Canadian dollar: CAD in Revenge Mode, Recent Sell-Off Was Too Far, Too Fast

By Gary Howes

The Canadian dollar (CAD) is enjoying a strong comeback as dynamics in global FX change; we are seeing heavy selling on global equities and this has afforded some squaring of the negative CAD positioning we have seen.

We would suggest that the reason the Canadian dollar has benefited from the negative sentiment in global markets has to do with what how this sentiment is to impact on stimulus tapering at the US Fed. With sentiment increasingly fragile it would seem markets are betting the US Fed cannot afford to cut its support to the global economy just yet.

CAD has been one of the big losers as markets prepare for Fed tapering, and any signs of a delay has proven beneficial to the USD.

A look at the markets shows:   

• The pound sterling to Canadian dollar exchange rate is 0.89 pct in the red at 1.8309.
• The euro to Canadian dollar rate is 0.3 pct lower at 1.5163.
• The US dollar to Canadian dollar exchange rate is 0.24 pct lower at 1.1077.

Note: Our CAD quotes are taken from the wholesale spot markets. Your bank will charge a spread at their discretion when passing on a retail rate. However, an independent FX provider is so well placed on the market that they are able to deliver you up to 5% more currency. Please learn more here.

As mentioned, dynamics have shifted in global markets, there is a renewed unease about the state of the economy which has shaken up recent trends.

"Yesterday morphed into a good old-fashioned risk off session after the weak Chinese PMI data combined with ongoing pressure on emerging market FX to drive investors back into safe-havens. It looked for a while like we had moved on from that but investors clearly retain an underlying anxiety about the state of the global economy," notes Shaun Osborne at TD Securities.

Amongst this shake-up we see the CAD benefiting.

British pound to Canadian dollar exchange rate hammered as markets finally accept Carney's message

The pound sterling is taking a beating today. The Bank of England has spent recent months emphasising to markets that it will only consider raising interest rates once the 7% unemployment threshold was breached.

The Bank had been hoping this would be at some far off date in the future. With UK unemployment falling sharply markets had started pricing in an interest rate hike by as early as the final quarter of 2014.

It is this upward pressure on yields that has fed into a broadly stronger GBP over recent months.

So what does the Bank do now that unemployment is falling at a rapid pace? It just scraps its plans! Overnight the Governor of the Bank of England pretty much buried his Forward Guidance policy and says the Bank of England will no start considering a broad range of indicators when deciding on interest rates, i.e how it made decisions before the arrival of Carney.

Mark Carney has told the Davos forum:

"The degree of stimulus will remain exceptional for some time. That should help reassure British business that the path of interest rate will be consistent with a sustained recovery.

Canadian dollar firms up

Osborne reflects on the fact that the CAD has been remarkably resilient to the broader risk off undertone that has developed in the past day or so—and especially overnight:

"CAD shorts started to pare back exposure late yesterday on the too far, too fast theory but we expect CAD gains to remain limited from here overall.  

"There are some negative price signal on the shorter-term charts but, as we have pointed out before, negative technical signals have not had that much traction with the market since September.  The broader trend higher remains firmly rooted in this market."

Nevertheless, Osborne is not ready to ditch the negative-CAD trend:

"There are some negative price signal on the shorter-term charts but, as we have pointed out before, negative technical signals have not had that much traction with the market since September.  The broader trend higher remains firmly rooted in this market.  

"USDCAD (could) drop back to the 1.10 area where there is a small gap on the short-term chart left open by Wednesday’s surge.  We still rather think near-term USDCAD weakness is a buy."