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Trading Canadian Dollar is an Effort of Clarifying Fundamental Sway

Trading Canadian Dollar is an Effort of Clarifying Fundamental Sway

2018-09-05 03:30:00
John Kicklighter, Chief Strategist

Talking Points:

  • USDCAD is a poor reflection on the Canadian Dollar's general standing
  • While concerns over NAFTA negotiatons weigh the Loonie, it is more broadly buoyant with the BoC setting offering some support
  • Trading Canadian Dollar pairs is a process first of identifying key fundamental themes and the best outlets for their resolution

See how retail traders are positioning in the EURUSD, EURJPY and EURGBP as well as other FX majors, other global indices, gold and oil intradayusing the DailyFX speculative positioning data on the sentiment page.

The Contrast Between USDCAD and the Canadian Dollar

There is a significant difference in the performance of the most liquid Canadian Dollar cross (USDCAD) and the bearings of the Canadian currency itself. When it comes to the former, the US Dollar exacts a remarkable degree of influence that can readily overpower the CAD. That is especially true during the contentious NAFTA negotiations that are ongoing between the United States, Canada and Mexico. Where USDCAD has charged higher to extend a multi-month advancing channel, an equally-weighted index of the Canadian currency is far more restrained in its own losses. Rather than register steady losses as would seem to be the case for its benchmark cross, the Loonie has in fact only recently come off its highs. Traders should be open to bearish and bullish scenarios along with the pairs that would best position the currency.

Daily Chart of USDCAD and Equal-Weighted CAD Index

Key Themes for the 'Loonie': Trade Wars, Monetary Policy and Risk Appetite

In evaluating the next move from the Canadian Dollar, it is first important to evaluate what the most important fundamental cues are in which to keep track. As it happens, there are a host of high profile fundamental concerns that will prove particular important on bearing and tempo for the Canadian Dollar moving forward. On the risk appetite spectrum, the Canadian Dollar has set its course when the Bank of Canada (BoC) positioned itself to be the second most hawkish of the major central banks. Though a wide 'second' to the Federal Reserve, the Canadian central bank is a remarkable contrast to the RBA and RBNZ which are consider carry currencies but have shown little will to raise rates through the foreseeable future. That makes the upcoming central bank decision that much more important. If the group is any more dovish or hawkish moving forward, the currency will respond in kind owing to the anticipation. However, whatever move the Loonie starts via the BoC rate decision, persistent fears over the uncertainty of trade wars will keep the currency unstable. US and Canadian sources (President Trump and Prime Minister Trudeau) were confident that a resolution to the NAFTA replacement standoff would be found last week by Friday. That never came to pass, however, and the Loonie started to retreat. Which of these major themes will continue to draw the greatest market interest? Bearing and pace will almost certainly depend on which theme dominates.

Daily Chart of USDCAD and an Eqully-Weigted CAD.

Preference for CADJPY of a Stumble, AUDCAD, NZDCAD or CADCHF for Strength

As always, there are various possible outcomes for the Canadian Dollar depending on what theme sets the pace and what outcome it stages. There are two high-profile events ahead that can tap deeper fundamental veins and thereby drive the currency one direction or the other. Bank of Canada (BoC) event will garner the most attention. The BoC is one of the few major central banks that has actually normalized policy and it is one of an even smaller group that has even attempted a pacing. If the BoC maintains its hawkish bearing through rhetoric that fuels speculation of a future hike (much less an actual hike at this meeting), it can help lift the Loonie for its rarified status. To rouse bears, a status quo stance is not enough, the BoC would need to state no possibility of hikes in the proximate futures. It is the trade wars report for July due Wednesday that can provide the truly bearish outcome for the Loonie. The Canadian trade report (and US equivalent) are due Wednesday. This will help signal exactly what kind of impact such policies are having on economic measures. For a bullish CAD outlook CADCHF is one of my preferred outlets, though AUDCAD and NZDCAD could offer their own appeal. Alternatively, a bearish course would find good company in CADJPY given its connection to risk trends. We discuss Canadian Dollar strategy specifically in today's Quick Take Video.

Daily Chart of USDCADDaily Chart of AUDCAD

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