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Canada Enters Recession: USDCAD Primed for Volatility

Canada Enters Recession: USDCAD Primed for Volatility

2015-09-04 22:43:00
James Stanley, Strategist
Canada Enters Recession: USDCAD Primed for VolatilityCanada Enters Recession: USDCAD Primed for Volatility

Fundamental Forecast for the Canadian Dollar: Neutral

It was an interesting week for Canadian economic data: On Tuesday we received a messy GDP report that saw the country slip in to ‘technical recession’ territory; marked by two consecutive quarters of declining GDP growth. The silver lining was a .5% growth print in June alone when Oil prices began to break lower. On Thursday we saw export numbers highlight a shrinking trade balance, far beating expectations aided in part by a weak Canadian Dollar and growing strength in the United States. And we capped the week off on Friday with a stronger-than-expected employment number; although the unemployment rate increased due to increased labor-force participation (somewhat of the opposite of what happened in the US with declining unemployment coupled with a shrinking labor-participation rate).

The net impact of this batch of data saw the USDCAD trade within a 205-pip range throughout the week as price action swung in both directions; but this isn’t all-too-different from what we’ve seen in many other related markets. Oil has traded within a range as well, albeit with a higher degree of volatility as this range comprised over 12% of its value ($49.30 high, $43.19 low/ range of $6.11 on the week).

With a Bank of Canada rate decision on the docket for next week in which the Bank and Stephen Poloz are largely expected to stand pat, the primary drivers in USDCAD will likely emanate from pressures in Oil and Global Equities as the economists see-saw back-and-forth around that first US rate hike and whether or not the panic shown over the past couple of weeks is a sign of something larger down-the-road.

The bigger issue for the Canadian Dollar will likely be tied to Oil prices. The GDP print that we saw with the encouraging uptick in June doesn’t take into account the major slide that was seen in Oil prices in the month of July; when Crude dropped by more than 20%. The surprise uptick in employment for August makes it appear as though the slide in Oil may not as been impactful as what was expected; but with numerous forces in the global economy showing weakness at the same time while the Fed indicates that they’re getting closer to hiking rates despite the numerous signs of weakness, that close link between Oil and the Canadian economy may be difficult to overcome.

The range-bound pattern from this week in USDCAD defines the levels of interest for this week. While USDCAD stays within the range, traders should look for low-risk setups to get long in the support zone of 1.3115-1.3160 with profit targets in the 1.3250-1.3300 area. Short positions should be careful, as this flies-in-the-face of the bigger-trend; but resistance being seen in this same 1.3250-1.3300 area could lend itself to additional range positions. Breaks of last week’s high at 1.3350 should be construed bullishly, and traders should then look to buy on dips upon breaks of this resistance.

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