USD CAD Resumes Slide

With the Bank of Canada set to meet tomorrow, today’s focus is on theCanadian Dollar. Overnight trading action indicates a higher openingfor the Canadian Dollar spurred by higher expectations in the U.S.equity markets and firmer crude oil.

Daily Analysis

With the Bank of Canada set to meet tomorrow, today’s focus is on the Canadian Dollar. Overnight trading action indicates a higher opening for the Canadian Dollar spurred by higher expectations in the U.S. equity markets and firmer crude oil.

Investors should look for the USD CAD to open sharply lower at about 1.1042. Much of this weakness overnight can be attributed to the unexpected news regarding the CIT Group. Late last week, investors were looking for this small business lender to file for bankruptcy protection after the U.S. government balked on a request to bail it out.

Over the weekend the CIT Group reached an agreement with bondholders to provide as much as $3 billion in emergency funding. With bankruptcy avoided for the time being, investors drove up equity prices and triggered greater demand for higher risk assets including the Canadian Dollar.

Earnings momentum is expected to continue this week as investors are betting that the trend that began last week will drive equity prices higher this week. Banks in particular have been the driving force behind the upside momentum. This week 30% of the S&P 500 and 40% of the Dow stocks are scheduled to report so traders should expect solid movement and volatility.

Look for the USD CAD to continue to post losses this week as long as equities remain in their positive trends. Firmer crude oil prices will be another positive influence on the Canadian Dollar as energy exports make up a large percentage of the Canadian economy. In fact raw materials account for more that 50% of Canada’s export revenue.

As mentioned earlier, the Bank of Canada is set to meet tomorrow. Expectations are for the BoC to leave interest rates unchanged at near zero. Furthermore with inflation under control and the economy beginning to show signs of recovery, look for the BoC to refrain from applying any stimulus in the form of quantitative easing. In keeping with the trend, however, do not be surprised if the BoC makes some comments regarding the price level of the Canadian Dollar. Like most central banks, it does not want to see rapid appreciation curtail any export gains. There always seems to be a concern that a higher priced Canadian Dollar will drive buyers away from Canadian goods.

The Bank of Canada is most likely going to cite two recent reports as its reasons for keeping interest rates unchanged. In a survey released July 13, Canadian businesses reported more optimism about their futures sales prospects and that credit conditions were easing.

Secondly, Canadian consumer prices declined last month on an annual basis for the first time since 1994. Cheaper gasoline was cited as the main reason for the decrease. The Canadian Consumer Price Index was in line with expectations and suggested that the economy is in a position to rebound. Based on the numbers, the economy is in no danger of deflation either which was a concern earlier in the year because of its possible negative effect on a commodity-based economy. The economic reports showing room for improvement and inflation in line with expectations are the primary reasons the Bank of Canada will cite tomorrow when they announce that interest rates will remain unchanged.

Technically, the main trend is down. The strong move below the .618 retracement level at 1.1142 has sent the USD CAD soaring overnight. Expectations are for the downside momentum to continue as long as this market continues to receive selling pressure from higher equity markets. The charts indicate that this market has room to fall over the near-term to the last swing bottom at 1.0941.

A trade back over 1.1142 will be a sign that the buying is greater than the selling and could be a signal that a bottom is being formed. 

Daily Chart

Click to Enlarge Image

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

Disclainer: