Last week, the Canadian dollar registered a gain of 50 pips against the US dollar to end at 1.3910. However, between November, 1st and January, 15th, the US dollar had gained more than 1500 pips against the Loonie. Thus, traders wonder whether the current reversal in trend is a sort of simple technical correction or the beginning of a new long-term trend.
Fundamentally, the Canadian dollar is a commodity-sensitive currency. The prevailing bearishness in the commodity market had weakened the Canadian dollar from 1.0627 to 1.4686 against the US dollar in a span of about 2 years. Furthermore, the US dollar strengthened almost against all the major currencies in the past year by about 14% (the fastest pace in 40 years).
The problems in the middle-east and the stimulus program in the Eurozone provided the recipe for a strong US dollar. Thus, it was not surprising to see the Canadian dollar lose about 50% of its value against the US dollar in the past two years. However, as of now, it seems that the situation seems is poised for a change. A strong US dollar, as everyone knows, is harmful to the US economy in the long-term. The economic data released last week seems to reflect such a scenario.
The Royal Bank of Canada’s seasonally adjusted PMI (purchase manager’s index) rose from the December low of 47.5 to 49.3 for the month of January. On the other hand, in the USA, the ISM’s (Institute of Supply Management) survey gauged the PMI for January at 48.2, which is a mere 0.2% rise against the December manufacturing activity. The estimate of analysts’ was 48.6. The final Markit Eurozone PMI was 52.3 and in line with the preliminary reading, thereby indicating an expansion in the manufacturing activity.
The ISM (US) non-manufacturing PMI for January was 53.5, which was well below the analysts’ expectation of 55.1. Moreover, the most-watched unemployment claims stood at 285,000. The analysts’ expectations were 279,000. All these factors triggered a violent US dollar sell-off. However, the unimpressive unemployment rate (7.2% against an expectation of 7.1%) in Canada assisted the US dollar to gain some of the lost ground on the final trading day of last week.
However, the depressing unemployment data was balanced by an impressive positive change in the trade balance (CAD -0.6 billion against the expectation of CAD -2.2 billion). Thus, bearish sentiment in the CAD was largely absent for most of the week.
Going forward, there is no major Canadian economic data scheduled to be released this week. On the other hand, traders will be closely monitoring the US crude oil inventory data, unemployment claims, and the testimony of the Fed Chair Janet Yellen to the Joint Economic Committee of Congress. Any indication of a further rate hike this year would cause the US dollar to strengthen again.
Currently, the crude oil inventory in the US is 58% above the five-year seasonal average. If the inventory dips below last week’s level of 7.792 million barrels, then a rise in the price of crude and further weakening of the US dollar will happen. Other than that, a rise in the unemployment claims above the analysts’ estimates of 287,000 will also weaken the US dollar further.
Considering the decline in the crude oil inventory last week and the considerable gap that existed between the estimates and the actual unemployment claims, we can expect the situation to remain more or less the same this week. Thus, barring the impact of the comments from Yellen, we largely expect the US dollar to remain under pressure against the Canadian dollar for the weeks to come.
Technically, as shown in the image below, the USDCAD pair had broken major support at 1.3950. Now, the counter is seeing a pullback to retest the broken level, which will now act as a resistance.
Considering the fact that the monthly support had been broken, it would not be easy for the pair to go upwards. Thus, a forex trader can take a short position in the USDCAD pair at around 1.3950 levels with a stop loss above 1.4206. The target price for the trade would be around 1.3390. The risk to reward ratio for the trade would be approximately 1:3.
As far as a binary options trader is concerned, a put option contract can be purchased with a March (first or the second week) expiry. The recommended strike price for the contract is around 1.4000.
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.
