[RealInose]

Bullish on the CAD though the rally versus the USD does appear to have reached some “rich” levels in the short term at least that may require a moderation in the
trend. While the improvement in risk appetite in the past few weeks has helped lift the CAD and the USD’s performance remains highly correlated with global equity markets, the CAD will continue appreciating against the USD over the medium term. The IMF’s latest economic outlook notes that Canada is “well positioned” to withstand the US-led slowdown. In addition, while the Bank of
Canada (BoC) has reduced its benchmark interest rate effectively to zero, its reluctance to take additional, nonconventional monetary policy measures adds to the longer term attraction of the CAD. China’s central bank expressed concern that quantitative easing measures introduced by some central banks around the world means that currency “devaluation risks may rise”. The obvious area of specific concern for the Chinese authorities is the USD, given China’s large foreign exchange reserve stockpile of some USD 2 tn.

While the BoC has not ruled out taking additional stimulus measures, recent comments from officials indicate that the domestic economic situation would have to deteriorate sharply before such steps were taken. With the global economy apparently stabilizing, quantitative easing measures appear a fair way off in Canada – but well underway in the US, UK and in Switzerland, for example.
Investors may be drawn to the relatively “harder” CAD at the expense of those currencies where additional monetary measures are being implemented.

Technically, USD/CAD’s abrupt drop over the course of the past few weeks suggests the market is moving into a new, lower trading range at the very least. After the frequent tests of the 1.30 zone in the past few months, the break under the range base at 1.1764 suggests substantial downside risks for USD/CAD over the course of the next 6-9 months – towards 1.0465, in some's opinion, from a technical point of view. The break under the 200-day moving average benchmark also indicates a trend change for the USD. Stay sideline right now and look for the opportunities to sell 1.1850, risking 1.1950 and target a move to 1.15 now.