USDCAD: Path of least resistance is higher for the pair - Rabobank

Christian Lawrence, Senior Market Strategist at Rabobank, suggests that their bias remains for a higher USD/CAD but they will need to see a confirmed close (a close followed by a subsequent higher close) above the 50% Fibonacci retracement of the January to May sell-off if we are to see the pair enter a new trading range of 1.36-1.3840.

Key Quotes

“As mentioned, we do still see the path of least resistance as higher for the pair.”

“In terms of positioning, recent CFTC data show CAD net shorts have diminished notably and now stand close to neutral territory. We suspect that much of this unwind is a result of year-end positioning and profit-taking rather than a change in sentiment and we would suggest that the next CFTC release will likely see an increase in net short positioning once again. Indeed, the bulk of new USD/CAD options traded so far this year according to DTCC data have been out-of-the money calls, although this does only represent a very small snapshot of the market and so some caution should be exercised before reading too much into that data point.”

“In terms of interest rate differentials, a look at 3mth OIS spreads shows almost no change since the end of the year while the 2yr swap spread at 35bp is stable just off the recent highs. We remain of the view that the Bank of Canada is unlikely to move rates this year while the US curve may be pricing too much as far as rate hikes are concerned. Indeed, contrary to the three rate hike projection for 2017 seen in the Fed’s DOT plot, Rabobank’s Fed watcher, Philip Marey, is calling for just one in December although the risk is skewed to more over less.” 

“Recent data highlight this growing divergence with key Canadian releases disappointing expectations. CPI inflation fell 0.4% m/m with the year-on-year rate dropping from 1.5% y/y to 1.2% y/y in November while GDP data showed a soft start to Q4 as GDP contracted 0.3% m/m in October against expectations of a flat print. In contrast, although referring to an earlier period, the third estimate of US GDP growth in Q3 was revised up 0.2ppt to 3.5% q/q annualized. Of course, all this said, USD/CAD’s future path remains at the mercy of President-elect Donald Trump. Much uncertainty remains about Trump’s policies and plans but we do know that the White House controls trade policy and if he should so choose, Trump will find it relatively easy to change the trade relationship between the US and Canada. Although we do not expect Trump to rip-up NAFTA, that could certainly be the starting point from which he decides to start trade negotiations and even this would likely result in significant pressure on CAD.”