Top Trade Idea 2019: Canadian Dollar, 2019 Underdog? Short AUD/CAD, NZD/CAD, EUR/CAD

The Canadian Dollar took a turn for the worse in the 4Q 2018, but it may finish 2019 on a stronger note. Its collapse was accompanied with a record losing streak in crude oil prices and a cautious BoC rate announcement in December. With that said, the central bank is still relatively hawkish compared to most of the developed ones. In the last policy statement of 2018, the Governing Council noted that rates ‘will need to rise into a neutral range to achieve the inflation target’. Governor Stephen Poloz himself said that a neutral range is in the neighborhood of 2.5% to 3.5%. Mind you, they are currently at 1.75% which is three hikes away from the minimums.

With the exception of the US Dollar and a more hawkish Federal Reserve, I would favor gains in the Canadian Dollar against the Australian and New Zealand Dollars as well as the Euro. Looking at the chart below, the chances of a rate hike in 2019 from the RBA and RBNZ are looking increasingly slim. Both central banks are sticking to the status quo and leaving rates on hold. Meanwhile, the Euro is overshadowed by political instability and the consequences of Brexit which could undermine economic growth. Given these circumstances, the decline in CAD may have left it at a discount to go long in 2019 at a better price. The timing will have be critical.

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