Canadian Dollar is a Convincing Buy

The US Dollar tends to weaken and Oil tends to rise in the month of April, according to research by UBS.

“The USD is seasonally weak in April. Over the past 10yrs [2006, 2016] the average USD Index depreciation in April is about 1%,” say UBS.

In fact, in only one year out of the last ten did the US Dollar rise -  2010 – and then only by a little over 0.2%

At the same time the price of oil has a strong tendency to rally in April due to increased demand for Crude from reopening refineries which traditionally shut for maintenance in March.

The Canadian Dollar (Loonie) is highly correlated with oil because it is the country’s greatest export and so a rise in the price of the latter tends to support the former.

As such April tends to be a positive month for the Loonie.

Further, both BofA’s commodity analysts and Nordea Bank are forecasting oil to resurge back up into the higher 50’s during 2017.

CAD supported by Econ Data

A recent positive run of data for the Canadian Economy, including very strong retail sales, also supports the currency.

Whereas there had been fears the Bank of Canada (BOC) might need to ease policy again, the outlook has since shifted to neutral as noted by governor Poloz’s recent speech, which for analysts at TD Securities, “reinforced our view that the Bank is likely to remain on hold until H2 ‘18.

Albeit with the proviso that their conclusion would be to “fade CAD rallies.”

With Trump reflation on the wane and talk of pressure from end of month and April flows to Japan, the US Dollar doesn’t look in great shape either.

“The Trump reflation trade has been winding down pushing the USD lower and now it’s approaching some critical technical levels.  Will it bounce upward?  Also, repatriation flows to Japan continue until the end of the month,” wrote Michael Bridgman, Private Forex Coach, on his blog this morning.

Not everyone is bearish, however, Bank of America (BofA) have stuck their neck out in a recent note by suggesting that USD/CAD is going to rise to 1.39.

Their argument is that the Loonie is overvalued by 5% from its fundamentals and the current price of oil.

“CAD has recently been outperforming relative to standard drivers such as oil prices and interest rate differentials.

“However, we still see CAD as roughly 5% overvalued, consistent with our end-of-year forecast for USD-CAD approaching 1.39.“Although CAD is an oil currency, we still look for interest rates and central bank expectations to play an outsized role,” said the note by BofA Strategist Rhys Evans.

Technical Picture Points to Losses for USD

The downside tenor of the chart of USD/CAD fits with the predominantly bearish fundamentals outlined above.

USD/CAD is at risk of breaking down out of the current narrow consolidation range.

We expect a move below the 1.3300 level to confirm such a break and reach a target at the 50-day moving average (MA) situated at 1.3240.

The pair is showing that the recent upwards tilted consolidation range has been diverging with steadily diminishing momentum providing more evidence of the pair’s vulnerability to weakness.

The pattern formed since the March 9 highs may be a bearish flag pattern too, with significant downside implications.

GBP/CAD not as bearish

For Sterling Canadian Dollar traders the outlook is less bearish from a fundamental perspective as GBP does not share USD’s seasonal propensity to weaken in April, and in fact seems to show the opposite tendency to strengthen if anything.

“The Pound is a “special case” according to UBS, who say that it usually appreciates by an average of 2.0% during April.”

This is due predominantly to the heavy weighting of the UK stock market to oil and gas companies which attracts large inflows of foreign capital in April, eager to trade the Oil rally via equities.

From a technical perspective, GBP/CAD appears to have put in a convincing top after meeting the 200 – day moving average (MA) from where it could be reversing.

This is in line with the assumption that CAD will rise in April, although not that GBP will – yet anyway – although we are still in March technically.

One anomalous factor which would impact this season is that the Pound may be more influenced by Brexit political risk rather than portfolio flows.

The three-wave measured up-move on the charts which began at the January lows looks complete and we must wait for confirmation of direction from price.

There is a possibility of more declines pushing the pair down to a target at 1.6460, however, likewise a break above the tweezer top at 1.6893 would reinvigorate the up-trend and see a probable extension to 1.7000, but overall these are not conviction calls.