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CAD Weakness becomes an October Theme as Hawkish BoC Pulls Back

CAD Weakness becomes an October Theme as Hawkish BoC Pulls Back

Tyler Yell, CMT, Currency Strategist

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Talking Points:

  • USD/CAD Technical Strategy: strong resistance at 1.2778, awaiting sell opportunities
  • USD/CAD ST support focus at 1.2438approaching key resistance near 1.19 figure after spirited recovery
  • Sentiment Highlight: overall selling bias provides ST bullish outlook

The Canadian Dollar has continued to fall away from the impressive strengthening that took many by surprise over the summer. The rally from early May was driven by the Bank of Canada forecasting and fulfilling rate hikes in 2017 that previously were not priced into the market. This relationship showed up first between the narrowing yields of US and Canadian two-year sovereign yield spreads.

At the beginning of October, the market was pricing in a 2/3 chance of another BoC hike before the calendar turned, and now the probability has dropped to 46% with an 80% chance of a hike in January. At the same time, since late August, Canadian economic data has underwhelmed economist’s expectations.

The under-performance of economic data is important and Canadian Dollar weakness has accelerated since Bank of Canada Governor Stephen Poloz has said that the bank is in “intense data-dependent mode” on future hikes and that growth will moderate. These comments on Monday took the Canadian Dollar across the board losing the most to the Japanese Yen and was worth a 0.6% drop against the USD that gave way to CAD falling to 1.2545 to the US Dollar

The technical outlook is focusing on further rises against the broader downtrend that began in early May. Short-term support is the 1.2520-1.2468 zone (Oct 13 high, 55-DMA.) Below this zone, a daily close below the 1.2433 figure (Oct. 12 low) opens the door for a return to the downtrend. Currently, a hold above the 1.2433 area favors a march toward 1.2723-78 zone (38.2% retracement of May-Sept. range, Aug 15 high.)

Unlock our Q4 forecast to learn what will drive trends for the US Dollar through year-end!

CAD Weakness becomes an October Theme as Hawkish BoC Pulls Back

Chart created by Tyler Yell, CMT. Tweet @ForexYell for comments, questions

USD/CAD Insight from IG Client Positioning: overall selling bias provides ST bullish outlook

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 tyell@dailyfx.com.

CAD Weakness becomes an October Theme as Hawkish BoC Pulls Back

USDCAD: Retail trader data shows 48.3% of traders are net-long with the ratio of traders short to long at 1.07 to 1. The number of traders net-long is 4.4% higher than yesterday and 9.7% lower from last week, while the number of traders net-short is 4.2% lower than yesterday and 45.7% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed USDCAD trading bias (emphasis added.)

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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Contact and discuss markets with Tyler on Twitter: @ForexYell

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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