Market Analysis

Is The CAD Over-inflated Ahead of Friday’s Canadian Inflation Data?

Ahead of Friday’s Canadian inflation data, Canada’s TD Securities has been casting its eye over the dollar/Canada (USDCAD) noting that “the CAD is the best-performing G10 currency since the end of April.”  “Current market momentum suggests a good chance for some further extension of USDCAD lower over immediate horizons,” TD believes and wouldn’t be surprised if the pair didn’t gravitate towards “major support in the form of the 3 May 2016 low at 1.2461 in the days or weeks ahead.” So far, so good for those who see the CAD rising further. But it’s very rare to see a one-way bet in the currency markets and traders always have to be conscious of the balance between momentum and positioning.

Traders will have their own opinions but TD is looking for some stabilisation in USDCAD later in the year and therefore wonders if “those looking to pursue CAD strength from here may find greater traction on certain key crosses.” In TD’s view “with [Canada/USA] rate spreads remaining the dominant driver for USDCAD, it is difficult to argue that spot has lagged these developments.. if anything, USDCAD may have already overshot to the downside levels easily supported by rate differentials” and that “it may become harder for investors to ignore the persistent weakness seen in energy markets.”  Additionally, “the technical landscape does not look very compelling to expect another large and sustained move down in USDCAD,” TD feels. “Momentum has been powerful, but the daily RSI has spent most of the last several weeks in oversold territory. It is approaching the same threshold on the weekly variant.”

Written by Neal Kimberley, External Currency Analyst.