Strong GDP Growth, Crude Oil Rally Keeps Loonie Bullish

Strong GDP Growth, Crude Oil Rally Keeps Loonie Bullish

On the basis of weak inflation and poor retail sales data, our July 17 report had forecast the Greenback to decline against the Canadian dollar. The report also mentioned our interest to open a short position in the USDCAD pair near 1.2680. We had also stated that an investment in a put option may be made while going short in the currency market. As forecasted, the USDCAD pair fell to 1.2430 levels, thereby leading to a profit from both the trades. We do not expect any trend reversal at this point in time and expect the USDCAD pair to move down further due to reasons mentioned below.

The Institute of Supply Management of Chicago reported a purchasing managers index reading of 58.9 in July. The Bloomberg Consensus estimate was 61, while the Reuters estimate was 60. In June, the PMI reading touched a three-year high of 65.7. Thus, it can be understood that the market had expected the reading to decline, but not to this extend.

During the July Fed meeting, no changes were announced in the monetary policy. However, the statement released at the end of the meeting expressed concern about the weak inflationary pressure. The market believes that Fed may find it difficult to normalise rates under the current scenario. In fact, the odds of a rate hike in 2017 had fallen to 58%, from 65% seen before the release of the statement. Harm Bandholz, a strategist at UniCredit bank in New York, stated that the market is concerned whether the Fed would express worry about a policy mistake. While giving a briefing to the clients, Lloyds bank stated to its commercial banking clients that it expects a rate hike only by the end of the year.

The rate hike and the hawkish tone of the Bank of Canada continues to keep the Canadian dollar bullish. Additionally, the recent GDP data indicate that the Canadian economy is firing on all cylinders. The GDP grew 0.6% m-o-m in May, versus analysts expectations of 0.2% growth. During the previous month, the GDP grew 0.2%.

In the commodity market, the crude closed above the crucial level of $50 a barrel for the first time in more than two months. With that, the US WTI had gained about 9% last month. The appreciation in the price of crude oil is expected to favour Canada, which is a prominent oil exporter.

The USDCAD pair is facing resistance at 1.2550. The momentum indicator is moving below the reading of 100. That indicates a weakness in the currency pair. The USDCAD pair is also trading below the 50-period moving average. Thus, a continuation of the current downtrend is expected.

USDCAD - Technical Analysis - 2nd August 2017

To gain from the downtrend, we wish to go short in the USDCAD pair near 1.2540, with a stop loss order above 1.2650. The short position will be closed when the pair drops to 1.2180 where the next support exists.

An investment in a put option would enable us to mimic a short position in the currency market. A strike price of about 1.2540 and an option expiry date around August 10th looks ideal for the intended trade.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

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