Search ForexCrunch
  • USD/CAD has popped higher out of the recent consolidation.
  • A  61.8% retracement of the June-July swing high and lows falls in around the 1.3350s guarding a run to the May pullback resistance.

USD/CAD has popped higher out of the recent consolidation and has taken on the 200-day moving average on the 1.33 handle to complete a 50% man reversion of the June downside to July swing lows.  

USD/CAD has been suffering as CTA’s continue to short oil for which the Loonie is directly correlated to considering the reliance that that Canadian economy has on the oil industry and its exports – around $66.9 billion worth, or +23.8% according to records of Canadian global shipments during 2018.  

“Despite sky-high geopolitical uncertainty in the region, with Iran continuing to expand its uranium enrichment program and as the US sends additional troops and defence systems to Saudi, the prospect of lower demand growth and continued strength in supply is keeping the market comfortable in looking past the risks of further disruptions for now,”

analysts at TD Securities explained.  

Speculative longs to take profit

Also, when weighed against the rest of the currencies, CAD has been the strongest G10 currency this year, so far, helped significantly by a rebounding domestic economy and a neutral Bank of Canada policy stance. In other words, it is thus vulnerable to an extended pullback as the fundamentals roll in and encourage speculative longs to take profit.

Commodity currencies saw overall selling last week by both funds and money managers and funds were net sellers of CAD. However, it is questionable as to whether the downside in the Loonie is sustainable considering that growth is still expected to hold near trend and encourage the BoC to maintain a steady hand into 2020. The technical picture may be less muddy, so long as the bears can fend off advances beyond a 61.8% retracement of the aforementioned range.  

The Fed back in the mix

What traders might wish to consider, is whether the Federal Reserve is about to turn uber dovish, or, will the manufacturing data be seen as a transitory factor that can likely be something to just monitor for the time being?  

Yesterday, the US ISM manufacturing came in at a weak 47.8 (down from 49.1 previously), falling in below the levels of January 2016 when the last US manufacturing recession hit. Indeed, it was a surprise, however, in another survey released yesterday, the  Markit’s purchasing managers index, suggested that U.S. manufacturing was not only in expansion in September but also growing at the fastest pace in five months!

Analysts at NBF Economics and Strategy explained that the ISM index also tends to cover larger companies and would, therefore, have been more impacted than Markit’s measure by the strike at General Motors during September, “a temporary event in any case“.

“But even assuming manufacturing is as bad as the ISM is suggesting, that would not necessarily mean the U.S. economy as a whole is in recession. As today’s Hot Chart shows, we’re still well above the 42.9 mark which even the ISM says “generally indicates an expansion of the overall economy”. So, while manufacturing woes are not good news, they do not preclude continued expansion of the U.S. economy.”

On the back of the release, US rates fell, with notably 2Y swap rates down some 10bp and the dollar weakened. US stocks were down more than 1% in the US and negative sentiment has carried over to Asia.

Expectations for the October Fed meeting shifted to now stand at around 60% for an October cut as we indeed call for (compared with 40% before). Let’s wait to see what the Nonfarm Payrolls comes out with for the next directional leg in the Dollar and sentiment for the Federal Reserve. It should not be forgotten, that the Dollar tends to attract a safe-haven bid in times of uncertainty and the CAD is always going to suffer when oil prices are crumbling.  

USD/CAD levels

The 61.8% retracement of the June-July swing high and lows falls in around the 1.3350s guarding a run to the May pullback resistance and 78.6% Fibo’ around the 1.3450s. A 100% retracement opens 1.3570s ahead of the 2019 highs of the 1.3660s which capped the summer 2017/ 2018 bull run. On a resumption of the downtrend, and in pursuit of a reversal of the 2017 bull trend, a 50% man reversion opens the 1.2920s.