Don't Bank on the Bank of Canada

The USD/CAD has been overbought for some time, read here what our guest blogger Matthew Clark has to say about

The USD/CAD had a sharp sell-off yesterday afternoon following the release of Canadian GDP data showing good growth numbers. With no numbers out of the US all eyes were focused on this release which saw the Canadian dollar immediately strengthen more than 0.6 %. The Canadian economy grew at a higher pace of 0.3% in December and 2.8% year-on-year.

But on a technical basis this is the move we were anticipating and confirms our bearish trend. Any Canadian weakness following this upcoming Friday’s non-farm payrolls release from the US should be used as an opportunity to buy the CAD.

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On Tuesday the Reserve Bank of Australia (RBA) announced no change in its interest rate, following last week’s comments from Bank of Canada Governor Poloz reducing expectations of a rate cut later today to below 40%. The CAD continued to weaken until yesterday’s figures, completing the retracement in wave 2 on the short-term charts.

This set us up for the wave 3 of iii lower, which is generally the largest, most impulsive move. Overnight we retraced slightly, setting up great sell levels ahead of the BoC announcement later today.

CAD hour SOURCE: Bloomberg Chart
CAD hour SOURCE: Bloomberg Chart

 

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Canada has suffered more than any other G7 country from the sharp fall in oil prices over the last eight months. Oil is a major export for Canada and the recent plunge in crude prices has weighed on the currency. But with oil trading back sharply from the lows set on Monday it looks like the correction in oil should continue benefiting the Canadian dollar.

Support at 1.2350 may be tough to break but once it does it will advance our view for this bearish case and is in line with our overall outlook for a weaker USD.

Looking at the longer term chart below we can see clearly that the RSI is showing the USD/CAD has been overbought for quite some time. Although on a longer-term outlook we can see we are trading away from the highs. We are from any minimum retracement of 38.2% at 1.1970 and the 61.8% at 1.1453.

We do not expect any change from the BoC later today and expect the CAD to keep on strengthening. So don’t bank on the bank.

CAD weekly SOURCE: Bloomberg Chart
CAD weekly
SOURCE: Bloomberg Chart

 

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