The wildfire in the Alberta region not only resulted in a contraction of the Canadian economy in the second quarter, but also forced the financial institutions to slash the country’s GDP growth to 1.2% in 2016. The weakening correlation between the Canadian dollar and crude oil also aided the USDCAD rally to a high of 1.3360. Now, for the reasons mentioned below, we anticipate the USDCAD pair to remain in an uptrend.
The first and foremost reason for anticipating the USDCAD pair to be in an uptrend is the high probability of a Fed rate hike in December. The economic data does not indicate that the US is firmly on a growth track. The economy is still facing headwinds. Still, many analysts believe that a rate hike is quite important at this stage as a delay may later force the Fed to tighten its monetary policy often, thereby hampering the growth.
After remaining range bound between $40 and $50 per barrel, the crude oil seems to have finally broken the upper band. The oil is currently trying to consolidate above $50, based on the production cap agreement expected to be finalized in the next month. However, this time around, the rise in the crude price did not translate into an increase in the exchange rate of commodity currencies such as the Canadian dollar. The reason is that the price rise is purely based on an anticipated production cut and not due to an increase in demand. Unless the demand increases, the Canadian dollar will continue to remain largely unaffected by the price swings in crude oil.
The Bank of Canada left the benchmark interest rates unchanged at 0.5% last week. However, the Bank of Canada’s governor stated that the members shrugged off the rate cut decision in the final moment, after taking into account the recent changes made to the mortgage laws, which has created a sense of uncertainty. Considering the 0.5% cut in the economic growth outlook to 1.2% in 2016, the economists believe that it is not going to take longer for the Bank of Canada to announce another rate cut. Thus, considering these facts, we anticipate an uptrend in the USDCAD pair in the days ahead.
So, the forecast can be utilized to take a long position in the USDCAD pair at about 1.3300. To limit losses, a stop-loss order can be placed below 1.3150. The profit can be booked when the USDCAD pair touches a high of 1.3650.
A one-touch call option can be bought with the aim of making money from the probable uptrend of the USDCAD pair. The strike price of the call option should be preferably lower than 1.3520, while the expiry date can be in the last week of November.
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.
