Canadian Dollar (CAD) Exchange Rate Consolidates, Can the New-Found Strength Persist?
- Written by: Gary Howes
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The Canadian Dollar exchange rate complex retains its new-found strength in the Friday morning session in London, but the risks of a fresh lurch lower remain a distinct possibility.
Friday is seeing the Canadian dollar (CAD) retain its recent strength. We expect markets to remain consolidative ahead of today's US Non-Farm Payroll report.
On Thursday, CAD picked up fresh bids in sympathy with a rampant Australian dollar; the commodity currency complex is having a good day and while CAD may not be steaming ahead it is benefiting nevertheless.
Gains against the pound sterling are being witnessed as a longer-term trend higher in GBP-CAD wanes.
Of course there is also yesterday's BoC event to thank. Either way, the CAD looks as follows:
Analyst Jonathan Terela at Western Union warns that the strong move higher could yet fade: "Expect this power move to retrace a bit through the day and settle down as traders are hesitant to take large positions prior to important economic releases. Look for 1.0960 to be a key level of support, followed by 1.0910 level, which was the February low for the USD/CAD currency pair."
Beware: The selling may not be over yet
Despite recent gains in the rate we must stay mindful to longer-term forecasts that suggest further losses in CAD can be expected into mid-year. Against the pound sterling the CAD may reach 1.87 and against the Euro a rate of 1.49 is predicted.
In addition, short-term pressures may also reappear according to Stephen Gallo at BMO Capital who considers the headline US dollar / Canadian Dollar exchange rate:
"Very recent price action in USD/CAD suggests that the short-CAD covering we had been highlighting as a factor since the start of the week has been reserved until after the BoC.
"Our hunch is that it’s not entirely finished yet. So although we do expect very good support 1.095-1.1025, a very weak US employment report tomorrow will put the USD quickly on the defensive versus the CAD."
US data to dominate outlook
The main scrutiny and focus tomorrow is going to be on the US data, because of what it could mean for the ‘taper’ and because the US 10-year yield is not far from its 2014 lows.
"The outcome of Canadian employment, on the other hand, should simply restrain or exaggerate the magnitude of the initial USD/CAD move stemming from the US data. For today, the most immediate risk in USDCAD would appear to be that better Canadian data due at 0830 and 1000 EST get the ball rolling down towards 1.100," says Gallo.
Bank of Canada retains cautious tone
The BoC retained the cautious tone that we expected it would at yesterday’s policy meeting but the markets have taken the absence of a further shift in policy thinking as a modest CAD-positive when the statement was really a reiteration of January’s heightened concern about inflation.
"Despite the pop higher in January CPI, we still rather think inflation will end Q1 about where the BoC thought it would in the January MPR (headline close to or a little below 1%). There’s no all clear on inflation here just yet," says a note from TD Securities on the matter.
The note continues; "USD/CAD has taken back a little more than half of the sharp rally seen through the middle of last month and while the slide in price makes as a little uncomfortable (below the 40-day MA) —we retain a broadly bullish USD/CAD view and a core long position—we do not expect USD/CAD losses to pick up materially from here. Rather, we look for support to hold up in the low 1.10s and for bargain hunting interest to pick up."
With focus elsewhere (this morning at least and Canadian employment out tomorrow, USD/CAD may be something of a sideshow today.
Post-ECB EUR/CAD weakness below support in the 1.5100/25 area may weigh on USD/CAD.
