- USD/CAD downside appealing looking through the coronavirus.
- Federal Reserve could be forced into an insurance cut, weighing on the dollar.
USD/CAD is trading between a low of 1.3271 and 1.3305, slightly down on the day at 1.3282 during the time of writing. Commodity currencies have been seeing overall selling, except the buying stance by asset managers in CAD according to last week’s COT report, although the coronavirus is keeping the currency on the back foot in spot FX.
The state of play in markets still very much embraces the risk of a W-shape recovery rather than a V-shape recovery due to the spread of the coronavirus fears which has catalysing an even larger risk-off play this week. Global stocks are swimming in a bloodbath and the CRB index has dropped with commodities falling back into distribution. Oil is leading the way and if it were not for a pullback in the US dollar and an exodus from US stocks, USD/CAD would likely be a lot lower considering the correlation between oil and CAD. On the CSI, CAD has overtaken the greenback as the strongest of the currencies.
Carry trade appeal and CAD trumps AUD
‘Smart money’, seeing the trees through the forest, could well be anticipating value in the Loonie given that it is one currency with its house in order and an attractive carry. Firstly, is has looser ties to the Chinese economy (exports) and therefore, the loonie is one of the less directly vulnerable currencies in commodity-FX. When the dust settles, although it is still far too early to assume when that will be, but with a gun to the head, one might expect that 2020 H2 will see the coronavirus pandemic panic behind us.
When taking into consideration implied volatility in the DXY, the Canadian dollar is actually offering a higher implied yield on the three-month outlook of 0.40, the highest of the G10s. Short AUD/CAD 2020 has been playing out well and taking into account the recent run of positive data, (a drop in unemployment endorsing robust inflation to stay within in close proximity of the Bank of Canada’s mid-point band target of 2%).
A rebound in oil will be a blessing for the bulls stepping into the CAD early doors. However, we are not out of the woods in this regard and we can still see lower levels on a break below $50bls WTI, (a daily support structure). Markets are waiting for a tip of the hat form OPEC+ but that may not come until the March meeting, and thus far, Russia is seemingly reluctant to participate in further curtailments.
USD/CAD outlook depends on the Fed
The outlook for USD/CAD thus depends on what the market sentiment will be for the Federal Reserve. An easing bias and renewed dovishness will likely tip the balance in favour of the bears. Markets are pricing a 10% chance of easing at the next Fed decision on 18 March, yet an insurance cut should not be out of the question.
Fed governor Brainard, for instance, said earlier this month that a policy may need to remain accommodative to reach the 2% inflation target, and even supported an inflation overshoot to achieve average inflation of 2%.
USD/CAD levels
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