Sive Morten
Special Consultant to the FPA
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- 18,673
Fundamentals
(Reuters) - The Canadian dollar strengthened against a weaker greenback on Friday in thin pre-holiday market trading, and capped off an overall gain for 2016. The loonie saw an annual gain for the first time since 2012, firming nearly 3 percent for this year. The dollar index, which measures the U.S. dollar against a basket of six major rivals, gained about 3.7 percent for the year.
Overseas, a short-lived surge in the euro dominated foreign exchange markets on Friday, with a lack of liquidity and automated short-covering in euro exacerbating moves. The Canadian dollar finished trading at C$1.3427 to the U.S. dollar, or 74.48 U.S. cents, stronger than the Bank of Canada's official close of C$1.3508, or 74.03 U.S. cents.
"A lot of it was about month-end, year-end flows, and position squaring ahead of the new year," said David Bradley, director of foreign exchange trading at Scotiabank. The currency traded between C$1.3401 and C$1.3505, touching its strongest level since before Christmas. The price of oil, a key Canadian export, was lower on Friday, but notched its biggest annual gain since 2009 after OPEC and other major producers agreed to output cuts. U.S. crude prices were up 0.06 percent to $53.80 a barrel, while Brent crude lost 0.18 percent to $56.75.
The Canadian dollar, which outperformed its key currency counterparts, was trading in line with market expectations for the end of 2016. "Overall, the market is looking for U.S. dollar strength for the first half of 2017, followed by perhaps some Canadian dollar strength into the latter part of 2017," said Jack Spitz,
managing director of foreign exchange at National Bank Financial, pointing to expectations the Federal Reserve will hike interest rates in 2017, in contrast to forecasts for the Bank of Canada and elsewhere.
COT Report
On CAD, CFTC shows slightly bearish data, but it stands for 20th of December. That week traders have closed some longs on CAD. But, as you can see, overall position stands rather flat since May 2016. Total positions dropped significantly compares to 2015 and it means that investors mostly do not treat CAD among priority currencies. At the same time Crude oil CFTC data shows significant growth of net long positions, as on CME, as on ICE Crude. And right now they stand very close to maximum levels. It means that upside crude oil potential could be limited. The important event will be on 21-22 of January, new OPEC meeting in Vienna.
Guys, I've chosen CAD as subject for our second weekly report on this week. All that we will say on CAD here, mostly is just a hypothesis, and our view doesn't suggest that this definitely will happen. Many points definitely will be arguable, but our task today is to show just a vector, some scenario on CAD that we think is not absolutely impossible.
It would seem that this scenario is stunning and too brave, but on market very often scenario of this kind works. This our view is a not a fiction, it has some fundamental background and if some events will happen - it could be real.
Usually "all genius is simple", that's why we bring you our fundametal background for CAD in simple manner. We see 3-4 long term fundamental reasons that suggest CAD weakness:
1. Donald Trump new energy strategy
Make America energy independent, create millions of new jobs, and protect clean air and clean water. We will conserve our natural habitats, reserves and resources. We will unleash an energy revolution that will bring vast new wealth to our country.
Six 0.25% rate hikes in 2 years. Two should come in 2017 and four in 2018. By Fathom consulting opinion market right now underestimates Fed policy in 2018 and fair prices 2017 policy. It means that in 2nd part of 2017 more agressive pricing-in of 2018 policy should start, which lead to dollar growth:
3. Overall impact on CAD could be twofold. First is purely from USD appreciation and difference in rate policy of Fed and Bank of Canada. Second - D. Trump new energy policy and OPEC extraction freezing will free room to US domestic shale oil extractors that will impact import volumes and also hit Canada's budget income. The only exception could be, if Trump will intend to provide some preferences to Canada export compares to Middle East exporters.
Anyway, combination of rate difference and reducing budget income will become a solid headwind for CAD. This is our major view. Still, situation could develop differently, stronger or weaker, depending of the strength of particular factors... Despite whether you agree or not, you could keep it in mind and control USD/CAD action from the prism of our scenario as well.
Now we're turning to technical analysis, but we also will take a look at long-term charts from perspectives of our scenario...
