of trade. - DR
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