Wednesday's FOMC outing showed the Powell Fed to be less model-driven than its predecessors, but the lack of any language confirming four 2018 rate hikes sent the dollar plunging lower.
Article / 30 August 2016 at 14:40 GMT

USDCAD bulls holding more of the cards

FX Trade Strategist /
  • Canadian data undermines loonie
  • Yellen's comments fuel US dollar demand
  • Loonie vulnerable to further weakness


 Is seasonality one reason for getting behind USDCAD? Photo: iStock

By Michael O'Neill

USDCAD has decisively broken above the middle (1.2900) of its 1.2650-1.3250 range that has been intact since May. Janet Yellen’s nod toward a US rate increase, last Friday, has sparked broad US dollar buying across the G10 spectrum and USDCAD has joined the party.  Should you?

Reasons to buy USDCAD

1. US rate outlook: FX markets are beginning to believe that a US rate hike is possible as early as September 21, in part because of Federal Reserve chair Janet Yellen’s comments on August 26, stating that she believes the case for a rate increase has strengthened.

2. Oil prices: The supply demand imbalance does not appear to have been corrected. Saudi Arabia and Iran have increased production although demand has not increased.  The CEO of Shell told Reuters that he didn’t see the oil market rebalancing until the end of 2017. Renewed WTI weakness would lead to USDCAD gains

3. Seasonal issues: USDCAD tends to strengthen between September and December. Since 2010, USDCAD has strengthened four out of five times. Part of the move can be attributed to repatriation flows. A large number of Canadian corporations are US-owned and profits get returned to the parent at year-end.

4. Bullish long term technicals. USDCAD has been in an uptrend since bottoming out at 1.0620 in June 2014 and that uptrend line comes into play at 1.2730. In addition, Fibonacci retracement of the 2016 range projects a move to 1.3570 on a break of 1.3308.

USDCAD seasonal strength
 Source: Saxo Bank

Reasons to sell USDCAD

1. Q3 Economic rebound: The Bank of Canada (BoC) forecast in the July Monetary Policy Report (MPR) that Q3 GDP growth would be 3.5%. This growth will be driven in part by Federal Infrastructure spending and non-commodity exports.  Non-commodity exports are close to pre-recession peaks and are expected to grow in line with the US economy.

2.Rebounding US economy: The latest Atlanta Fed’s GDPNow forecast is 3.5%, as of August 29. The US is Canada’s largest trading partner and Canada and the Canadian dollar does well when the US economy expands.

3. Oil prices are firm:  WTI is in an intraday uptrend while trading above $46.25.  If the uptrend remains intact, USDCAD gains should be limited. Oil prices are torn between speculation of a price support mechanism being adopted by Opec in Algiers on September 27 and reports of increasing supply amid stagnant demand.

4. A 0.25% US rate increase is not a surprise. The Federal Open Market Committee has been priming the pump for a rate increase since last December. US rates are extremely low by historical standards so a bump in rates to 1/2 to 3/4 percent shouldn’t bother anyone.

None of the reasons to buy or sell USDCAD are new or fresh and should already be reflected in the price. These moves have occurred in a holiday-thin-market environment. It is the last week of the summer (ignoring the calendar) and a large number of traders are on vacation which suggests that FX moves may be exaggerated.

Canada posted a current account deficit of $19.86 billion which, while expected, will undermine the currency. Wednesday’s GDP data will be important. The Q2 data is expected to be weak but the June month over month data isn’t. If the Canadian economy is going to rebound in the second half, a healthy jump in the June numbers would be a big help.

It is telling that even after Yellen’s speech and supportive input from vice chair Stanley Fisher, the rate hike odds for September, as posted by CME FEDWatch Tool, are only 20%. Those odds may change on Friday with the release of the US nonfarm payrolls report.

Despite the diverse Canadian dollar influences, the Loonie remains at the mercy of two key drivers; oil prices and US interest rates. As long as the US interest rate outlook is bullish and oil prices remain soft, USDCAD will remain bid.

 Soft oil prices will keep USDCAD to the fore. Photo: iStock

— Edited by Martin O'Rourke

Michael O'Neill is an FX consultant at IFXA Ltd
Market Predator Market Predator
Really huge inside knowledge, perfect Job Mike!
Relevant articles for you


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer
- 沪ICP备13028953号-1

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail