CAD Viewed as a Procyclical Currency
G7 OECD Leading Indicator is a negative factor for the CAD in current environment. OECD, Organization for Economic Co-operation and Development, releases the Leading Indicator for early signals of economic expansion or slowdown.
- USD/CAD has a negative correlation with the G7 OECD Leading Indicator.
- Periods of growth and expansion tend to benefit the CAD and vice-versa.
- Note that USD/CAD posted a bullish long-term trend reversal in 2008 as the Leading Indicator pierced long-term support.
- Relationship suggests that CAD will not register sustained gains until Leading Indicator begins to stabilize.
Equity markets a key variable in helping to explain the directional bias in USD/CAD. Investors using equities as proxy for risk aversion; affects procyclical nature of CAD.
- Investment themes driving the CAD have evolved since 2005.
- “Petro-currency” theme was a catalyst for CAD strength in 2005.
- The role of China and base metals came to the forefront in 2006.
- Huge thematic shift took place in H2 2008.
- Crude oil correlation became less significant, while the role of equity markets gained prominence.
- Risk aversion theme using equities as a proxy.
- The CAD has been moving in lock-step with equities for the last 7 years.
- Periods of equity market strength serve as a positive for the CAD and vice-versa.
- An offshoot of the procyclical nature of CAD.
Crude oil is having a reduced impact on the directional bias in USD/CAD
- USD/CAD also has a negative correlation with crude oil.
- Note how USD/CAD broke higher in 2008 –just as crude oil broke lower.
- Correlation has declined since late 2008 though.
2-year U.S.-CAN swap spreads should also be considered for USD/CAD price direction
- Aside from equity and commodity markets, interest rates also have an impact on USD/CAD.
- Note that 2-year U.S.-CAN swap spreads have a very high correlation with USD/CAD.
Uptrend in 2-year U.S.-CAN swap spreads is a bullish factor for USD/CAD
- Ascending channel pattern guiding 2-year U.S.-CAN swap spreads higher.
- Uptrend and high correlation coefficient present a bullish factor for USD/CAD.
USD/CAD: Key Daily Resistance Level at 1.3017
- USD/CAD has been trapped in a 1.1800-1.3000 trading range this year.
- Note that prices have failed to pierce key resistance at 1.3017 despite four attempts since October 2008.
- Presents a tough hurdle for USD/CAD to overcome.
- Recent break below an ascending triangle base at 1.2268 has imparted a downside medium-term bias.
- Close below initial support at 1.2030 would highlight a key double bottom at 1.1826 in this regard.
- Break below the 1.1826 level would be significant and project additional losses toward 1.1661, followed by 1.1477.
- Must register a daily close above 1.3017 in order to generate new upward price momentum.
USD/CAD: Long-Term Corrective Phase Losing Momentum
- USD/CAD easily attained price targets at 1.0850 and 1.1000 in very short order.
- Prices are now struggling to sustain moves above the 1.3000 level.
- The monthly studies are beginning to peak from overbought levels.
- Suggests that Fibonacci retracement zone between 1.2623 and 1.3464 should delineate a possible top-building process.
- Resistance at 1.3017 and 1.3464 expected to attract selling interest in this regard.
- Monthly close below support at 1.1783 would enhance the top-building thesis, highlighting 1.1477 thereafter.
- Note that prices will have to pierce the trendline at 1.1007 for a full-blown bearish trend reversal.
- The new targets are located at 1.1800 and 1.1500.
USD/CAD – Hedging Strategies for H2 2009
Key Themes:- Major topping pattern/process may be underway near the 1.3000 region
- However, anticipated selloff in equities in H2 2009 may impede asustained CAD rally
- Mixed variables point to a 1.1500-1.3000 trading range
Buyers of USD/CAD- Use pullbacks to support levels at 1.2030, 1.1783 and 1.1477 as a buying opportunity
- Reduce exposure on a break above key resistance at 1.3017 (stop loss level)
- Monitor equity markets and swap spreads for directional bias and possible trend changes
Sellers of USD/CAD- Use rallies to resistance at 1.2449, 1.2717 and 1.3017 as a selling opportunity
- Reduce exposure on a break below support at 1.1477 (stop loss level)
- Establishment of a potential top near 1.3000 drives hedging behaviour