Technicals
Monthly
Monthly chart is well-known for us, since we've traded initial upside rally in 2015-2016. Recall how we've expected reaching of AB=CD target around 1.34 area. Right in January of 2016 this target has been hit and even exceeded and whole 2016 year CAD mostly spent in downside retracement. Trend is bearish here, market is not at OB/OS right now, but this is not the point. Most interesting is price action itself.
Let's take a look at bearish potential first. As you can see, action since Feb 2011 is first reversal swing, when upside action is greater than previous swing down. Usually, after reversal swing market shows deep retracement. This comes from existing of previous bearish momentum that should be faded down but it pushes price lower while still working. As a result, we could get AB=CD retracement down right to 1.1560 major Fib support. Right now we have first half of this pattern in place. This is probably the only bearish technical factor here...
From the other side, if we will be right in our assessement of fundamental background, next upside target stands at 1.618 AB-CD and 1.618 extension of recent retracement (i.e. butterfly Sell pattern could be formed here). THese targets stand around 1.60 area. It doesn't mean that market will pass 30 points in one year, probably it could take 2-3 years.
Current price action also keeps door open for bullish progress. As 100% AB=CD target has been hit, market has shown just minor retracement to monthly K-support and returned right back to 1.36 target. Also it stands above previous 2008 top of 1.27 area. This is rather shy reaction on reaching of major AB=CD target.
On Monday makret will open around YPP and the same 1.36 resistance. If price will break it up this will be bullish sign that will stand contradictory to behavior of bearish market.
That's being said, our long-term job on CAD is to monitor price behavior and compare it with scenario that we discuss here. First step here will be to work with 1.36 resistance level:
Weekly
On weekly chart we have classic "222" Sell pattern, at least at first glance - strong thrust down and following AB-CD retracement. Last week we also have got bearish stop grabber here that suggests taking out of 1.31 lows. So, overall combination mostly supports idea of downward AB-CD pattern on monthly chart right?
But it is not as simple as it seems. Here we have weaker example of grabber that stands against major tendency, that's why it fails oftener and it is not the fact that it will work. Most important is a second one - price action with upside AB-CD. What is last upside action 1.31-1.36? Market has completed AB=CD in October, should bearish market turn down as soon as AB-CD has been completed? Definitely. Thus, recent upside swing doesn't match normal price behavior and mostly should be treated as bullish sign.
That's being said, here, price probably could show some downward action to MPP, or even slightly lower, but we will be able to say that market indeed has become bearish, only if price will drop below MPS1 and 1.31 level. Thus, on coming week we will watch what will happen with grabber pattern:
Daily
On daily chart on coming week we will watch for two moments. First on is tactical - actually we have here B&B "Buy" pattern. Thrust up was not bad, market stands very close to strong support area - daily OS, WPS1+MPP and Fib level. This is very good combination that should hold even bearish market, push it slightly higher and significantly increase chances on reaching at least minimal target of B&B.
Second - is a B&B consequences. Precisely speaking, will B&B lead to some greater upside action and possible 1.36 area breakout or not. But this will become important closer to the end of the week probably.
Also guys, here you can see importance of 1.31 level - this is lower border of the channel as well. Its breakout will be definitely bearish sign:
Hourly
So, on hourly chart setup is almost completed for B&B. CAD has reached 1.618 extension of AB-CD pattern right at K-support area. On top you probably could recognize some shape of H&S pattern.
The only thing that we do not have yet is reversal pattern, may be it will be butterfly... but overall combination of Agreement right at K-support should be enough. Besides, we have strong daily support 40 pips lower. B&B target, at least based on current price levels stand around 1.3522. That's being said, B&B setup looks nice.
We will start with B&B and simultaneously will monitor what will happen later, whether market will continue action to 1.36 major resistance and higher...
Conclusion:
Today guys, we put scenario on CAD. Definitely it is not flawless and definitely it is arguable. Definitely it will not fulfilled precisely as we've described. But, we think it is interesting and worthy to be discussed, especially with a fundamental background that we have right now.
Besides, in short-term perspective we have tactical pattern that could be traded separately without any lookback to long-term fundamental picture.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
(Reuters) - The Canadian dollar strengthened against a weaker greenback on Friday in thin pre-holiday market trading, and capped off an overall gain for 2016. The loonie saw an annual gain for the first time since 2012, firming nearly 3 percent for this year. The dollar index, which measures the U.S. dollar against a basket of six major rivals, gained about 3.7 percent for the year.
