Day two: potential USD/CAD trade

USD/CAD looked overbought yesterday at 1.0740 and the bears have pushed the USD lower overnight.

Source: Bloomberg

We are left with USD/CAD at 1.0711 (at the time of writing this morning) and thus I feel longs from here look compelling. As detailed yesterday I am keen to leave a stop loss on the idea at 1.0550 and target a potential move to 1.0850.

One of the key event risks for the trade idea comes into focus now with US retail sales at 10:30pm AEST (consensus expects +0.6%), while Janet Yellen testifies to the Senate. It’s important to note that the Fed chairman speaks on behalf of the collective rather than her own immediate thoughts, so in theory her narrative could be more hawkish than expected (USD positive). The issue here though is the market is not expecting anything that we haven’t already heard before, either from recent fed speakers or from last week’s FOMC minutes.

The bond market saw reasonable movement last week with the front end of the curve (i.e. short term maturities) having pulled back of late, so you can see why the USD is failing to really move higher. However it’s interesting that if you were to look at a total yield spread (i.e. the premium various US bonds command over Canadian bonds) then one could make an argument that USD/CAD should be trading at 1.12.

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