The USD to CAD Exchange Rate Breaking Out to the Upside - Targeting 1.3150

canadian dollar 1

“The downtrend channel that has been dragging USD/CAD lower over the past three months has been broken.” - Hantec Market's Richard Perry

The US to Canadian dollar exchange rate is breaking to the upside following US dollar gains made across the board on Tuesday May 3. 

The gains come amidst a broad-based pick-up in USD sentiment, ostensibly due to Fed speakers resurrecting the possibility of a rate hike in June.

(Be aware that Friday sees the release of the all-important US and Canadian employment data, so this should be an interesting day).

USD/CAD has broken out of a falling wedge pattern or ‘channel’ depending on interpretation, which is a very bullish technical sign.

USDCADMay05

Apart from the Fed rhetoric, which Scotiabanks FX Strategist Shaun Osborne points out, was probably not actually the real reason for the dollar's rise, since the speakers (Lockhart and Williams) are not voting members of the FOMC and there was no corresponding rise in yields, the other catalyst given for the strong move higher was Canadian trade data, which showed the deficit deepen to its widest level on record.

The Trade Balance came out at -3.4bn in March, which was a billion deeper than the -2.4bn in February and much wider than the -1.4bn expected.

“Weak trade perhaps reflects sluggish growth in the US in Q1. But regardless of the reason, headwinds for the external sector will dampen the recent rise in Canadian interest rates and help widen out US-Canada rate differentials back in the USD’s favour.” Commented Scotiabank’s Osborne.

The strong move higher in the pair resulted in a breakout from a falling channel or descending wedge pattern on the daily chart, which could now signal a move higher which is equal to the height of the pattern at its widest point, or – to be safe, at the very least 61.8% of the height of the wedge/channel at its widest point.

If the height is 7.50 Canadian dollars then 61.8% of that is 4.64, which gives an upside target measured from the point of the breakout at 1.27, of 1.3164.

Hantec’s Perry does not stipulate an upside target, as such, but does say that 1.2990 needs to be overcome, “to signal real intent.”

However, we think that may almost be too high a level, given the natural tendency for resistance to cluster around large round numbers such as 1.3000.

We stick, therefore with our current forecast of a break above 1.28 - which has now already happened – leading to a move up to 1.3000, only now we extend that target to 1.3150, mid-term.

Analyst, Vassili Serebriakov, at BNP Paribas, also sees more CAD weakness on the horizon, although his 2016 end of year target is 1.42.

The team at Paribas see the driver for more upside as renewed expectations the Bank of Canada (BOC) will reduce interest rates again, as the government’s fiscal stimulus programme will prove inadequate to the task of reviving growth.

In addition, commenting on the last BOC press conference, Serebriakov says Governor Poloz revealed some concern about the strength of the loonie, which could be an early warning for the currency:

“During his press conference Governor Poloz indicated that a stronger CAD could put export growth at risk, adding that the BoC would have had a rate cut bias without fiscal stimulus. We think the government and the BoC are too optimistic on the fiscal boost to the economy, and suspect GDP may fall short of the BoC’s projection for 2.2% growth in 2016.”

Paribas are also bearish on Oil - another factor which is expected to work against the loonie: 

“The recovery in the CAD has extended beyond our expectations, but we see the tailwinds for the currency starting to fade. Our commodity strategists argue that a further crude oil rally would be self-defeating, by likely drawing in increased US production and preventing the rebalancing of the oil market.”

Nevertheless, an alternative view is that US Shale oil is too capital intensive to be viable again, as it relies on the current low-interest rate environment to be profitable, which will not last forever, and in addition is too risky now that oil prices have probably structurally devalued to a new lower band for the foreseeable future.