Short term
Trade view / 12 September 2016 at 12:30 GMT

Is enough, enough for USDCAD rally?

FX Consultant / IFXA Ltd

In less than four days, USDCAD has exploded higher, rallying from 1.2820 on Wednesday to 1.3120 on Monday September 12. The move was triggered by:  
(a) The Bank of Canada was viewed as dovish due to downside risks to inflation  
(b) Drop in WTI crude oil to $44.82 from $47.75
(c) A quasi-neutral European Central Bank statement leading to questions of the effectiveness of ECB and Bank of Japan monetary policies.
(d) Shift into risk aversion trading

FX markets have got themselves into a lather due to constantly see-sawing Fed rate hike expectations due to mixed US data and Fed speaker comments. Oil prices have bounced erratically on conflicting comments about production caps, etc. ahead of the meeting in Algiers. WTI gains from news of a massive decline in crude oil stocks have been erased.  USDCAD has soared as WTI prices dropped.

Perhaps, enough is enough.

The Commitment of Traders report and other studies indicate that the FX market was rather long Canadian dollars.  Stop losses were triggered on the break above 1.2950 and 1.3050 which may have exacerbated the top-side move. 

If this week’s US data is mixed or below expectations, the US dollar will retreat.

The WTI retreat from $47.75 appears to be corrective as long as the uptrend at from August 1 remains intact (currently $44.00/barrel).

The intraday and short-term technicals show USDCAD in very steep uptrends which are vulnerable to breaking. In addition, USDCAD is close to strong resistance in the 1.3150-1.3200 which has capped rallies since May.

Management and risk description

The key risk to this trade is that the intraday USDCAD uptrend is intact and this idea  recommends selling before there is confirmation that the intraday uptrend has broken. The trade will be stopped out if the current bout of risk aversion expands, creating renewed demand for US dollars. The stop will be triggered if strong US data leads to renewed expectations of a September rate hike. The stop will also get triggered if WTI prices drop through $44.00/b.

Trade idea parameters

Sell ½ USDCAD at market (1.3115) balance at 1.3145

Stop: 1.3208

Target: 1.2975

Time horizon: 5 days

Chart USDCAD 1 hour with take profit and stop loss levels shown
 Source: Saxo Bank

Chart: USDCAD  4 hour highlighting resistance zone
Source: Saxo Bank

Chart: USDCAD  5 year daily with moving averages.
Source: Saxo Bank

— Edited by Clare MacCarthy

Non-independent investment research disclaimer applies. Read more
12 September
Michael O'Neill Michael O'Neill
UPDATE: USDCAD dropped quicker than anticipated. Cancel the 2nd sell order and reduce the stop loss to 1.3092, ensuring a small profit.
12 September
Estuardorlemus Estuardorlemus
Thanks for the update Mike
13 September
kyosuke kyosuke
thanks for sharing


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