FX Medium Term Trading Idea – USD/CAD

Technical View
Price broke the downtrend channel back in June 2019. A decline to 1.3012 was followed by a rally to the breakout point of 1.3370. This is also close to the upper trend line of a down trending channel. If price is unable to breakout of this downtrend channel, price is likely to be moving lower to the lower trendline of the downtrend channel near to 1.2800. MACD is still bearish despite price moving towards the previous resistance point. However, Stochastic is hinting of more price movements higher. 20EMA is currently flat and not hinting much at the moment.

Fundamental View
On the economic front, Canadian economic data has fared better than US economic data. Poor US economic data had led the Federal Reserve Bank to cut interest rate twice since July 2019 while the Bank of Canada has yet to cut rate this year. The interest rate differential between these 2 countries is down to 25bp in the US$ favour, which had led to the USD/CAD declining since the turn of 2019 from as high as 1.36 to a low just above 1.30. The Fed may yet cut interest rate again this year for a third time but BOC is unlikely to cut interest rate at the moment. Inflation target for Canada is close to the BOC’s target rate of 2% with the Canadian economy “operating close to potential and inflation on target.” A narrowing of interest rate differential is likely to favour the Canadian dollar.

 Another determinant in favour of the Canadian dollar is crude oil price. 5% of global oil production was recently incapacitated by a drone attack on Saudi oil production facilities. This has led to higher crude oil price and until the production facilities are restored and producing normally, price of crude oil is likely to remain at inflated level. This is in the Canadian dollar interest. Tension in the Middle East is also likely to keep crude oil price high. US president Trump has repeatedly hit out at Iran and accuses Iran of the Saudi oil attack. Market and investors are worried of a military “lesson” on Iran and this is likely to keep crude oil price inflated.

Following the Saudi oil attack, US president Trump had released oil reserve from the Strategic Petroleum Reserve to keep the market “well supplied.” Drawdown will need to be replenished and once the Saudi facilities is back in full operation, crude oil price will remain high for a while as the US replenished and stock up its strategic reserve. These factors are likely to keep the Canadian dollar strong.

In view of the above reasoning, we would recommend selling USD/CAD above 1.3300 for a price move to 1.28 in the next 6 months. Stop should be placed at 1.3600.

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