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CAD rallies to 1.2860

Posted on: March 31, 2016

It’s been quite the week and we still have US non-farms jobs data to contend with tomorrow. But it will likely seem anti-climactic given the moves seen already this week and the fact that FOMC chair Yellen seems so fixated on external risks that another strong US job number won’t do much in terms of raising interest rate hike expectations. We would need to see a real monster(i.e. 300k+) for the market to really change perceptions at this point.

Yesterday, CAD continued to benefit from the broad USD sell-off inspired by Ms. Yellen’s Tuesday speech. The market went to 1.2913 but seems like a profit-taking signal went off as the USD regained ground against all the majors and CAD closed back at 1.2967. Overnight, continued USD buying occurred, which saw CAD weaken to 1.3011. The whole move was odd, given how much hype was given to supposed month end USD selling. To me it was a sign that the month end flow was not going to be the no brainer short USD trade everyone assumed.

Nevertheless, as London started trading, markets did began to sell USD again and CAD rallied to 1.2930 before the release of January Canadian GDP data. The result was a massive positive surprise of +0.6% vs +0.35 expected. CAD immediately rallied to 1.2885 as stop losses below 1.2900 taken out, from that point it got a bit messy, zagging between 1.2890 and 1.2920.

Finally, about 40 minutes before the London close the market started to sell USD in earnest again (but again, it was another “tell” that something was off as market usually waits till 5-10 minutes before these days to execute fixes). CAD rallied hard to 1.2860 but never looked like threatening the 1.2830 level which as I noted two weeks ago seems to be favorite buy zone level for Elliot Wave theorists. Instead, as we got to within 10 minutes of the London close the market started buying back USD aggressively and a lot of short-terms specs must have been stopped out as the market careened back to 1.2975 within 30 minutes after London closed.

All the US data today has shown positive upside, but with the market so fixated on month end they choose to completely ignore it (thanks also to Janet Yellen, since the FED is no longer data dependent, but market sentiment dependent apparently). However, I think that with the short term specs being blindsided by lack of follow through they now adopt a more neutral outlook and so the CAD buying should abate for the rest of the day, especially as we do have US jobs data out tomorrow and the market will wait for a weak print for which to start new USD shorts.

This week has been hard to call, I think that the bounce off 1.2860 this morning is positive for the USD from a technical perspective, but I wonder how much upside there is given Yellen’s wet blanket speech this week. So I am small long USD at these levels 1.2975, but would look to take partial profit at 1.3010 and evaluate how it trades form there. Lastly, I just want to toss out that some technicians at the Canadian banks are making a case that April is usually a terrible month for CAD.

I am not a big fan of using seasonality to try and predict currency moves, as Forex is what they call in stats as a Regime Switching model. Nonetheless, there might be some annual flows (bond coupon payment repatriation to Japan for example) that might be at play. Something I will keep in the back of my mind.

  • Thursday’s Inter-bank range: 1.2913 – 1.3040
  • Asia overnight Inter-bank range: 1.2952 – 1.3011
  • London overnight Inter-bank range: 1.2940 – 1.3006

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