FX Trading 1 April 2019

Technical View

Price has been moving in an uptrend channel for the past 13 months. Recently, price just tested the lower channel trend line support and was able to bounce off the lower trend line. Both 20EMA and 50EMA are also supporting price just above the lower trend channel. Stochastic is rising from the oversold extreme and has lots of room to proceed higher. This should support USD/CAD price higher. MACD is bullish. If price is able to hold the EMAs’ supports and trendline support, price should be better to move higher to test the upper trend line resistance at 1.3800

Fundamental View

An inverted yield in US Treasury yields has led to talks of a possible recession coming in the US. Canadian yield curve is actually worse than that of the US. It has inverted from 1-month all the way to 10-year. If the US is going into a recession, Canada is more likely to head into a recession before the US. This is likely to favour the US$

The bond yields differential also favours the US. This is likely to keep the US dollar stronger than the Canadian dollar. US Treasury also has a higher credit rating than the Canadian bonds.

Crude oil price has been rising of late but it may not benefit the Canadian dollar. Crude oil price has been rising due to an output cut by the leader oil producing countries. The price of crude oil may have gone up but the absolute barrels of oil sold have actually decreased. Such a scenario may not be sustainable.

USMCA is not ratified as yet. Canadian Trade Minister’s Freeland said US metal and lumber tariffs were completely unacceptable and raise questions for Canada to ratify USMCA. If this is not ratified to replace the NAFTA, Canada will tend to lose out on trade with the biggest economy in the world. This will have a negative impact on the Canadian dollar.

Strategy

We think the current downward movement in USD/CAD price is a good opportunity to get into a long term uptrend. A price decline into 1.3300 to 1.3280 support zone is a good opportunity to accumulate for a long term target of 1.3800 which was 2017’s high. A good location to place stop loss would be at 1.3040.


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