USD/CAD – Loonie Takes Flight Despite Weaker Crude

The Canadian dollar is starting off the week on the front foot (CAD$1.2507) and this despite crude prices trading a tad softer ($55 Brent) as the Saudis continue to pump more. Saudi Arabia has indicated it was now pumping near a record high of 10 million barrels per day, adding to concerns of global oversupply.

With no significant economic data out today and excluding commodities, the CAD is basically tracking the global market theme of a broad weakening in the U.S dollar. The “big dollar” continues to come under short-term pressure as the street reassesses the likely timing of the first Fed rate hike. Last week’s Federal Open Market Committee meeting has managed to inject a lot of uncertainty into currency traders’ thinking, hence the massive uptick in intraday currency moves.

Since Friday, the loonie has succeeded in shrugging off a brief spat of weakness after a disappointing January retail sales print (-1.7% vs. an expected -0.8% print) and inflation data. Most of the early weakness came from the sales report as both yearly all-items inflation and yearly core for February hit estimates (+1% and +2.1%).

Trading the currency pair has been rather choppy of late, mostly within established ranges. The loonie bear has to be worried that USD/CAD has failed to extend the long-term rally through C$1.2800 area. It has now stalled twice atop of this level. The CAD should be retaining its weakening bias – horrible retail sales and weaker crude prices – but failing to print new dollar highs will have the ‘weak’ CAD shorts worried. Fundamentals would suggest that this is the correct position (long USD/CAD), however, since the FOMC meeting many of the over extended long U.S dollar positions have been threatened and/or liquidated. The pause in the long dollar trend seems to be providing CAD much needed support.

Will Poloz help the CAD Bear?

Excluding commodities, the short-term directional play of the CAD remains at the mercy of the BoC. Later this week Governor Poloz and Deputy Governor Lane both deliver speeches. The most important will be the Governor’s speech on Thursday March 26. He is due to speak at the Canada-UK Chamber of Commerce, in London at 09:30 am EST. The Street will try to gauge how the Central Bank might be balancing slow growth with the surprising strength on inflation (core remains above +2% at +2.1%). The Governor’s credibility is very much on the line. Especially after he used some very-dovish language to support his surprise decision to cut rates in January and then followed it up this month doing an about turn holding rates steady with some optimistic comments. It may require a more dovish undertone in his speech to once again push the CAD lower to test the psychological C$1.2800 handle.

The OIS (Overnight Index swaps) is pricing in another rate cut from the BoC in the coming months. The market remains a better buyer of U.S dollar on dips. So long as the USD/CAD support at $ 1.2500 and $1.2475 remains intact over the short term, the more confident the USD bulls will be in taking on the psychological $1.2800 level once again.

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