Sive Morten
Special Consultant to the FPA
- Messages
- 18,673
Fundamentals
(Reuters) - The Canadian dollar rallied against its U.S. counterpart on Friday, extending gains following the Bank of Canada's steady rate decision mid-week, as crude oil prices rose and retail sales data suggested the economy was stronger than expected.
Oil rose as a cold snap boosted demand for heating oil across the United States and Europe.
Global equity and commodity markets had been hit hard so far in 2016 on heightened fears about slower global growth, but have recovered on rising expectations of monetary easing by central banks in Europe and Japan.
"The market is beginning to get a better handle on the risk," said Adam Button, currency analyst at ForexLive in Montreal. "The first three weeks of the year, everyone was panicking about everything."
"It got a little bit overdone and the snapback rally has been tremendous."
The Canadian dollar ending the session trading at C$1.4150 to the greenback, or 70.67 U.S. cents, much stronger than the Bank of Canada's official close of C$1.4279, or 70.03 U.S. cents.
The currency touched its strongest level since Jan. 11 at C$1.4139, while its weakest level of the session was C$1.4300.
It touched C$1.4689, or 68.08 U.S. cents at one point on Wednesday, its weakest since 2003.
The market has reduced expectations for Bank of Canada rate cuts after the central bank decided on Wednesday to leave its policy rate at 0.50 percent, putting the onus on federal authorities to raise spending.
"The Bank of Canada has signaled they have a higher threshold for acting soon and they have punted the ball to the federal government," said Derek Holt, an economist at Scotiabank.
Canadian retail sales jumped 1.7 percent in November, far more than expected, due to higher sales at new car dealers and Black Friday purchases, data from Statistics Canada showed.
On the other hand, Canada's annual inflation rate edged up less than expected to 1.6 percent from 1.4 percent in November, Statistics Canada said. The core inflation rate continued to edge downward, falling to 1.9 percent from 2.0 percent the previous month.
Canadian government bond prices were mostly lower across the maturity curve, although the two-year price was up half a Canadian cent to yield 0.454 percent. The benchmark 10-year fell 45 Canadian cents to yield 1.318 percent.
The Canada-U.S. two-year bond spread was 4.4 basis points more negative at -41.9 basis points as Treasuries underperformed at the front of the curve.
CFTC data shows typical bearish sentiment - strong growth of net short position and open interest. Here, we mostly are interested in "where is the end of this journey". By taking a look at historical chart we see that CAD has limited potential of increasing net long position since it stands very close to historical maximum. Hence, following this logic market still could continue move slightly higher (by chart shape), but final point should be somewhere around already. Short position takes ~75% by far of total speculative position, so it could rise for 8-10% to reach 82-85%. This is particularly last top around 72-75K of net shorts...
Technical
Monthly
Why we like CAD right now is because of clarity of long-term setup. Of course we do not know how perfect setup will work, but previous bet was nice and market indeed has hit our long-term target. When we haven't got reasonable retracement down from 1.3468 rock hard resistance (major Fib level and AB=CD target) - we understand that something else was standing on a background of this rally. At those moment extraordinary Crude oil drop just has started. And we need some time to get more signs from market to make conclusions.
As CAD stands in tight relation to Crude Oil, it doesn't make sense to look at it without Crude Oil analysis:
Here we would like to share with you our long-term look at Crude oil. First of all we should understand that Crude oil is not just necessary commodity for global economy but also a political tool. Taking into consideration current geopolitical tensions spiral, we will take a look at Crude right from this perspective. You probably will look to our conclusions with suspicions and may be you will be right, but we just can't not recognize some common moments. Definitely that current Crude oil drop has not economical nature, it is driven not by pure economical factors. Last time scenario with almost the same and last time when Crude oil shows the drop of similar degree was in 2001 and 2003 - right no the eve of US invasion in Iraq.
Crude market is not at oversold right now and current minor retracement right now mostly is due completion of small AB-CD pattern and oversold on lower time frames. Our major target stands at 17.83$. So we see relation between low price on 2003 and now. We think that after market will hit our target - some big shifts in global geopolitics could start, may be new escalation spiral, higher degree tensions on Middle East or even war. It is difficult to say definitely, but something has chance to happen that will shake markets to the bottom.
Also remind our DRPO "Sell" on S&P 500 monthly chart. They are part of the same puzzle.
Now, what relation it has to CAD. Very simple. On monthly CAD we have untouched target that now will be the major one and probably it will be reach at the same moment, when Crude will hit 18$ point.
