Long USD short CAD
The recent bullish trend in the Canadian Dollar (CAD) began after the second week of May 2017. The bullish trends in the Euro and GBP, weighted to 69.7% of the Dollar Index, helped propel the Canadian Dollar higher and USD lower. Economic data coming out of Bank of Canada (BOC) has been explosive. Canadian GDP was highest in the second quarter than in any other G7 country at 4.5%. We have already seen the BOC raise rates once in 2017 and the market is pricing in an 80% chance of an October hike. On Friday October 20th, The BOC will release its Month over Month (MoM) and Year over Year (YoY) CPI data. The expected uptick in inflation would bring MoM to 0.4% and YoY to 1.4%, respectively.
CFTC positioning data shows a strong capitulation of speculator positioning at the end of July. At the end of May, when the bullish trend began, short volume was at a 9 year high. Capitulation to long CAD positioning began the 3rd week of July, after the currency had already moved 6% to the upside. September price action saw the bearish trend in the USD/CAD continue with the pair breaking the 1.21 support level, intraday.
Trader positioning in CAD has reversed to its largest Long volume since Fall/Winter of 2012, which followed with a 3 year decline of 45% in the currency. Trader positioning reflects the herd mentality chasing performance or Alpha. There are both economic and geopolitical risks to the rebound in the Canadian Dollar that are not being priced in.
The global rebound in energy prices has helped fuel Canadian CPI. Strong housing markets in Toronto and Vancouver have also helped inflation. The timber tax that U.S multinational corporations are paying to stock lumber for construction and building industries, will inhibit our purchasing power to buy lumber and build in the US, unless our prices inflate. There is a geopolitical risk of a Canadian exit of NAFTA, or dissolution of the entire agreement. Additionally, the rebound in the Euro and GBP since Brexit, US Political Elections, and E.U elections, has been a strong headwind to the US Dollar. Open long and short volume for DXY is at the lowest it has been all year, suggesting that traders are waiting for more data and event volatility before pushing open interest to 2015 highs.
This is a low volume entry point to take advantage of a cheap and uncrowded position. Long USD/CAD coincides with price action since the 2008 Financial Crisis, the risks to the Canadian economy that are not being priced in, the oversold DXY and the overbought CAD. At an entry point of 1.2500, our stop loss to the downside will be at 1.2000, with exit points at 1.3000, 1.3500/3700, and 1.4500. To an investor that is more suitable to risk, the pair could be held until the 2002 highs of 1.6000.
We will continue to watch and monitor price action for the Majors (Euro, GBP, and Yen) for the remainder of the week. Economic data out of Europe, minor ECB speak, and Bank of Canada CPI data will help give direction to the pair. The October rate decision from the BOC, and December unwind of Federal Reserve balance sheet coupled with a rate hike, will set a course for the pair moving into 2018. We will continue to monitor the pair and adjust our positions and recommendations accordingly.