Sive Morten
Special Consultant to the FPA
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- 18,643
Today guys, we replace Gold analysis with USD/CAD. Mostly we've said everything on Gold last week and nothing new has happened yet. But on CAD we have interesting setup.
Fundamentals
(Reuters) - The Canadian dollar hit a nine-month high against its U.S. counterpart on Friday, boosted by higher oil prices and domestic growth which supported the Bank of Canada's recent switch to a more hawkish stance.
The central bank also said Canadian companies were more optimistic about future sales and exports, while improving demand was driving capacity pressures that should boost investment and hiring, in a report on Friday that further increased expectations for a rate hike.
At 4 p.m. ET (2000 GMT), the Canadian dollar was trading at C$1.2967 to the greenback, or 77.12 U.S. cents, up 0.3 percent. It touched its strongest since Sept. 9 at C$1.2947 during the session.
But further appreciation for the currency will require follow-through on the newly hawkish tone, according to Brad Schruder, a director of foreign exchange sales at BMO Capital Markets. "The Bank of Canada has talked the talk and now they need to walk the walk," he said. "In addition, they need to convince the market that this is the beginning of cycle towards tighter monetary policy rather than just removal of the emergency cut Governor Poloz put in a couple of years ago."
Speculators cut bearish bets on the Canadian dollar for a fifth straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. Canadian dollar net short positions tumbled to 49,495 contracts as of June 27 from 82,881 a week earlier.
Canada's economy expanded by 0.2 percent in April after a 0.5 percent increase in March, Statistics Canada said. The gain matched analysts' estimates.
It leaves the economy on track to grow at a 2.5 percent pace in the second quarter, which is "more than enough to justify the recent change in tone from the Bank of Canada," Avery Shenfeld, chief economist at CIBC Capital Markets said in a research note.
Chances of a Bank of Canada rate hike in July have increased to one-in-two from just 20 percent after subdued inflation data last week, data from the overnight index swaps market shows.
Oil prices climbed for a seventh straight session in their longest bull run since April but were still set for the worst first-half performance since 1998. U.S. crude futures settled up $1.11, or around 2.5 percent, at $46.04 a barrel. The two-year price dipped 3.5 Canadian cents to yield 1.100 percent and the 10-year declined 48
Canadian cents to yield 1.762 percent.
COT Report
CFTC data shows moderately bullish sentiment. In fact, month ago CAD was at all-time oversold level as net speculative short positions has hit all-time high (chart is invert scale). Now we see that 4th week in a row speculators contract bearish positions and most massive short covering has happened last week, because major support level has been broken on USD/CAD.
Why we call overall sentiment moderately bearish? Mostly because rally still stands on 1st stage - as no new longs were opened yet. When we will see CAD appreciation is accompanied by open interest growth, we could call it as strong bullish sentiment. But right now CAD is mostly driven by short covering... Nevertheless this is also good driving factor as it provides solid trading impulse.
Technicals
Monthly
We rare take a look at long-term perspective of CAD, thus lets recall what setup, actually we have here.
We've traded initial upside rally in 2015-2016. Once market has reached our AB=CD target around 1.34 area it has turned to ping-pong action from monthly OB to OS. After that, whole 2016 year CAD mostly spent in this range. Trend is bearish here, right now market is not at OB/OS.
Right now we see three setups here but of different time scales. The longest one is upside continuation to 1.618 all-time AB-CD target around 1.60 area. Currently it is difficult to imagine, how this could happen, as most people look only on CAD/Crude Oil relation, where prices already stands low. Definitely to push CAD so high, market will need external important driving factor, not just Crude Oil prices. May be this will not happen at all, but until price stands above parity and keeps valid initial AB-CD - theoretically this scenario is possible. Althgough it is not important for us as it too long-term.
Second scenario is downward AB-CD retracement, approximately to 1.156 area. This is our major scenario right now. As you can see, action since Feb 2011 is first reversal swing, when upside action is greater than previous swing down. If you will take close look you'll see that here we "3-black crows" pattern. It quite rare happens on markets and usually indicates big reversal points. All black candles to the right from "A" point shows tail closing. This is bearish sign.
After reversal swing market shows deep retracement. It has completed last month, when CAD has tested YPP and major 5/8 Fib resistance (not shown).
