The great Canadian bull run has been quite impressive to start the year.  The Loonie is one of the top performers in G10 for 2019 after being decimated in December.  The main drivers of this run include:

  • The rebound in global oil prices: Yes, even Canadian oil…

  • A weaker US Dollar - Mr. Powell fought the market, and the market won (for now)

  • Improvement in global risk appetite - US & China are playing nice, but mood can change in an instant

We have seen all three of the above reverse a bit since Thursday, which has resulted in bulls jumping back in on USD/CAD.  As seen in the daily chart below, buyers stepped in right around the 100 DMA (1.3180).  Is this a temporary pause amidst a bigger reversal in the pair?  Or will global sentiment crack and send USD/CAD roaring back in to the mid-high 1.30s?  We should have some answers over the next week or so.

USDCAD

Figure 1 - USD/CAD Daily (NetDania)

A break of the 100DMA would be significant, and even more so if it blows through the 200 DMA (1.3086) as well.  Global market risks have been muted but are still prevalent.  Since USD/CAD can only go as far as market sentiment will allow for, you may not want to jump into a short position at this point unless we see confirmation of a trend continuation. 

This week we have the Brexit vote, which is almost certain to be rejected by UK parliament.  We have also yet to hear any concrete next steps from US-China negotiations, and the gap appears to be as wide as ever.  Oh, and the US government shutdown is fast approaching the 1-month ever. 

If we get positive developments on these fronts, then risk assets (such as the Loonie) stand to continue their strong January.  But don’t hold your breath…The more likely scenario is that nerves slowly begin to return, and we could see USD/CAD bounce and continue its uptrend seen on the weekly chart below.  In the short-term, I have yet to be convinced that either direction is more likely than the other, which is why I would suggest patience and caution before adding or entering new USD/CAD positions.  If anything, pulling risk of the table is probably the best play until the trend becomes clearer.  In terms of the long-term outlook, all significant risk factors are still very much alive.  Plan accordingly.

USDCAD

Figure 2 - USD/CAD Weekly (NetDania)

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