Sive Morten
Special Consultant to the FPA
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- 18,695
Fundamentals
Situation changes rapidly and now we need to provide update on our CAD setup as first part of our trading plan is completed. Gold market shows no big changes at this time and we could wait a bit more with update. Thus, today let's take a look at CAD instead.
Major background of FX market we've provided yesterday, in our EUR report, here we provide just specific moments that have relation to CAD directly.
Recall our setup for CAD - last week it has suggested upside action on USD/CAD (CAD weakness). This action has happened by Bank of Canada monetary policy revision. As a result, the Canadian dollar weakened to its lowest in more than two months against the greenback on Thursday following a speech from a deputy governor of the Bank of Canada, as investors raised bets that the central bank may cut interest rates this year.
The Canadian economy is in for a longer-than-expected "detour" as consumer spending, business investment and the energy sector weigh, but economic growth is set to pick up later in 2019, Bank of Canada Deputy Governor Lynn Patterson said.
The speech came one day after the Bank of Canada held interest rates steady as expected and said there was "increased uncertainty" about the timing of future rate increases.
"Today's speech by Deputy Governor Patterson did little to change the market's dovish perception," said Royce Mendes, a senior economist at CIBC Capital Markets. "The Bank of Canada will likely have to lower their sights even further in the months to come."
Money markets have moved to price in about a 35 percent chance of an interest rate cut this year. Before Wednesday's interest rate decision, the market had been pricing in a small chance of a hike.
The loonie lost ground as the greenback rose against a basket of major currencies. The U.S. dollar currency index was boosted by a weaker euro, after the European Central Bank pushed out the timing of its first post-crisis rate hike to next year and offered banks new rounds of multi-year cash.
Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries and German bunds. The two-year rose 10 Canadian cents to yield 1.628 percent and the 10-year climbed 52 Canadian cents to yield 1.766 percent. The two-year yield touched its lowest intraday since December 2017 at 1.620 percent.
The price of oil, one of Canada's major exports, was supported by continuing OPEC-led supply cuts and U.S. sanctions against exporters Venezuela and Iran. U.S. crude oil futures settled 0.8 percent higher at $56.66 a barrel.
The value of Canadian building permits fell by 5.5 percent in January from December, Statistics Canada said. Analysts had expected a decrease of 5.0 percent.
But on Friday situation has changed drastically. The Canadian dollar strengthened against its U.S. counterpart on Friday, as bets for an interest rate cut by the Bank of Canada this year were slashed after domestic data showed a spike in jobs that surprised investors.
Employers added 55,900 jobs in February, which was the third month of outsized gains in the last four and exceeded the 20,000 jobs created in the United States for the same month. Analysts had forecast February job numbers to be flat in Canada.
"It was a great report card for the Canadian jobs market and it flies in the face of some of the other statistics that we've been seeing lately out of Canada," said Scott Smith, managing partner at Viewpoint Investment Partners.
Data one week ago showed that Canada's economy barely expanded in the fourth quarter. Chances of an interest rate cut by December, which had climbed this week on a more dovish tone from the Bank of Canada,
fell to less than 20 percent from about 40 percent before the jobs data, the overnight index swaps market indicated.
"I think if you look at this big picture it is an argument for the Bank of Canada to remain on the sidelines in the near term, rather than one for them to consider eases," said Andrew Kelvin, senior rates strategist at TD Securities. The Bank of Canada's benchmark interest rate is at 1.75 percent.
Speculators have raised their bearish bets on the Canadian dollar, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. As of March 5, net short positions had increased to 40,444 contracts from 39,177 in the prior week.
Recently market has hit ultimate historical short position level. This week position has changed but not significantly.
Source: cftc.gov
Charting by Investing.com
Technicals
Monthly
Recall that our discussion has started with strong bearish engulfing pattern by the close of January candle. Pattern stands at major 5/8 resistance. January black candle has closed below the lows of December, which could be treated as Reversal month as well. On a way down market also has tested YPP.
Strong support here stands at 1.2706 as YPS1 and 1.22-1.25 K-area.
For the monthly chart, this is tactical setup, because it doesn't suggest too extended targets, as they should stand somewhere inside recent upside swing. But... this is for monthly time frame. For daily one this could be long-term direction which makes trading process easier.
