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Day one: potential USD/CAD trade

Potential trade idea: long USD/CAD at 1.0710, stop loss at 1.0550, potential target 1.0850.

USD notes
Source: Bloomberg

Technically USD/CAD printed a bullish reversal on Friday, trading below Thursday’s low and closing firmly above the high. On the weekly chart the uptrend drawn from the September 2012 low has held firm again and I am keen to use this as a directional guide.

On the daily chart the pair has broken above the recent consolidation and a move above 1.0749 (the 38.2% retracement of the June sell-off) could take the pair up to the 61.8% retracement of the same move, which is my initial target.

The MACD on the daily chart has broken above the signal line, and while the absolute level is still below zero it suggests we could see further short-term momentum in the pair.

Fundamentally all eyes fall on Thursday’s (12am AEST) Bank of Canada central bank meeting and while interest rates aren’t expected to be altered, I expect Governor Poloz to retain a dovish bias. Governor Poloz could look more closely at recent comments from Janet Yellen and suggest the recent rise in inflation is ‘noise’. Co-incidentally we also get Canadian CPI on Friday (10.30pm AEST), with expectations the pace of inflation will remain at 2.3%.

My view is also formed on potential USD strength. Janet Yellen speaks twice this week and while her views are largely known, traders will be looking for a signs that the Fed could raise rates if wage inflation increases.

An article in the Wall Street Journal titled ‘Rate debate heats up among Fed officials’ published on Friday suggests that rates could be raised earlier than expected.

We also get US retail sales numbers and traders expect a strong print here.

It’s worth having looking at positioning with CFTC data (released on Saturday) showing that net longs on CAD at the highest level since February 2013. Net longs are now at 10,295 contracts, which is a huge gain from the short 69,000 contracts seen in March.

Spot FX USD/CAD chart
Click to enlarge

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