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CAD rallies to 1.2915

Posted on: March 30, 2016

Well, it’s been a somewhat baffling few weeks as a central bank watcher. Two weeks ago the market bought USD aggressively ahead of the FOMC rate meeting, only to be shocked and awed by a very dovish “Dot Plot”, resulting in a widespread liquidation of USD longs across all the majors and causing CAD to rally from 1.3390 to 1.2930.

Then last week, we get a parade of Fed speakers, most of them usually on the dovish side of the equation, saying the FED could potentially hike in April, and Bullard in particular questioning the usefulness of the dot plot. And so last week the market reversed the previous move and started reacquiring USD, prompting CAD to weaken to 1.3295.

And then, add a bit of weak US GDP data over the Easter holiday, and the USD went into the defensive mode ahead of a speech by FOMC Chair Yellen. CAD was at 1.3275 on Monday morning, before Yellen’s speech it had rallied to 1.3150. And so you would have thought the market was fairly well positioned, whatever Yellen said. But no, she completely caught the market off guard by her very dovish comments, leading to another wave of USD selling that has continued into today’s session. CAD reached 1.2913 this morning as consistent USD selling was seen.

Talk of large month end USD sell requirements also weighing on the market. That being said, after breaking below 1.2920 (the low from two weeks ago) which should have encouraged a stop loss run below 1.2900, in fact what happened was a large amount of profit-taking on the London close, and in quick reversal CAD sold back to 1.2975.

As an aside, the recent CAD strength was despite of Crude weakening off. Today, WTI gained some ground on the back of neutral oil inventory data and the broad based USD sell-off, almost reaching $40.00 before the afore mentioned profit-taking set in. That being said, it seems to have found support at $38.50 and that in turn is helping CAD, which just rallied back from 1.2970 to 1.2950.

So, what can we say about all this? First, the Fed has completely managed to fool the market, twice in two weeks. There is something to be said for the Bank of Canada model where the Governor is the voice of monetary policy and the Deputy Governors when they speak just add a t bit of additional weight. Contrast this with the many voices of the FOMC, trying to ascertain just what is the prevailing thought is getting to be a very tricky proposition. And as US monetary policy drives everything else, these U-turns are heightening uncertainty and confusion. Insofar as Yellen is the Head of the Fed, her voice carries the most weight, and thus after yesterday I have to assume that unless global conditions improve markedly, there will be no FOMC rate hike in April nor likely June.

Thus, there is no reason to expect the USD to rally significantly from here and so I am changing my medium term range from 1.28-1.3800 to 1.2500 – 1.3500. I would suggest that unless crude does stag a major rally above $60/barrel that CAD will have a very hard time reaching 1.2500, as that level will be sure to attract a lot of longer-term USD buy interest.

For today, I am flat, as not willing to fight the oncoming train, but at least for today it looks like profit-taking is limiting any further CAD gains.

  • Tuesday’s Inter-bank range: 1.3051 – 1.3179
  • Asia overnight Inter-bank range: 1.3050 – 1.3081
  • London overnight Inter-bank range: 1.3004 – 1.3071

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