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Currency: Friday, February 26

Posted on: February 26, 2016

Well, this week has taught me not to make bold statements about market direction when coming back from vacation. On Wednesday, the market was all about risk aversion and rising crude inventories. Less than 48 hours later, crude is testing $35.00/barrel levels and CAD managed to break the 1.3640 technical pivot point and extend a rally down to 1.3505 this morning.

It’s tempting to quote from the Joe Schema show and say “What is going on!!??. But I think aside from the fact that liquidity remains scarce is that the market, the real reason underlying the current moves is a statement from China this week indicating they planned to expand stimulus spending to 4% of GDP ( from about 1.3% now and exceeding analyst forecasts of 2.3%). If they actually do add that amount of stimulus, that is a potential huge increase in demand, and thus why the commodities and the commodity bloc have outperformed this week.

On the crude front, statements have been confusing, with Saudi Arabia on Tuesday night saying no production cuts were needed, followed by comments yesterday that another emergency OPEC meeting was being set up. The market at present puts more weight on the potential positives than the negatives and so it seems the short crude trade is losing its luster. The oversupply problem still exists, so I am hard pressed to see crudes rally extend above $40.00 at present. On the other hand, the danger of dropping below $20.00/barrel now seems increasing remote.

So what that means for CAD is that the 1.4690 levels we saw in January likely mark the high for the year (as Janek Guminski on our sales desk has been trumpeting to the masses since the BOC didn’t cut rates in January). I continue to have doubts that CAD can maintain a significant move stronger, but that doesn’t mean we can’t see 1.3300 levels where I think you should reload longer term USD longs.

Overall, I still maintain that the likely trading range for the next few months is 1.3250- 1.4050. That seems a bit wide to me, but of course you have to incorporate the present illiquidity at high volatility, we are regularly seeing 150 point move intraday whereas 2 years ago they were a much rarer event.

For today, I think we have seen the lows at 1.3505, the market will likely consolidate in the 1.3500/1.3600 zone. Be on the lookout for stop loss orders above 1.3565, that might cause a spike to 1.3590, but I am inclined to think we see corporate USD above 1.3600 as their hopes of selling at 1.4000 are dashed and they move their orders lower. I am small short USD at current levels (1.3545) and will add to that should crude stage a break above $34.75 (currently $33.75).

  • Thursday’s Inter-bank range: 1.3517 – 1.3660
  • Asia overnight Inter-bank range: 1.3525 – 1.3550
  • London overnight Inter-bank range: 1.3505 – 1.3547


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