The Loonie Signals a Reversal as IMF Slashes Outlook

The Loonie Signals a Reversal as IMF Slashes Outlook
April 18, 2016

 
Following the recovery in the price of crude oil, in little over three months, the Canadian dollar strengthened from 1.46896 to 1.28850 against the US dollar. The downtrend in the USDCAD currency pair was also aided partially by the reluctance on the part of the Fed to raise the interest rates. However, the lack of firm buying support for crude oil, above $40 level, and the weak Canadian economic data indicates that the currency pair will face a short-term trend reversal.

Energy sector contributes 24.6% of Canada’s GDP. A day before the meeting between the OPEC and non-OPEC members in Doha (Qatar), Iran informed that it will not send its representative. This has raised questions about the real possibility of a production cut. Without any decrease in the production, there seems to be little chance for the crude to firmly go past the $40 mark. Such a scenario continues to haunt the Canadian economy.

The data from the Statistics Canada showed that the factory sales in February have dropped more than anticipated. The manufacturing sales fell 3.3%, amidst analysts’ estimates of a decline of 1.5%. Sales declined in 16 out of 21 sectors. The 12.6% decline in the sales of petroleum and coal products is the ninth consecutive month of decline. The Statistics Canada also revealed that the wages, compared to December, have come down 0.7% in January.

Recently, the IMF (International Monetary Fund) had cut its growth projections of Canada. The organization now expects the 2016 GDP growth of Canada to be 1.5%, compared to 1.7% predicted earlier. Similarly, for 2017, the GDP growth guidance was trimmed to 1.9% from 2.1% forecasted previously. The IMF has also cautioned Canada that the unemployment rate may rise to 7.3% this year and even touch 7.4% in 2017.

The Organization for Economic Co-operation and Development (OECD) has also slashed the 2016 global economic growth outlook by 0.3% to 3%. Thus, it can be understood that for the time being the USDCAD pair has little scope of declining further.
Fundamentally, the currency pair can be expected to remain range bound with bullish bias.

Technically, as indicated by the RSI, the USDCAD currency pair is in the oversold region. The RSI has also formed a positive divergence. The charts also indicate that the momentum is rising.

USDCAD Technical Analysis - 18th April 2016

Thus, a forex trader would be better placed if he takes a long position at this time (near 1.28). A stop loss order can be placed 150-200 pips below the major support at 1.26852. The profit can be booked near the major resistance at 1.3260. The trade carries a risk to reward ratio of 1:2.

By purchasing a one touch call option contract, a binary options trader can benefit from the impending price action. The date of expiry should be preferably chosen to be in the third week of May. Furthermore, a strike price of 1.30 or lower would greatly benefit the trade.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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