As usual, first step that we're waiting for is minor pullback inside the body of engulfing pattern. This pullback is very important for us, as it should provide entry point. Also it is not forbidden to trade it long on daily chart. Second step of trading plan - downside extension.
Now, as month has passed we see that first stage is completed. Now the major concern - starting of downside second leg. It is sophisticated situation in the world as economically as politically, so we need to keep on the table alternative scenario of engulfing failure as well, although it would be nice if we will not get it..
Weekly
So as we've suggests upside pullback indeed has started from strong support area of weekly K-support and YPP. Now we've got the pattern that we've talked about last week - our "222" Sell pattern stands in place.
Unfortunately, we haven't got bearish grabber as well, it would be more than welcome here, but, CAD still has chances to form it this week...
Daily
Here we see that on upward action market has hit ultimate target of our reverse H&S pattern - 1.618 XOP extension. Now price stands at Agreement resistance around major 5/8 Fib level and daily Overbought.
This is an area where we initially intend to go short. The one thing still, that could scare a bit - too strong upside action and psychologically it is difficult to go against it.
Thus, we could wait for some clear bearish reversal pattern on intraday charts.
Also, this area around Fib resistance is crucial one for overall setup. Upside breakout will be negative sign for long-term bearish scenario, because for any retracement Agreement at major 5/8 level & OB level should be enough. If market will break it up, it could mean that this is not a retracement. So, we should be aware of this. This is another reason why it is better to get some clear bearish reversal pattern on intraday charts...
Intraday
On 4H chart we have clear DRPO "Sell" pattern. So if you do not fan of long-term setups - this one could be used separately, just with 1.33 target. But we still hope that DRPO leads to more serious consequences.
On 1H chart we keep an eye on H&S shape pattern and potential "222" Sell. It should be relatively safe to go short here against recent top. Major XOP has been hit, no W&R should follow and action above previous top will mean only one thing - upside continuation.
At the same time, chances on technical drop as respect of resistance are solid, so we should get enough space to move stops to breakeven.
Conclusion:
Canadian dollar provides very interesting setup now. Since setup is forming on monthly chart - it could provide weeks and weeks of clear direction for trading on daily time frame.
Next week we're watching for two things - reversal patterns on intraday charts, trying go short against recent top and, second is - bearish weekly grabber by the end of the week.
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.
Situation changes rapidly and now we need to provide update on our CAD setup as first part of our trading plan is completed. Gold market shows no big changes at this time and we could wait a bit more with update. Thus, today let's take a look at CAD instead.
Major background of FX market we've provided yesterday, in our EUR report, here we provide just specific moments that have relation to CAD directly.
Recall our setup for CAD - last week it has suggested upside action on USD/CAD (CAD weakness). This action has happened by Bank of Canada monetary policy revision. As a result, the Canadian dollar weakened to its lowest in more than two months against the greenback on Thursday following a speech from a deputy governor of the Bank of Canada, as investors raised bets that the central bank may cut interest rates this year.
The Canadian economy is in for a longer-than-expected "detour" as consumer spending, business investment and the energy sector weigh, but economic growth is set to pick up later in 2019, Bank of Canada Deputy Governor Lynn Patterson said.
The speech came one day after the Bank of Canada held interest rates steady as expected and said there was "increased uncertainty" about the timing of future rate increases.
"Today's speech by Deputy Governor Patterson did little to change the market's dovish perception," said Royce Mendes, a senior economist at CIBC Capital Markets. "The Bank of Canada will likely have to lower their sights even further in the months to come."
Money markets have moved to price in about a 35 percent chance of an interest rate cut this year. Before Wednesday's interest rate decision, the market had been pricing in a small chance of a hike.
The loonie lost ground as the greenback rose against a basket of major currencies. The U.S. dollar currency index was boosted by a weaker euro, after the European Central Bank pushed out the timing of its first post-crisis rate hike to next year and offered banks new rounds of multi-year cash.
Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries and German bunds. The two-year rose 10 Canadian cents to yield 1.628 percent and the 10-year climbed 52 Canadian cents to yield 1.766 percent. The two-year yield touched its lowest intraday since December 2017 at 1.620 percent.
The price of oil, one of Canada's major exports, was supported by continuing OPEC-led supply cuts and U.S. sanctions against exporters Venezuela and Iran. U.S. crude oil futures settled 0.8 percent higher at $56.66 a barrel.
