CAD Running Out of Steam, Bears May Prevail

Talking Points:

  • USD/CAD nears a critical chart point.
  • Further interest rate hikes are expected as the Canadian housing market continues to boom.
  • Retail sales disappoint but inflation is expected to tick higher.

Fundamental Forecast for NZD: Neutral

We remain neutral on the Canadian dollar for the time being but may look to short the Loonie against the USD if the market keeps running ahead of any expected interest rate hikes. With market expectations of another 0.25% rate increase in October to 1% already baked in, traders will look to next week’s GDP data as the next driver of any move.

Inflation ticked higher in July, to 1.2% from 1% in June, and the Bank of Canada Governor Stephen Poloz recently noted that the current inflation undershoot is due to temporary factors and that inflation will move back towards the central bank’s 2% target.

A look at the charts shows a triple-bottom at the 1.24130 level in late July, after USD/CAD fell from a May 5 high print of 1.37950. A break of this low could see the pair eye the May 2015 low of 1.19220, while on the upside the gap opened on July 12, between 1.27690 and 1.28588, is the first target. The stochastic indicator is also heavily in oversold territory and points to a potential USD/CAD upside move.

Chart: USD/CAD Price: Daily Timeframe (February – August 25, 2017).

CAD Running Out of Steam, Bears May Prevail

Chart by IG

Retail trader data shows 70.5% of traders are net-long with the ratio of traders long to short at 2.39 to 1. In fact, traders have remained net-long since Jun 07 when USDCAD traded near 1.3446; price has moved 7.0% lower since then. We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDCAD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USDCAD-bearish contrarian trading bias.

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--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

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