As a result, we could get AB=CD retracement down right to 1.1560 major Fib support. CD leg just has started and still has solid potential.
Our bearish grabber has been completed recently as price dropped below 1.2980 level. Last candle also has tail close. Failure of the price to pass through YPP significantly increases chances on downward continuation.
Here we have two targets based on major AB-CD pattern. First is 0.618 extension coincides with 1.24 lows and agrees with Yearly PS1. Second - is a major one that creates Agreement with 1.1560 major 5/8 Fib support area:
Weekly
Weekly chart brings two important moments. First is - price stands at strong support level and weekly oversold. It means that immediate downside action hardly is possible and some retracement probably should happen.
Second - loonie has broken upside channel or flag consolidation. To be sure that downside action will continue, price should stay below trendline and should not return back inside the flag. This is very valuable information for us, because we could easier estimate invalidation point and retracement that we will watch for.
Also it means that we need just recent swing down to plan our trades on CAD.
Daily
Daily chart gives very clear information on what level to watch. Here price also stands at oversold. Careful readers could find some similarities with setup on GBP that we've discussed yesterday. As on GBP as on CAD here price creates wide resistance area that includes two K-areas, WPR1 and MPP. Both of them stand around our trend line that we have to control.
Here we are not interested with WPP. Since price stands at weekly and daily OS, retracement probably should be higher. That's why we will focus on 1.3175-1.32 area which includes K-resistance, WPR1 and MPP. Second K-resistance 1.3270-1.3312 will be interesting as a barrier for stop placing.
Thus, we've estimated all major components of trading plan - potential targets, entry area, invalidation and stop placement area.
Currently it makes no sense to look at intraday charts, since we have nothing there, as price has closed right around lows of the day & week. Last component that we will keep an eye on within a coming week will be intraday patterns, such as AB-CD. They should bring precision in estimating or confirmation predefined entry levels. This we will discuss in regular daily videos...
Our idea of retracement is also supported by Crude Oil daily chart, where price also stands at OB. IF you trade Commodities - this could become nice B&B "Sell" Setup:
Conclusion:
In nearest few months we intend to trade bearish AB=CD pattern on monthly chart of CAD.
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.
Fundamentals
(Reuters) - The Canadian dollar hit a nine-month high against its U.S. counterpart on Friday, boosted by higher oil prices and domestic growth which supported the Bank of Canada's recent switch to a more hawkish stance.
The central bank also said Canadian companies were more optimistic about future sales and exports, while improving demand was driving capacity pressures that should boost investment and hiring, in a report on Friday that further increased expectations for a rate hike.
At 4 p.m. ET (2000 GMT), the Canadian dollar was trading at C$1.2967 to the greenback, or 77.12 U.S. cents, up 0.3 percent. It touched its strongest since Sept. 9 at C$1.2947 during the session.
But further appreciation for the currency will require follow-through on the newly hawkish tone, according to Brad Schruder, a director of foreign exchange sales at BMO Capital Markets. "The Bank of Canada has talked the talk and now they need to walk the walk," he said. "In addition, they need to convince the market that this is the beginning of cycle towards tighter monetary policy rather than just removal of the emergency cut Governor Poloz put in a couple of years ago."
Speculators cut bearish bets on the Canadian dollar for a fifth straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. Canadian dollar net short positions tumbled to 49,495 contracts as of June 27 from 82,881 a week earlier.
Canada's economy expanded by 0.2 percent in April after a 0.5 percent increase in March, Statistics Canada said. The gain matched analysts' estimates.
It leaves the economy on track to grow at a 2.5 percent pace in the second quarter, which is "more than enough to justify the recent change in tone from the Bank of Canada," Avery Shenfeld, chief economist at CIBC Capital Markets said in a research note.
Chances of a Bank of Canada rate hike in July have increased to one-in-two from just 20 percent after subdued inflation data last week, data from the overnight index swaps market shows.
Oil prices climbed for a seventh straight session in their longest bull run since April but were still set for the worst first-half performance since 1998. U.S. crude futures settled up $1.11, or around 2.5 percent, at $46.04 a barrel. The two-year price dipped 3.5 Canadian cents to yield 1.100 percent and the 10-year declined 48
Canadian cents to yield 1.762 percent.