The value of Canadian building permits fell by 5.5 percent in January from December, Statistics Canada said. Analysts had expected a decrease of 5.0 percent.
But on Friday situation has changed drastically. The Canadian dollar strengthened against its U.S. counterpart on Friday, as bets for an interest rate cut by the Bank of Canada this year were slashed after domestic data showed a spike in jobs that surprised investors.
Employers added 55,900 jobs in February, which was the third month of outsized gains in the last four and exceeded the 20,000 jobs created in the United States for the same month. Analysts had forecast February job numbers to be flat in Canada.
"It was a great report card for the Canadian jobs market and it flies in the face of some of the other statistics that we've been seeing lately out of Canada," said Scott Smith, managing partner at Viewpoint Investment Partners.
Data one week ago showed that Canada's economy barely expanded in the fourth quarter. Chances of an interest rate cut by December, which had climbed this week on a more dovish tone from the Bank of Canada,
fell to less than 20 percent from about 40 percent before the jobs data, the overnight index swaps market indicated.
"I think if you look at this big picture it is an argument for the Bank of Canada to remain on the sidelines in the near term, rather than one for them to consider eases," said Andrew Kelvin, senior rates strategist at TD Securities. The Bank of Canada's benchmark interest rate is at 1.75 percent.
Speculators have raised their bearish bets on the Canadian dollar, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. As of March 5, net short positions had increased to 40,444 contracts from 39,177 in the prior week.
Recently market has hit ultimate historical short position level. This week position has changed but not significantly.
Source: cftc.gov
Charting by Investing.com
Technicals
Monthly
Recall that our discussion has started with strong bearish engulfing pattern by the close of January candle. Pattern stands at major 5/8 resistance. January black candle has closed below the lows of December, which could be treated as Reversal month as well. On a way down market also has tested YPP.
Strong support here stands at 1.2706 as YPS1 and 1.22-1.25 K-area.
For the monthly chart, this is tactical setup, because it doesn't suggest too extended targets, as they should stand somewhere inside recent upside swing. But... this is for monthly time frame. For daily one this could be long-term direction which makes trading process easier.
As usual, first step that we're waiting for is minor pullback inside the body of engulfing pattern. This pullback is very important for us, as it should provide entry point. Also it is not forbidden to trade it long on daily chart. Second step of trading plan - downside extension.
Now, as month has passed we see that first stage is completed. Now the major concern - starting of downside second leg. It is sophisticated situation in the world as economically as politically, so we need to keep on the table alternative scenario of engulfing failure as well, although it would be nice if we will not get it..
Weekly
So as we've suggests upside pullback indeed has started from strong support area of weekly K-support and YPP. Now we've got the pattern that we've talked about last week - our "222" Sell pattern stands in place.
Unfortunately, we haven't got bearish grabber as well, it would be more than welcome here, but, CAD still has chances to form it this week...
Daily
Here we see that on upward action market has hit ultimate target of our reverse H&S pattern - 1.618 XOP extension. Now price stands at Agreement resistance around major 5/8 Fib level and daily Overbought.
This is an area where we initially intend to go short. The one thing still, that could scare a bit - too strong upside action and psychologically it is difficult to go against it.
Thus, we could wait for some clear bearish reversal pattern on intraday charts.
Also, this area around Fib resistance is crucial one for overall setup. Upside breakout will be negative sign for long-term bearish scenario, because for any retracement Agreement at major 5/8 level & OB level should be enough. If market will break it up, it could mean that this is not a retracement. So, we should be aware of this. This is another reason why it is better to get some clear bearish reversal pattern on intraday charts...
Intraday
On 4H chart we have clear DRPO "Sell" pattern. So if you do not fan of long-term setups - this one could be used separately, just with 1.33 target. But we still hope that DRPO leads to more serious consequences.
On 1H chart we keep an eye on H&S shape pattern and potential "222" Sell. It should be relatively safe to go short here against recent top. Major XOP has been hit, no W&R should follow and action above previous top will mean only one thing - upside continuation.
At the same time, chances on technical drop as respect of resistance are solid, so we should get enough space to move stops to breakeven.
Conclusion:
Canadian dollar provides very interesting setup now. Since setup is forming on monthly chart - it could provide weeks and weeks of clear direction for trading on daily time frame.
Next week we're watching for two things - reversal patterns on intraday charts, trying go short against recent top and, second is - bearish weekly grabber by the end of the week.
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.
