USD/CAD at 1.25: what’s next?

BY DEB SHAW | 

  • Unlike other currencies, there are few obvious narratives supporting the Canadian dollar
  • Technicals look exhausted, while bearishness towards USD is likely to increase from here
  • Despite limited drivers, Canadian dollar likely to rally in the short-term

Despite the ongoing sell off in the US dollar, USD/CAD has managed to stay above 1.25. Relative to the Canadian dollar, other currencies such as the euro and the British pound have enjoyed much stronger rebounds. Looking at the last few days, this can be explained by the lack of obvious narratives driving the Canadian dollar. The euro is rising on hopes that the ECB is set to taper its quantitative easing program (Draghi is speaking this Thursday, and an ECB meeting is scheduled for later this month), while the pound is enjoying a relief rally as Theresa May’s leadership position appears to be secure for now.

 

Where’s the catalyst?

Looking at Canada, there has been limited recent news that can power the currency higher. Economic growth is falling in rate-of-change terms, while the Bank of Canada appears to be hitting pause on its plans to ‘normalize’ interest rates. Speculator sentiment towards the Canadian dollar also remains elevated, and is thus not a catalyst for loonie strength. Meanwhile, several media outlets have reported that the current NAFTA negotiations may be on the brink of failure, given ‘outrageous’ demands from the US.

While the recent rise in crude oil prices should help CAD, crude oil has been unable to break out of its two-year trading range. This leaves technical factors and the US dollar as remaining areas of support. Thankfully, good news may be on the horizon.

 

Technicals looking overbought, USD/CAD due for a pullback

Looking at a chart of USD/CAD on a daily timeframe, the pair looks due for a correction. Based on oscillators such as the Relative Strength Index (shown on the chart), USD/CAD is approaching overbought levels. In recent history, USD/CAD has sold off on lower RSI figures (RSI today is above 51). Given the USD bear that has been ongoing since last summer, USD/CAD has fallen into oversold conditions (RSI < 30) more frequently. This can be seen below:

1.26 looks like a top, momentum flipping to the downside

10-11-2017 USDCAD

 

Lots of factors can drive down the US dollar in the short-term

While news from Canada has not helped the currency in recent times, US news continues to weigh on the currency. After expectations rose that the White House would be able to get tax reforms through Congress, recent news from Washington is dampening hope. Trump recently engaged in a Twitter feud with Republican Senator Bob Corker, while political blogs have reported that four Republic senators in total may be opposed to the tax bill. If more than two Republican senators oppose the tax bill, then it will fail to pass if all Democrats and independents vote against the bill (this was the same issue that led to Trump’s inability to reform healthcare).

All in all, bearishness towards the US dollar and technical exhaustion is enough to trigger a short-term Canadian dollar rebound. The initial hesitation in recent days is likely to be temporary.

Topics: Canadian dollar