At the same time, market right now stands in retracement and upside action will not be straight. Take a look CAD right now at monthly overbought and turns to retracement. Right now technically most suitable level as retracement target is 1.30-1.32 It includes former top, untouched YPP and monthly K-support area. Although to be honest, guys, in current circumstances, I'm not sure that retracement will be so deep. Actually, on a way up market has no strong barriers any more, since last major Fib resistance has been broken. That's why next target is 1.56-1.58 major 1.618 AB-CD extension and YPR1. As we've seen above - neither CFTC nor Crude oil does not erase chances on reaching this level.
Weekly
Here we also have lovely picture. CAD has hit overbought and formed perfect bearish engulfing pattern right at top of AB=CD pattern. Following engulfing pattern's logic retracement should be equal to the length of the bars and approximately it coincides with 1.35-1.36 level. This is simultaneously K-support, oversold and MPP. This probably will be our first target on a way down.
Still, we know that as soon as market forms engulfing, next step is minor retracement back inside its body. So, initially we will be able to trade this upside retracement and after that - turn position down.
Daily
This picture we mostly have discussed on Friday and it shows definite way how we will trade first step in our trading plan - minor upside retracement back inside weekly engulfing pattern.
As we've estimated on Friday we've got B&B "Buy" pattern that should trigger upside retracement that we're waiting for. The one problem that we see here is thrust up. No, it is normal, it is good, but I'm not sure what part of it we should take for B&B recognition. Either as we show on chart or 2 times longer - from 1.3330 lows.
The reason for that is retracement in rectangle. It has not reached 3/8 Fib level, so theoretically we have whole thrust right from 1.3330 Anyway, market right now stands as at major Fib level from minor thrust as at major level from the whole thrust, because we 're at K-area .
That's being said, if B&B will work at all - upside action should start somewhere here. CAD right now at K-support and oversold.
Hourly
So, guys we were right on reaching deeper targets on hourly chart, which are 1.618 of AB-CD pattern and butterfly, but market even has overcome them slightly. And this is not very good sign. It means that we will need to wait for some more bullish confidence and prove that upside action really has started. Probably we will wait for upside reversal and then will try to take position on minor retracement. B&B has solid upside potential, so we do not need to hurry.
Or, may be we will wait something on 4-hour chart. If you will take a look at it - you'll see that there we have perfect thrust down. So, we could get, say, DRPO "Buy" there or something else...
Conclusion:
Although we see long-term bullish context for USD/CAD and think that CAD will become weaker, in short term perspective market is ready for retracement down.
Thus, our short-term trading plan suggests upside bounce approx. to 1.4450 level as first step, second - downward continuation to 1.35-1.36 level.
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 rallied against its U.S. counterpart on Friday, extending gains following the Bank of Canada's steady rate decision mid-week, as crude oil prices rose and retail sales data suggested the economy was stronger than expected.
Oil rose as a cold snap boosted demand for heating oil across the United States and Europe.
Global equity and commodity markets had been hit hard so far in 2016 on heightened fears about slower global growth, but have recovered on rising expectations of monetary easing by central banks in Europe and Japan.
"The market is beginning to get a better handle on the risk," said Adam Button, currency analyst at ForexLive in Montreal. "The first three weeks of the year, everyone was panicking about everything."
"It got a little bit overdone and the snapback rally has been tremendous."
The Canadian dollar ending the session trading at C$1.4150 to the greenback, or 70.67 U.S. cents, much stronger than the Bank of Canada's official close of C$1.4279, or 70.03 U.S. cents.
The currency touched its strongest level since Jan. 11 at C$1.4139, while its weakest level of the session was C$1.4300.
It touched C$1.4689, or 68.08 U.S. cents at one point on Wednesday, its weakest since 2003.
The market has reduced expectations for Bank of Canada rate cuts after the central bank decided on Wednesday to leave its policy rate at 0.50 percent, putting the onus on federal authorities to raise spending.
"The Bank of Canada has signaled they have a higher threshold for acting soon and they have punted the ball to the federal government," said Derek Holt, an economist at Scotiabank.
Canadian retail sales jumped 1.7 percent in November, far more than expected, due to higher sales at new car dealers and Black Friday purchases, data from Statistics Canada showed.
On the other hand, Canada's annual inflation rate edged up less than expected to 1.6 percent from 1.4 percent in November, Statistics Canada said. The core inflation rate continued to edge downward, falling to 1.9 percent from 2.0 percent the previous month.
Canadian government bond prices were mostly lower across the maturity curve, although the two-year price was up half a Canadian cent to yield 0.454 percent. The benchmark 10-year fell 45 Canadian cents to yield 1.318 percent.
The Canada-U.S. two-year bond spread was 4.4 basis points more negative at -41.9 basis points as Treasuries underperformed at the front of the curve.
