Last week, the Canadian dollar continued its impressive run against the Euro. The EURCAD currency pair touched a low 1.4198, before closing at 1.4212 on Friday. It now seems like the Canadian dollar has become absolutely bullish against the Euro and other major currencies. A study about the reason behind the strengthening of the Loonie against the Euro will enable a trader to assess the probable future course of the EURCAD currency pair.
In January 2016, the GDP of Canada grew by 0.6%, which was twice the analysts’ estimate. Including the growth in November and December, the GDP of Canada increased 5% on an annualized basis. An increase in exports boosted growth in the manufacturing, transportation, and warehousing sectors. Stronger economic data strengthened the Canadian dollar against all the major currencies including the Euro. Furthermore, a recovery in the price of crude oil kept the currency in the bullish orbit. Ultimately, the currency gained much more than what the fundamentals foretold.
According to the analysts at BNP Paribas, the market has overreacted to the Canadian GDP data and the Loonie has strengthened 2%-3% more than its fundamental value. Thus, a correction can be expected soon.
The evidence of overvaluation can be seen from the fact that the Canadian dollar did not gain much even with the recent release of exceptional economic data. The data from the Canadian Housing Sector showed that the building permits for February increased by 15.5%, which was well above the analysts’ estimates of 4.7%. Still, the Canadian dollar largely remained unmoved. Usually, such strong economic data would see the currency strengthen immediately.
Vassili Serebriakov, the analyst at BNP Paribas, stated that Canada will be unable to meet the GDP forecast of 2.2% for 2016 and 2.4% for 2017. The analyst now expects only a GDP growth of 1.4% in 2016 and 1.6% in 2017.
The Eurozone, on the other hand, has started responding positively to the stimulus. The German ZEW economic sentiment reading was 11.2, compared to the analysts’ expectation of 8.2. Thus, considering these facts, we can expect the Canadian dollar to weaken against the Euro in the upcoming weeks.
Technically, the pair has bounced back from the support, which exists at 1.4192. The currency pair, as the chart indicates, would find resistance at 1.4595 levels. The stochastic indicator reflects a highly oversold scenario.
Thus, a currency trader can position himself in the best possible manner by taking a long position at the prevailing price. To prevent huge losses, a stop-loss order can be placed 200 pips below the entry price. The trader should book profits near 1.4550 levels.
A one-touch call option contract is suggested for a binary options trader to take advantage of the probable uptrend. The strike price for the trade should be about 1.4350. The trader should also ensure that at least two full weeks remain for the call option contract to expire.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
