USD/CAD gains significantly overnight

USD/CAD had its biggest one-day gain since June overnight, pushing to a high of 1.0781. 

There was a culmination of different factors that caused the move higher. On the USD side, we saw we saw the November US trade report highlighting a $5 billion narrowing of the deficit, which in turn was far greater than expected. Exports increased 0.9% month-on-month to a new record high, while on the import side we saw a 1.4% month-on-month decline, with petroleum the driving factor in both import and export figures.

It’s worth highlighting that this trade data brings real upside risks to the Q4 GDP print and you can see exactly why the USD is seen as the standout currency to be long in 2014. The US is expected to continue importing less petroleum and exporting more, potentially becoming a net exporter of energy products in the future, which will have significantly positive ramifications on the USD.

On the CAD side we saw a double whammy of weakness in Canadian manufacturing, with its Ivey PMI (purchasing managers index) falling to 46.3 in December, which is the lowest reading since May 2010. On the other hand we saw Canada’s own trade balance blow out to a C$940 million deficit, with the market expecting a deficit of C$100 million.

Being long USD/CAD has been a fund managers favourite of late, especially with the BAC (Bank of Canada) becoming more dovish over the recent months as inflation forces dissipate.

I have put a view of the weekly chart, which shows the strong uptrend in play, while the daily chart is also looking strong with all short- to longer-term moving averages heading higher. Momentum indicators such as the MACD are strong as well, while the 10-day is approaching 70, showing the strength behind the price.

My personal bias is to be long, however the hourly chart highlights the pair is overbought and I would be looking to buy dips down to 1.0730. I am cognisant of strong resistance at 1.0804 (the 38.2% retracement of the 2009 to 2011 sell-off), ahead of the 2010 high of 1.0854. Given the trend, shorting the pair is tough, but the bulls will want to see a closing break of these two levels for the move to continue in earnest. 

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