USD/CAD Price Analysis: Significant Trading Risk Ahead of BoC
- USD/CAD technical strategy: short with trailing stop moved to 1.3015, not holding above
- USD/CAD has tagged the 1.618% Fib extension ahead of high-risk BoC
- IGCS Highlight: USD/CAD pullback may be in the works
The gasoline in the engine that runs all global markets is expectations. When expectations are shaken, and new ones form, markets move. Speculators or hedges move to price in a new future and volatility is the result of an aggressive pricing in of an asset in the future. On Wednesday, the Bank of Canada will carry a burden of their own making in that a rate hike is priced in at a ~92% probability. That’s a heavy expectation and if they do not meet such expectation or provide a “dovish hike,” you can bet the market will aggressively reprice USD/CAD.
On Monday, the Canadian Dollar is the strongest currency in the G8 on a relative basis. The relative measure is taking a 4-hour chart and filtering 28 currency pairs against the 200-MA to see which currency is above the 200-MA the most. Currently, that honor goes to the Canadian Dollar. For those interested, the weakest currency pair on a relative basis is the Japanese Yen.
The market has reason to price in a 92% probability of a rate hike when Stephen Poloz & Co. of the Bank of Canada announces their decision on Wednesday. They’ve said as much by talking about the surprising growth in new areas that has supported the Canadian economy while the rate cuts of yesteryear have “done their job.” However, as a trader, you always want to identify the exit signs of a trade or a technical development. On USD/CAD, my exit door sits on a break above 1.3015.
The level 1.3015 marks the opening range high for the first week of July and second half of 2017. A break above this level would come from either a dovish announcement relative to market expectations (the bar appears low for that) or a no-hike, which would likely bring in aggressive repricing. A break above 1.3015 would also show a strong rebound of a downside price target of 1.2895, the 1.618% Fibonacci expansion target and a move to 1.33 as short USD/CAD traders count their winnings could unfold before the next move lower begins.
The medium-term remains bearish, and a break above 1.3015 would be anticipated to carry little further than 1.3250/33, but the short picture shows that there is a risk in buying CAD ahead of the BoC on Wednesday. Match that technical picture with the sentiment picture below, and you can see that short USD/CAD traders may be walking on thin ice for the moment.
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Chart Created by Tyler Yell, CMT
USD/CAD Insight from IG Client Positioning: USD/CAD pullback may be in the works
The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at firstname.lastname@example.org.
USDCAD: Retail trader data shows 66.3% of traders are net-long with the ratio of traders long to short at 1.97 to 1. In fact, traders have remained net-long since Jun 07 when USDCAD traded near 1.3481; theprice has moved 4.5% lower since then. The number of traders net-long is 3.8% lower than yesterday and 11.6% lower from last week, while the number of traders net-short is 34.2% higher than yesterday and 41.1% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDCAD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current USDCAD price trend may soon reverse higher despite the fact traders remain net-long.(Emphasis mine)
Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com
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