An Opportunity in USD/CAD?

I don’t often post trade calls on my blog (since I usually reserve that for BKT Subscribers). Last week, I called for a rally in EUR/GBP following the ECB and BoE rate decisions and now I am seeing a decent medium term opportunity in USD/CAD.

From a fundamental and technical perspective, the odds are skewed towards further gains in the currency pair. As economic data heads towards multi-decade lows, the greenback could continue to strengthen on safe haven plays. From a Canadian dollar perspective, oil prices have dropped 55 percent since the July peak, but the reaction in the Canadian dollar has been nominal. Economic data has been mixed but there is no question that the trajectory for growth is downwards. The merchandise trade balance is expected this week and I expect that and other data to be CAD bearish. There is no reason why the Canadian economy should be immune to the slowdown in growth.

Furthermore, there has been a VERY strong correlation between USD/CAD and the BAX (*Canada’s Bank Acceptance Futures). According to the following chart, the implied yield of the June BAX contract continues to fall - this suggests that the correction in USD/CAD should be temporary.

Technically, I also really like the way USD/CAD is trading. It is holding well above the first standard deviation Bollinger Band and the 50% Fibonacci retracement of rally that took the currency pair from 1.03 to 1.3020.

If USD/CAD manages to clear 1.20, there is no major resistance until 1.24 to 1.25.

Source: eSignal

Comments

[Prudent Man...:]

Interesting that no mention of inflation due to the "printing presses" being run worldwide.

Will we have worldwide "stagflation"? How will the governments deflate the money expansion. Those are questions that should be addressed now. Is then medicine worse than the disease?

2008 Nov 10 01:12 PM

[John Q. Fib...:]

I read this and came away not understanding what you are saying....

--that Canadian and US currency (both) are likely to rise inthe medium term against most other currencies

--that the gap that has opened between Canadian and US dollars is temporary, and that the Canadian dollar will return to near parity in the shprt term, meaning buy options on Canadian dollars.

--that the Canadian foreign exchange picture will be impacted by the decline in commodities prices if they prove permanent. Commodities are an important component of the Canadian export sector, but this loss of potential has not yet shown up in foreign exchange rates, so the Canadian dollar is likely to decline further vis-a-vis the American. Buying some sort of an option to sell at current rates is a good move.

I'm sure your more sophisticated usual readers know a Bax isn't one of those little black shrivelled up things one finds in fancy breakfast cereal. But are Baxes not those little furry things you see crossing the street in broad daylight?

2008 Nov 11 07:47 AM