COT Report
CFTC data shows moderately bullish sentiment. In fact, month ago CAD was at all-time oversold level as net speculative short positions has hit all-time high (chart is invert scale). Now we see that 4th week in a row speculators contract bearish positions and most massive short covering has happened last week, because major support level has been broken on USD/CAD.
Why we call overall sentiment moderately bearish? Mostly because rally still stands on 1st stage - as no new longs were opened yet. When we will see CAD appreciation is accompanied by open interest growth, we could call it as strong bullish sentiment. But right now CAD is mostly driven by short covering... Nevertheless this is also good driving factor as it provides solid trading impulse.
Technicals
Monthly
We rare take a look at long-term perspective of CAD, thus lets recall what setup, actually we have here.
We've traded initial upside rally in 2015-2016. Once market has reached our AB=CD target around 1.34 area it has turned to ping-pong action from monthly OB to OS. After that, whole 2016 year CAD mostly spent in this range. Trend is bearish here, right now market is not at OB/OS.
Right now we see three setups here but of different time scales. The longest one is upside continuation to 1.618 all-time AB-CD target around 1.60 area. Currently it is difficult to imagine, how this could happen, as most people look only on CAD/Crude Oil relation, where prices already stands low. Definitely to push CAD so high, market will need external important driving factor, not just Crude Oil prices. May be this will not happen at all, but until price stands above parity and keeps valid initial AB-CD - theoretically this scenario is possible. Althgough it is not important for us as it too long-term.
Second scenario is downward AB-CD retracement, approximately to 1.156 area. This is our major scenario right now. As you can see, action since Feb 2011 is first reversal swing, when upside action is greater than previous swing down. If you will take close look you'll see that here we "3-black crows" pattern. It quite rare happens on markets and usually indicates big reversal points. All black candles to the right from "A" point shows tail closing. This is bearish sign.
After reversal swing market shows deep retracement. It has completed last month, when CAD has tested YPP and major 5/8 Fib resistance (not shown).
As a result, we could get AB=CD retracement down right to 1.1560 major Fib support. CD leg just has started and still has solid potential.
Our bearish grabber has been completed recently as price dropped below 1.2980 level. Last candle also has tail close. Failure of the price to pass through YPP significantly increases chances on downward continuation.
Here we have two targets based on major AB-CD pattern. First is 0.618 extension coincides with 1.24 lows and agrees with Yearly PS1. Second - is a major one that creates Agreement with 1.1560 major 5/8 Fib support area:
Weekly
Weekly chart brings two important moments. First is - price stands at strong support level and weekly oversold. It means that immediate downside action hardly is possible and some retracement probably should happen.
Second - loonie has broken upside channel or flag consolidation. To be sure that downside action will continue, price should stay below trendline and should not return back inside the flag. This is very valuable information for us, because we could easier estimate invalidation point and retracement that we will watch for.
Also it means that we need just recent swing down to plan our trades on CAD.
Daily
Daily chart gives very clear information on what level to watch. Here price also stands at oversold. Careful readers could find some similarities with setup on GBP that we've discussed yesterday. As on GBP as on CAD here price creates wide resistance area that includes two K-areas, WPR1 and MPP. Both of them stand around our trend line that we have to control.
Here we are not interested with WPP. Since price stands at weekly and daily OS, retracement probably should be higher. That's why we will focus on 1.3175-1.32 area which includes K-resistance, WPR1 and MPP. Second K-resistance 1.3270-1.3312 will be interesting as a barrier for stop placing.
Thus, we've estimated all major components of trading plan - potential targets, entry area, invalidation and stop placement area.
Currently it makes no sense to look at intraday charts, since we have nothing there, as price has closed right around lows of the day & week. Last component that we will keep an eye on within a coming week will be intraday patterns, such as AB-CD. They should bring precision in estimating or confirmation predefined entry levels. This we will discuss in regular daily videos...
Our idea of retracement is also supported by Crude Oil daily chart, where price also stands at OB. IF you trade Commodities - this could become nice B&B "Sell" Setup:
Conclusion:
In nearest few months we intend to trade bearish AB=CD pattern on monthly chart of CAD.
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.
