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CAD consolidating in mid 1.3000s

Posted on: March 21, 2016

I must confess CAD has given me some angst and heartburn of late. After nailing the call last week that the FOMC would not be hawkish and therefore CAD would rally following the meeting, I will confess I was completely caught off guard at the extent of the liquidation. In 24 hours, USD/CAD gapped from 1.3390 to 1.2950 (440 points!).

Clearly, the market did not like the fact that the Fed’s dot plot now only assume 2 rate hikes this year versus the four hikes assumed at last December’s meeting. I do think the move was overdone, particularly in CAD space where economic models continue to target fair value at 1.3500. But between the markets disappointment with the Fed and crudes miraculous recovery to $41.00 on the back of hoped for OPEC production “freezes” CAD has had a glorious run. But as I do recall from my favorite macroeconomic course, The Dornbush overshooting theorem suggests that overshooting currencies will mean revert at some point.

On Friday, Canadian January retail sales were much stronger-0than-expected, at +2.3% vs +0.6% expected. As expected, that helped the CAD strengthen to its best level in 3 months at 1.2925. However, what was telling was that it only stayed there for less than a minute and at the end of the day CAD had weakened off to 1.3140 as end of week profit-taking took place.

And in today’s session, which has been marked by subdued trading, CAD has been unable to move below 1.3030, and in fact spent most of the session trading between 1.3045 and 1.3075. CAD for the most part is still taking its ques from the other majors which today have also been subdued, and likely to stay that way for the remainder of the session.

It could be the effect of spring break, as the market does have that sort of lackluster emotion to it. But, that being said, I do think the CAD has been over bought and the USD oversold, and so expect a move to 1.3200 this week. It might happen tomorrow with the Liberals presenting the annual budget.

It used to be back in the mid 1990’s that budgets were good excuses for the market to take a run at CAD, and with the media playing up a potential $30 billion deficit, it might get on the markets radar. Or it might not. It’s been a weird couple of years and fiscal stimulus might be seen as a good thing for CAD insofar as stirs demand. On the other hand, perception of a return to large budget deficits would highlight the risk to Canada’s triple a credit rating. And spur CAD selling.

In one sense, tying the Liberals to the perception of tax and spenders is misplaced given how the Chretien and Martin governments started the process of reigning in Canadian public debt in the nineties following the infamous Wall Street Journal story calling Canada a Northern Banana Republic. But markets can have myopic eyesight, forget all about that and instead focus on the debt built up under Trudeau Liberals in the 1970’s and assume like father, like son.

Even if the markets take a pass on playing up that particular scenario, I do think it is over extended and so I am long USD at these levels and will only stop out on a move below 1.2920.

  • Friday’s Inter-bank range: 1.2924 – 1.3043
  • Asia overnight Inter-bank range: 1.2995 – 1.3070
  • London overnight Inter-bank range: 1.3022 – 1.3093


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