Week in FX Americas – Loonie Finds No Love

If the Canadian Government is onside everything must be just fine with the loonie? Prime Minister Harper said the BoC’s monetary policy is appropriate and that the currency’s depreciation doesn’t reflect weakness in the economy. Governor Poloz and his monetary policy has happened to trigger a -6% decline in the country’s currency against its largest trading partner the US, where 70% of their total exports travel. No one seems worried about the recent movement, apart from the CAD bulls, as long as the currency trades at “appropriate levels given the various economic realities.” Last October the BoC governor happened to remove their hawkish bias, a bias put in place by the previous Governor Carney 12-months prior. This has removed a market license to support the currency that has since printed a four-year low outright earlier this week.

For many analysts, shortening the CAD outright is considered one of the go-to trades for 2014. However, few expected the currency to have weakened so rapidly so early in the New Year. Next week the BoC again could be putting the loonie directly in the speculators crosshairs. The street is anticipating the BoC to signal the need for lower interest rates by using rhetoric rather than action, an indirect approach to boost economic growth by devaluing the currency.

The loonie is not winning the ugly race amongst the commonwealth currency, for now that honor happens to remain with the Aussie dollar (0.9642). The USD/CAD uptrend seems to be taking a small breather because of the good-sized option interest on the topside (1.1000). However, technically through these levels expect further stop losses to be triggered, opening up the market route to test 1.1300 levels sooner rather than later. The market remains a better buyer of USD on any dips, which currently remain few and far between.

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