CAD could be close to bottoming, but all depends on a US trade deal
Despite CAD’s decline against USD this year, speculative longs and the buying of Canadian assets have accelerated signalling that a bottom might be close, however, for that to be the case, much depends on US-Canada trade relations.
USD/CAD is near key support levels above 1.3000, but data from the Commodity Futures Trading Commission show CAD net long positions at 19,340 contracts as of Feb 14 from 8,550 a week earlier along with a record annual purchases of CAD 10.23bn of Canadian securities in December. It appears that some market players are bullish on CAD though this data is unfortunately fairly dated.
However, for that bullish story to play out it will require some clarity over Canada’s trade relationship with the US where it sends 75% of its exports. Encouragingly, the new US administration has talked of only tweaking that relationship, which alleviated concerns. The ire of the administration seems to be predominantly aimed at Mexico and China rather than Canada.
Also, Canada is benefiting from the recovery in oil and other commodity prices.
However, the US is debating imposing a 10% border tax to help fund big corporate tax cuts and if carried through could knock 1.0-1.5% off Canada’s economy and hammer CAD, unless of course an exception was made for this country, maybe as part of its membership of the threatened North American Free Trade Agreement. However, this border tax may not happen as it faces stiff opposition within US political and business circles. Canada will certainly hope that’s the case.
With all this uncertainty, it’s no wonder that Canadian Premier Justin Trudeau made such a big fuss about signing the Comprehensive Economic and Trade Agreement (CETA) with the EU. Canada now desperately needs to diversify its export base and will no doubt be keen to do a deal with the UK to once it leaves the Union. However, it will take several years before CETA can make a meaningful impact on Canadian trade flows.
Another factor is the pace of US interest rate rises – if they happen faster than expected, say due to the US administration’s stimulative policies, then USD could resume its rally.
In essence, whether USD/CAD is close to bottoming out depends to a large extent whether the US-Canadian trade relationship is simply tweaked or Canada becomes victim of a protectionist US. So far, the signs are more positive for Canada, but given the spontaneous nature of the new US administration this could turn in a moment.
TECHNICAL ANALYSIS: USD/CAD – Building up to volatility burst
USD/CAD has been falling all of this year so far after hitting a year high of 1.3388 on Jan 20. Whether the pair are close to bottoming out is difficult to tell, despite the confidence of some market players, but one thing that is likely soon, is a burst of volatility.
The range the pair trade in, has been steadily narrowing as exemplified, for example, by the Bollinger bands and the daily RSI is around neutral and some indicators such as the daily slow Stochs are not giving particularly strong or reliable signals at this juncture.
What usually follows this situation is a burst of volatility, and whether that’s a bear or bull move for CAD will likely depend on the news flow from the new US administration and its trade policies. However, if the pair can hold above 1.3070, then that should be positive as that is above the previous base built around 1.3020.
A down move should find support at 1.3027, 1.3022, 1.2980 and 1.2969 while a rally could encounter resistance around 1.3145-7, 1.3185, 1.3212 and 1.3325.
By Justin Pugsley, Markets Analyst, MahiFX