This article is written by Matthew Clark who is the owner of Global Forex Pros.
ABOUT THE AUTHOR: Matthew has been a trader for more than 20 years, running FX desks at major banks and retail brokers. He recently started Global Forex Pros as a service for brokers to offer their clients, teaching them to trade in real-time as professional traders learn at banks and institutions, giving the retail trader the confidence to trade and increasing volumes for the broker.
Following the unexpected rate cut in January, Bank of Canada Governor Poloz surprised the market by dousing expectations of a rate cut next week. The market is focusing on interest rates across the globe in light of upcoming QE in Europe, and Ms. Yellens ambiguous testimony two days ago has left the markets guessing when the FED will move. Traders are always looking for evidence that could lead to further rate divergence between the dollar or the euro. But it is more about the timing of when to own the currency that gives you the most profitable returns. With surprise comments, as we saw from the BoC, the easiest way to do this is from the charts.
Yesterday’s comments “So, the downside risk insurance from the interest rate cut buys us some time to see how the economy actually responds” and “…what we are trying to do is to manage the risks we face, not eliminate them” has seen the chance of a rate cut next week from BoC drop from 80 percent to less than 40 and has seen the CAD rally strongly. But with the market beforehand looking for a rate cut, why are we now looking for the CAD to continue strengthening? With the majority assuming BoC would cut again on March 4th this has thrown a wrench into the plans of Canadian bears.
However, looking at the charts, we have been waiting for a sign of a top for a multi-week/ month and yesterday’s surprise news just confirmed our view.
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We can see whether our favoured view (above) or the alternate view is more accurate, that the Canadian dollar, irrelevant of the recent news or rate announcements, is set for a multi week rally. If we break down into the shorter time-frames we can clearly see that the MACD is starting to turn bullish signalling the end of the wave 1 down. Wait for the retracement and then sell USD/CAD, get ready to go crazy for the loonie as wave 3 of iii is not far from starting. And in the famous words of “Loonie Toons,” that’s all folks.