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CAD weakens to 1.3220

Posted on: April 05, 2016

Yesterday I felt some astonishment that CAD had managed to remain resilient in the face of weakening crude prices and hawkish comments from Fed Dove Rosengren. And it took the entire North American session for the cracks to appear, with CAD closing at 1.3088, the worst level of the day. And even then, the first hour of the limbo trading zone between Toronto closing and Sydney opening saw CAD recover back to 1.3069.

But then as liquidity returned as Asian trading got underway the CAD and indeed the entire commodity bloc weakened off, with CAD trading to 1.3111. Of note, FOMC member Evans was in Hong Kong last night and said he expected two rate hikes this year. So again, a dovish Fed member talking Hawkish, and gets me even more curious what Yellen says later this week.

In any case, USD offers ahead of 1.3120 resistance kept it contained for the rest of Asia, but as London trading got underway CAD came under renewed pressure and weakened off to 1.3185 before the handover to North America. The market was at 1.3165 when Canadian February trade data came out at -$1.9 billion vs -$0.9 billion expected. That combined with new selling pressure on crude saw CAD weaken to 1.3205.

The usual corporate offers and profit-taking led to a move back to 1.3180 but then a flurry of decent US data (PMI, ISM index, Jolts job openings) helped spur yet another round of USD buying, and the market moved to 1.4220.

In a case of maybe the market going too far, too fast, since then there has been broad based USD selling across all the majors, and CAD recovered back to 1.3150 shortly after the London close. Also, there looked to be some significant stops going off in USD/JPY after Japan PM Abe commented that “they must refrain from arbitrary intervention”, and I suspect also caused some CAD buying versus the yen as CAD/USD moved down to 1.3147. It was kinda of what the hell is going on move as crude had not moved, and sure enough quickly reversed itself and currently the market is at 1.3180.

So yesterday I said I expected funds to reach 1.3150 this week, and as usual the move occurs right after the North American close. I sometimes wonder if I should just put on a trade at the North American close and take the next day off, as most straight line moves occur in the overnight session. Case in point, there was a 100 point move higher last night in funds even though the information that was catalyst for the move had occurred early in North American trading. So why did North America see continued USD selling yesterday and stay in a tight range? It comes down to the fact there is more two way flow in North America as corporates, real money funds, etc. look to hedge exposures. These type of clients do not typically try to trade tactically, they are usually purely motivated by where the price is (this is better than my quarterly target, lets execute). And most Canadian dollar “real” flows are in North America.

In the overnight session, there is fewer “real flows” aside from standing orders, and consequently with less liquidity speculative players can push the market faster. And that is what we have today. What looked like a no brainer move to me yesterday, being long USD at 1.3050, took until the last hour of the day to move into a profitable position. And for today, nothing has changed to alter the view that USD/CAD is still going higher, to 1.3350. And yet, we have abruptly come off the highs and have been consolidating at 1.3160 for the last 2 hours.

I suspect that the market will sell crude again after the release of API inventory data this afternoon, and so CAD should again weaken off in the overnight session and reaches 1.3250. So with that in mind I will be staying long USD at current levels and add to my position as we approach the end of the day.

  • Monday’s Inter-bank range: 1.3003 – 1.3088
  • Asia overnight Inter-bank range: 1.3068 – 1.3111
  • London overnight Inter-bank range: 1.3096 – 1.3159

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