Canadian Dollar Settles Down After Wild Month-End Swings, But Outlook is Overwhelmingly Positive
Wild swings were seen in the USD to CAD exchange rate, which broke below 1.2900 and hit a 5-month low before recovering quickly and aggressively to end the day near 1.3000.
"The intraday reversal in the currency pair caught everyone by surprise because there was no news or catalyst," notes foreign exchange strategist Kathy Lien at BK Asset Management.
Not only was Thursday the end of the month but it was also the end of the quarter suggesting the market may have been distorted by the mamoth flows of currency that take place at this time as global money managers adjust the balance of their portfolios.
Regardless, the outlook remains encouraging for those hoping for a stronger Canadian dollar.
The CAD surged higher in the wake of the release of official economic growth data which showed the Canadian economy grew 0.6% month-on-month in January with gains being broad-based and only a handful of sectors seeing small declines in output.
"Sinking oil prices - recall that WCS prices fell as low as $13/barrel in January - may also have forced energy producers to pump to the max to generate cash flow. The continued expansion of the services sector is also impressive," says Krishen Rangasamy, Senior Economist at National Bank of Canada.
The good handoff from last year and excellent start to 2016 point to a strong first quarter.
All this suggests that the Bank of Canada can sit back and take its hands off the levers - no more CAD-negative interest rate cuts are likely.
Rather, the next moves on interest rates may actually be up.
If this theory gathers traction we could well see the CAD growth story continue.
USD to CAD: Where Next?
Investors have begun to sell the U.S. dollar again and this weakness drove the commodity currencies to fresh 2016 highs.
The release of crude oil inventory data from the International Energy Agency on Wednesday March 30, showed a deeper-than-expected fall in inventories, suggesting demand had outstripped supply, which helped Oil futures rise by over 3.0% and the Canadian Dollar to surge too.
CAD is highly correlated to oil which is a major export for the country. Crude almost hit $40 a barrel on the back of the news but eventually settled unchanged when investors realised the importance of the inventory build.
While the hope that OPEC will freeze production mid April is keeping oil prices from tumbling lower, some believe that we've seen the peak in oil, and perhaps even a peak in CAD strength.
"We believe that the U.S. dollar has further room to fall because of the significance of Yellen's comments. Data from Canada and Australia is also expected to show improvement this week, encouraging further gains in the commodity currencies," says Kathy Lien, analyst at BK Asset Management.
Recently USD/CAD had corrected higher in an a-b-c move which reached its zenith at 1.3295 on Thursday 24, but then the pair started going down again, retracing the whole correction and now has also breached below 1.2922.
It remains out base case that this break will probably open the way to a continuation down to the October 2015 trough lows at 1.2832.
The October low is a significant ‘Cerebrus’ guarding access to more downside.
A break below it would add a heavy weight to evidence that the longer-term trend had changed from bull to bear market, and would change the whole structure of the market on a broader view.
A definitive break below - confirmed by a move below 1.2790 - would almost certainly open the sluice gates to a break down to 1.2500, and possible even lower to the S2 monthly pivot in the 1.24s.
Westpac Not So Sure
Not all analysts are so certain about the bearish trend continuing down to below the 1.2832 lows.
Australian bank Westpac, for example, argue the Canadian Dollar is running out of reasons to continue rallying:
“Catalysts for fresh meaningful downside in USD/CAD are running out - crude oil seems to have found a ceiling around $40/bbl while
"PM Trudeau's pro-growth budget is now priced-in and out of the way.”
Westpac expect a major reversal to occur at the October ’15 lows at 1.2840:
“We look to buy USD/CAD on a good pullback at 1.2840 with a stop at 1.2710.”
The Aussie bank looks to trade up to a “modest” target between 1.34-5.
They see risks of weakness for the dollar, however, resulting from more poor US data cancelling out an expected June interest rate raise:
“Weak durable shipments and spending data have put Q1 growth estimates in freefall, informed forecasters stripping a good 1ppt off Q1 in barely a couple days to the 0.5-1.0% range. If confirmed by more soft data in coming weeks Chair Yellen's caution will be validated and a June hike would be off the table given the time needed to rebuild confidence in the outlook, not to mention the proximity of the UK referendum in June.”
Nevertheless, they urge caution not to get trapped into expecting a dollar capitulation, as regional Purchasing Manager Data has been good recently pointing to a regenerative spurt:
“All told not an inspired USD outlook but we won't get carried away. DXY downside shouldn't extend beyond support levels into 93-94. Recent weak hard data has been a Jan/Feb story yet since then US financial conditions have eased sharply and all regional PMIs have risen strongly.”
In summary, 1.2830-40 is likely to be a major watershed level looking ahead, which could hold the key to the next major directional move, whether its back up as Westpac suggest or till further down as the dominant short to medium term trend stresses.