Overseas, a short-lived surge in the euro dominated foreign exchange markets on Friday, with a lack of liquidity and automated short-covering in euro exacerbating moves. The Canadian dollar finished trading at C$1.3427 to the U.S. dollar, or 74.48 U.S. cents, stronger than the Bank of Canada's official close of C$1.3508, or 74.03 U.S. cents.
"A lot of it was about month-end, year-end flows, and position squaring ahead of the new year," said David Bradley, director of foreign exchange trading at Scotiabank. The currency traded between C$1.3401 and C$1.3505, touching its strongest level since before Christmas. The price of oil, a key Canadian export, was lower on Friday, but notched its biggest annual gain since 2009 after OPEC and other major producers agreed to output cuts. U.S. crude prices were up 0.06 percent to $53.80 a barrel, while Brent crude lost 0.18 percent to $56.75.
The Canadian dollar, which outperformed its key currency counterparts, was trading in line with market expectations for the end of 2016. "Overall, the market is looking for U.S. dollar strength for the first half of 2017, followed by perhaps some Canadian dollar strength into the latter part of 2017," said Jack Spitz,
managing director of foreign exchange at National Bank Financial, pointing to expectations the Federal Reserve will hike interest rates in 2017, in contrast to forecasts for the Bank of Canada and elsewhere.
COT Report
On CAD, CFTC shows slightly bearish data, but it stands for 20th of December. That week traders have closed some longs on CAD. But, as you can see, overall position stands rather flat since May 2016. Total positions dropped significantly compares to 2015 and it means that investors mostly do not treat CAD among priority currencies. At the same time Crude oil CFTC data shows significant growth of net long positions, as on CME, as on ICE Crude. And right now they stand very close to maximum levels. It means that upside crude oil potential could be limited. The important event will be on 21-22 of January, new OPEC meeting in Vienna.
Guys, I've chosen CAD as subject for our second weekly report on this week. All that we will say on CAD here, mostly is just a hypothesis, and our view doesn't suggest that this definitely will happen. Many points definitely will be arguable, but our task today is to show just a vector, some scenario on CAD that we think is not absolutely impossible.
It would seem that this scenario is stunning and too brave, but on market very often scenario of this kind works. This our view is a not a fiction, it has some fundamental background and if some events will happen - it could be real.
Usually "all genius is simple", that's why we bring you our fundametal background for CAD in simple manner. We see 3-4 long term fundamental reasons that suggest CAD weakness:
1. Donald Trump new energy strategy
Make America energy independent, create millions of new jobs, and protect clean air and clean water. We will conserve our natural habitats, reserves and resources. We will unleash an energy revolution that will bring vast new wealth to our country.
- Declare American energy dominance a strategic economic and foreign policy goal of the United States.
- Unleash America’s $50 trillion in untapped shale, oil, and natural gas reserves, plus hundreds of years in clean coal reserves.
- Become, and stay, totally independent of any need to import energy from the OPEC cartel or any nations hostile to our interests.
- Open onshore and offshore leasing on federal lands, eliminate moratorium on coal leasing, and open shale energy deposits.
- Encourage the use of natural gas and other American energy resources that will both reduce emissions but also reduce the price of energy and increase our economic output.
- Rescind all job-destroying Obama executive actions. Mr. Trump will reduce and eliminate all barriers to responsible energy production, creating at least a half million jobs a year, $30 billion in higher wages, and cheaper energy.
Six 0.25% rate hikes in 2 years. Two should come in 2017 and four in 2018. By Fathom consulting opinion market right now underestimates Fed policy in 2018 and fair prices 2017 policy. It means that in 2nd part of 2017 more agressive pricing-in of 2018 policy should start, which lead to dollar growth:
3. Overall impact on CAD could be twofold. First is purely from USD appreciation and difference in rate policy of Fed and Bank of Canada. Second - D. Trump new energy policy and OPEC extraction freezing will free room to US domestic shale oil extractors that will impact import volumes and also hit Canada's budget income. The only exception could be, if Trump will intend to provide some preferences to Canada export compares to Middle East exporters.
Anyway, combination of rate difference and reducing budget income will become a solid headwind for CAD. This is our major view. Still, situation could develop differently, stronger or weaker, depending of the strength of particular factors... Despite whether you agree or not, you could keep it in mind and control USD/CAD action from the prism of our scenario as well.
