One-Way; CAD goes from bad to worse

It’s been one miserable day after another for the Canadian dollar, which continues to sink against its major counterparts. None more so than the US dollar with the pair breaching fresh 11-year highs on a daily basis. It can’t even cut a break against its ‘commodity currency’ peers with the Aussie and the Kiwi recording quarterly gains of 9% and 13% respectively. The AUDCAD pair is currently skirting around parity for the first time since January.

Resident Analyst, Adam Taylor, reckons a convincing “breach of the 1.00 psychological barrier would suggest 1.02 as the next logical target”, while expressing caution given it’s due for natural period of consolidation.

Still, those contrarians trying to pick the bottom may very well need to wait longer. How short can a market go before a little consolidation is called for? Certainly it doesn’t appear like any relief on the horizon with last week’s commitment of traders report showing short-side positioning is continuing to grow. What is does suggest, is with such a build-up in pessimism and short-players, its fortunes could (in the right conditions) turn as quick as you can say ‘short squeeze’.

While a lot of the CAD’s fortunes are contingent on what’s happening elsewhere (US dollar demand etc.) its relationship to oil is clearly a catalyst for its rout. It doesn’t help that crude oil typically trades inversely to the US dollar, which has been gunning it for other reasons.

Still, for trend traders and those betting on the rise of the US dollar, it remains a reasonable proposition. From a fundamental perspective, the Canadian economy (as a large oil producer) has been hit by the price of crude oil, a reason that could very well force the Bank of Canada’s (BoC) hand in lowering rates. This clear policy divergence from the U.S is just another reason why the short-players are building.

Bank of Canada Governor, Stephen Poloz, said recently that despite the drop in oil prices the economy should see “more persistent acceleration” through next year, while acknowledging the benefits of having a flexible currency given it absorbs shocks to the economy and helps exporters.

Canadian GDP (Oct) and retail sales are on the docket this Thursday Dec 24.

One-Way Trade – CAD goes from bad to worse. USDCAD up 18% in 2015.