Date: 04 Jul 2017

The recent hawkish tone of various Bank of Canada (BoC) policymakers has increased market expectations of a BoC rate hike on July 12. In the process, dollar/Canada (USDCAD) has headed lower. ThomsonReuters IFR (TRIFR) argued on Monday that “the crucial factor fuelling CAD moves has not been oil or interest rate expectations, it has been massive speculative bets. CAD shorts reached near record levels and CAD bears were selling into a rising market. In other words, they were nearly all losing money from the off and the capitulation of those bets has seen USD/CAD drop over 6% in 8 weeks.”

TRIFR continues that, in their view, “further downside progress below Friday’s fresh 2017 low at 1.2947 may well need speculative accounts to get long CAD. CAD bulls are rallying around the heightened chance of BoC tightening, but levels to buy the [CAD] are awful and any BoC moves are likely to be matched by Fed hikes.” On a technical basis TRIFR thinks “strong support is likely ahead [of] September and August 2016 lows, 1.2823 and 1.2765.” Canada’s CIBC thinks the BoC is more likely to wait until later in the year before hiking although the Canadian bank concedes that the Fed’s hike in June may left room “the BoC to hike without taking [CAD] yields through those stateside.” CIBC wonders if the market is actually being “a bit too dovish on the Fed” and if “we could be nearing the [CAD’s] best levels for 2017” arguing that perhaps “Canadian importers shouldn’t wait too long to do some US$ hedging.” In contrast the Royal Bank of Canada (RBC Capital Markets) is now forecasting the BoC will hike rates next week. RBC Capital Markets’ view of USDCAD is that “the recent break below strong congestive support at 1.3000 exposes 1.2823 and 1.2764 as the next supports of note for USD/CAD on the downside, with a return above 1.3186 required to negate the current downtrend.” Traders will note that both TRIFR and RBC Capital Markets are focusing on the same support levels. But perhaps the key question for traders is whether or not they judge that current CAD strength already incorporates the likelihood of a BoC rate. How traders feel on that issue likely informs their next moves in this currency pair.

Written by Neal Kimberley, External Currency Analyst.