USDCAD sell-off remains incomplete - TDS

Mazen Issa, Senior FX Strategist at TDS, notes that the USDCAD has nestled into a broad 1.25/1.35 range since the melt-up and subsequent melt-down in the first third of the year.

Key Quotes

“The Fed minutes did more to confuse than enlighten on prospective hikes. In our opinion, the diversity of opinion leaves little for FX markets to sink their teeth into and leaves the near-term outlook for the USD as ambiguous.

The lack of a unifying voice places a great deal of emphasis on Yellen’s speech at the Jackson Hole Symposium next week. Until then, CAD and other dollar bloc FX remain biased to perform.

The latest slide in USDCAD looks incomplete. Speculation of an oil production freeze offers support from rising WTI prices. Technically, we note that key support from the 3 May lows has failed while the daily RSI continue to hold above the ‘oversold’ mark. We see 1.2640/60 area as the next major attractor for USDCAD; this broadly coincides with trend-line support from the lows established on 14 May 2015.

At those levels we think the risk/reward backdrop would improve substantially to re-enter USDCAD longs with an immediate target of 1.3160 and a stop at 1.2450—just below critical support from the 3 May lows. We emphasize however that we view USDCAD as a (large) range play for the time being. We do not see a compelling case for USDCAD to break the broad range as noted earlier. On the one hand, the soft underlying macro conditions and the BoC’s narrative of an evolving rotation towards non-energy trade should make the CAD rally self-limiting. Indeed, on a bilateral and real effective basis, the CAD remains one of the best performing currencies this year.

On the other hand however, we do not see much of a catalyst for USDCAD to break the topside of the range as we think this would require confidence in the Fed to deliver successive hikes or for the BoC to ease policy. Both are low probabilities in our view. The BoC seems to be reluctant to use monetary policy to ease conditions and has instead placed greater emphasis on fiscal. Additionally, we think a low yielding environment encourages portfolio flow into dollar bloc FX like the CAD as FI managers look to these currencies to generate alpha.”