Now we're turning to technical analysis, but we also will take a look at long-term charts from perspectives of our scenario...
Technicals
Monthly
Monthly chart is well-known for us, since we've traded initial upside rally in 2015-2016. Recall how we've expected reaching of AB=CD target around 1.34 area. Right in January of 2016 this target has been hit and even exceeded and whole 2016 year CAD mostly spent in downside retracement. Trend is bearish here, market is not at OB/OS right now, but this is not the point. Most interesting is price action itself.
Let's take a look at bearish potential first. As you can see, action since Feb 2011 is first reversal swing, when upside action is greater than previous swing down. Usually, after reversal swing market shows deep retracement. This comes from existing of previous bearish momentum that should be faded down but it pushes price lower while still working. As a result, we could get AB=CD retracement down right to 1.1560 major Fib support. Right now we have first half of this pattern in place. This is probably the only bearish technical factor here...
From the other side, if we will be right in our assessement of fundamental background, next upside target stands at 1.618 AB-CD and 1.618 extension of recent retracement (i.e. butterfly Sell pattern could be formed here). THese targets stand around 1.60 area. It doesn't mean that market will pass 30 points in one year, probably it could take 2-3 years.
Current price action also keeps door open for bullish progress. As 100% AB=CD target has been hit, market has shown just minor retracement to monthly K-support and returned right back to 1.36 target. Also it stands above previous 2008 top of 1.27 area. This is rather shy reaction on reaching of major AB=CD target.
On Monday makret will open around YPP and the same 1.36 resistance. If price will break it up this will be bullish sign that will stand contradictory to behavior of bearish market.
That's being said, our long-term job on CAD is to monitor price behavior and compare it with scenario that we discuss here. First step here will be to work with 1.36 resistance level:
Weekly
On weekly chart we have classic "222" Sell pattern, at least at first glance - strong thrust down and following AB-CD retracement. Last week we also have got bearish stop grabber here that suggests taking out of 1.31 lows. So, overall combination mostly supports idea of downward AB-CD pattern on monthly chart right?
But it is not as simple as it seems. Here we have weaker example of grabber that stands against major tendency, that's why it fails oftener and it is not the fact that it will work. Most important is a second one - price action with upside AB-CD. What is last upside action 1.31-1.36? Market has completed AB=CD in October, should bearish market turn down as soon as AB-CD has been completed? Definitely. Thus, recent upside swing doesn't match normal price behavior and mostly should be treated as bullish sign.
That's being said, here, price probably could show some downward action to MPP, or even slightly lower, but we will be able to say that market indeed has become bearish, only if price will drop below MPS1 and 1.31 level. Thus, on coming week we will watch what will happen with grabber pattern:
Daily
On daily chart on coming week we will watch for two moments. First on is tactical - actually we have here B&B "Buy" pattern. Thrust up was not bad, market stands very close to strong support area - daily OS, WPS1+MPP and Fib level. This is very good combination that should hold even bearish market, push it slightly higher and significantly increase chances on reaching at least minimal target of B&B.
Second - is a B&B consequences. Precisely speaking, will B&B lead to some greater upside action and possible 1.36 area breakout or not. But this will become important closer to the end of the week probably.
Also guys, here you can see importance of 1.31 level - this is lower border of the channel as well. Its breakout will be definitely bearish sign:
Hourly
So, on hourly chart setup is almost completed for B&B. CAD has reached 1.618 extension of AB-CD pattern right at K-support area. On top you probably could recognize some shape of H&S pattern.
The only thing that we do not have yet is reversal pattern, may be it will be butterfly... but overall combination of Agreement right at K-support should be enough. Besides, we have strong daily support 40 pips lower. B&B target, at least based on current price levels stand around 1.3522. That's being said, B&B setup looks nice.
We will start with B&B and simultaneously will monitor what will happen later, whether market will continue action to 1.36 major resistance and higher...
Conclusion:
Today guys, we put scenario on CAD. Definitely it is not flawless and definitely it is arguable. Definitely it will not fulfilled precisely as we've described. But, we think it is interesting and worthy to be discussed, especially with a fundamental background that we have right now.
Besides, in short-term perspective we have tactical pattern that could be traded separately without any lookback to long-term fundamental picture.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
