I have been very bearish the Canadian dollar for the past few weeks, calling for a move to the 1.30 level on my blog and on Canada’s Business News Network.
I am in Chicago for the day so I won’t be blogging much.
As promised, the break of 1.30 was fierce with USD/CAD racing to a high of 1.30669. A number of stops were sitting at or above the 1.30 level, so when that price point was reached, the currency pair ran quickly higher. On an intraday basis, the Canadian dollar has fallen to the lowest level against the US dollar since 2004.
There is alot to be worried about when it comes to the Canadian economy. Employment numbers are due on Friday and I think they will be weak.
After the Bank of Canada cut interest rates by 50bp this morning, my target of 0.8350 in AUD/CAD has been reached. Yesterday, when the currency pair was trading at 0.8122, I argued that the possibility of the Reserve Bank of Australia leaving rates unchanged and the possibility of the Bank of Canada being more dovish would drive an upside breakout in AUD/CAD.
As for the Canadian dollar, I am still looking for it to fall to 1.30 against the US dollar. The rate decision has already driven USD/CAD to an 11 week high.
Not only did the Bank of Canada cut interest rates, but they talked about Quantitative Easing AND further rate cuts. Next stop for Canada is zero interest rates!
As for the Australian dollar, their “surprise” decision to leave rates unchanged should not have been much of a surprise to my readers as we talked about it yesterday. Over the past few weeks, comments from RBA officials have been surprisingly optimistic which should have been a signal for all traders that leaving rates unchanged is an option. Last night, RBA Governor Stevens said that There has already been a major change in both monetary and fiscal policy. The board will consider the position again at its next meeting.” In the RBA’s eyes, they have done alot. They are not closing the door on further rate cuts, but for the time being, they want to give the economy time to absorb the government’s aggressive fiscal and monetary stimulus.
In the middle of February, when USD/CAD was trading at 1.2515, I talked about how it could hit 1.28. Now that this target has been reached, the move could extend to 1.30.
At the time, I argued that the shrinking trade deficit in the US and the first trade deficit for Canada in 32 years would lead to more strength for USD/CAD. This morning, Canadian GDP numbers were much weaker than expected. In the fourth quarter, the economy contracted at the fastest pace since 1991, 17 years ago.
USD/CAD is also trading higher because of broad dollar strength. The dollar has skyrocketed as the Dow breaks 7k to hit the lowest level in 11 years.
USD/CAD is trading well into the Bollinger Buy Zone which i mentioned on Feb 11. There is scope for a bit of a retracement, but as long as the currency pair holds above 1.2600, we could see a move to 1.30. If USD/CAD does manage to trade at 1.30, we could see a gap higher.
Poor Canada has a lot more trouble ahead due to its sensitivity to the US economy. The only silver lining is the rally in oil prices.
The US and Canada both released trade numbers this morning. The US reported a smaller trade deficit while Canada reported a larger one US Trade Deficit Shrinks, Canada Reports First Deficit in 32 Yrs.
Here are the trade charts courtesy of FX360.com (each piece of economic data has historical charts)
US Trade Balance
Canadian Trade Balance
The currency to watch is USD/CAD. From a trade flow perspective, a shrinking deficit in the US and an increasing deficit in Canada could spell more gains for USD/CAD. The currency pair is currently trading right below our Bollinger Band buy zone and if it closes above 1.2515, we could see a move to 1.28.
The biggest mover this morning is the Canadian dollar which has rallied close to 300 pips against the US dollar and is closing in on the 1.20 level. What’s behind the move?
1. Major merger and acquisition flow. Mexican breadmaker Bimbo closed on a $2.38 billion acquisition of U.S. Bread making unit of Canada’s George Weston Ltd
Story in Reuters
Why does M&A flow Matter to Currencies
2. Oil prices are back above $40 a barrel and rising
3. OPEC Says Oil prices at $40-$50 is too cheap, prices need to be between $75 0 $100.
4. IMF says Oil May AVerage $50 a barrel this year and $60 a barrel next year