CFTC data shows typical bearish sentiment - strong growth of net short position and open interest. Here, we mostly are interested in "where is the end of this journey". By taking a look at historical chart we see that CAD has limited potential of increasing net long position since it stands very close to historical maximum. Hence, following this logic market still could continue move slightly higher (by chart shape), but final point should be somewhere around already. Short position takes ~75% by far of total speculative position, so it could rise for 8-10% to reach 82-85%. This is particularly last top around 72-75K of net shorts...
Technical
Monthly
Why we like CAD right now is because of clarity of long-term setup. Of course we do not know how perfect setup will work, but previous bet was nice and market indeed has hit our long-term target. When we haven't got reasonable retracement down from 1.3468 rock hard resistance (major Fib level and AB=CD target) - we understand that something else was standing on a background of this rally. At those moment extraordinary Crude oil drop just has started. And we need some time to get more signs from market to make conclusions.
As CAD stands in tight relation to Crude Oil, it doesn't make sense to look at it without Crude Oil analysis:
Here we would like to share with you our long-term look at Crude oil. First of all we should understand that Crude oil is not just necessary commodity for global economy but also a political tool. Taking into consideration current geopolitical tensions spiral, we will take a look at Crude right from this perspective. You probably will look to our conclusions with suspicions and may be you will be right, but we just can't not recognize some common moments. Definitely that current Crude oil drop has not economical nature, it is driven not by pure economical factors. Last time scenario with almost the same and last time when Crude oil shows the drop of similar degree was in 2001 and 2003 - right no the eve of US invasion in Iraq.
Crude market is not at oversold right now and current minor retracement right now mostly is due completion of small AB-CD pattern and oversold on lower time frames. Our major target stands at 17.83$. So we see relation between low price on 2003 and now. We think that after market will hit our target - some big shifts in global geopolitics could start, may be new escalation spiral, higher degree tensions on Middle East or even war. It is difficult to say definitely, but something has chance to happen that will shake markets to the bottom.
Also remind our DRPO "Sell" on S&P 500 monthly chart. They are part of the same puzzle.
Now, what relation it has to CAD. Very simple. On monthly CAD we have untouched target that now will be the major one and probably it will be reach at the same moment, when Crude will hit 18$ point.
At the same time, market right now stands in retracement and upside action will not be straight. Take a look CAD right now at monthly overbought and turns to retracement. Right now technically most suitable level as retracement target is 1.30-1.32 It includes former top, untouched YPP and monthly K-support area. Although to be honest, guys, in current circumstances, I'm not sure that retracement will be so deep. Actually, on a way up market has no strong barriers any more, since last major Fib resistance has been broken. That's why next target is 1.56-1.58 major 1.618 AB-CD extension and YPR1. As we've seen above - neither CFTC nor Crude oil does not erase chances on reaching this level.
Weekly
Here we also have lovely picture. CAD has hit overbought and formed perfect bearish engulfing pattern right at top of AB=CD pattern. Following engulfing pattern's logic retracement should be equal to the length of the bars and approximately it coincides with 1.35-1.36 level. This is simultaneously K-support, oversold and MPP. This probably will be our first target on a way down.
Still, we know that as soon as market forms engulfing, next step is minor retracement back inside its body. So, initially we will be able to trade this upside retracement and after that - turn position down.
Daily
This picture we mostly have discussed on Friday and it shows definite way how we will trade first step in our trading plan - minor upside retracement back inside weekly engulfing pattern.
As we've estimated on Friday we've got B&B "Buy" pattern that should trigger upside retracement that we're waiting for. The one problem that we see here is thrust up. No, it is normal, it is good, but I'm not sure what part of it we should take for B&B recognition. Either as we show on chart or 2 times longer - from 1.3330 lows.
The reason for that is retracement in rectangle. It has not reached 3/8 Fib level, so theoretically we have whole thrust right from 1.3330 Anyway, market right now stands as at major Fib level from minor thrust as at major level from the whole thrust, because we 're at K-area .
That's being said, if B&B will work at all - upside action should start somewhere here. CAD right now at K-support and oversold.
Hourly
So, guys we were right on reaching deeper targets on hourly chart, which are 1.618 of AB-CD pattern and butterfly, but market even has overcome them slightly. And this is not very good sign. It means that we will need to wait for some more bullish confidence and prove that upside action really has started. Probably we will wait for upside reversal and then will try to take position on minor retracement. B&B has solid upside potential, so we do not need to hurry.
Or, may be we will wait something on 4-hour chart. If you will take a look at it - you'll see that there we have perfect thrust down. So, we could get, say, DRPO "Buy" there or something else...
Conclusion:
Although we see long-term bullish context for USD/CAD and think that CAD will become weaker, in short term perspective market is ready for retracement down.
Thus, our short-term trading plan suggests upside bounce approx. to 1.4450 level as first step, second - downward continuation to 1.35-1.36 level.
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.