Canadian Dollar Strength at Risk Ahead of Bank of Canada Decision

Canadian Dollar Strength at Risk Ahead of Bank of Canada Decision

Fundamental Forecast for Canadian Dollar: Bearish

 

- Futures traders remain extremely net-long the Canadian Dollar

- Canadian Dollar nonetheless tumbles on US S&P 500, Crude Oil declines

 

The Canadian Dollar finished lower for the first week in three, falling sharply as the US S&P 500 turned lower and a broader pullback in financial market risk sentiment sunk previously high-flying Crude Oil prices. The severity with which the USDCAD bounced off of the 1.00 warns that Friday’s reversal could very well be the start of a bigger correction. We have argued and will continue to argue that Canadian Dollar positioning remains very heavily one-sided, and a sudden unwind in said leveraged positions could force further Loonie losses. A critical week of economic event risk ahead could subsequently dictate short-term direction for the Canadian Dollar, and traders should keep an especially close eye on any and all rhetoric from a highly-anticipated Bank of Canada interest rate announcement. 

Whether or not Friday marked the start of a larger USDCAD correction may very well depend on the Bank of Canada, while price action out of Crude Oil futures and the US S&P 500 will likely play a large part in the pair’s trajectory. The BoC is widely expected to leave its short-term benchmark rate unchanged at record-lows of 0.25 percent through its Tuesday announcement, but it is the attached statement that will draw all scrutiny from FX markets. Officials have repeated that they expect to leave interests low until the second half of the year—not unlike the US Federal Reserve’s insistence on leaving rates low for an “extended period of time”. Yet recent inflation numbers and generally buoyant economic data have complicated the case for excessively accommodative monetary policy. It will be critical to watch whether there are any changes in the bank’s commitment to leave rates unchanged through July at the earliest.

 

Traders should otherwise keep a close eye on moves in Crude Oil prices and the trajectory of other key risky asset classes. Friday’s Canadian Dollar tumbles serve as clear evidence that the high-flying Loonie remains closely correlated to a wide range of financial market securities. Indeed, CFTC COT Non-Commercial Futures positioning data shows traders are incredibly net-short the USDCAD. The leverage used in such bets raise the specter of a broader financial market deleveraging. History clearly shows that, when faced with margin calls and similar, traders liquidate any and all positions to meet cash demands. Canadian Dollar futures positions with large floating games seem like prime targets for liquidation in a broader market unwind. - DR

 

 

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