USD/CAD: Is that all you've got? - Rabobank

Christian Lawrence, Senior Market Strategist at Rabobank, notes that USD/CAD ended its 10% bear run that began back in April with the pair bouncing off the multi-year low of 1.2414 at the end of July and a subsequent attempt to return back to the familiar trading range of 1.28-1.30 stalled and the pair is now trading back around 1.2560.

Key Quotes

“Much of the sell-off in USD/CAD came as rate differentials narrowed but USD/CAD correlations have broken down of late with neither oil or rate differentials significant.”

“The question now for CAD has become “Is that all you’ve got?”

“We see USD/CAD trading back up to 1.28 in the near term but we expect a 25bp hike from the Bank of Canada in October and no hikes from the Fed will push USD/CAD lower in Q4.”

“Technicals

Although USD/CAD rebounded off a low of 1.2414, Rabo’s Daily Momentum Model is still triggering a “short” signal that implies a bearish trend is still in place. We are hesitant to jump on at this stage however, as we see some room for a modest relief rally. Indeed, we have already seen a sharp switch in positioning from net short CAD to net long CAD – the most extreme bullish positioning in CAD in over four and a half years and some profit taking can be expected. 

In terms of downside, the first support line to clear will be 1.246 which is the May 2016 low but the next major support line will be the July 26th low of 1.2414. Below there, 1.237 comes into focus although our base case is that USD/CAD is unlikely to reach that level. On the upside, regular readers will be more than aware of the ‘2 cent range’ trading favoured by USD/CAD since early 2016,and as such, we highlight 1.283-1.30 before a move north of the 1.3 handle would open up a move to 1.32.”