USD/CAD bulls target 78.6% Fibo of the Dec swing highs to YTD lows

• Bulls relish in a dovish BoC outlook, threats of coronavirus, BoC and GDP in focus. 
• USD/CAD runs stops through the 1.3160s, bulls set on a test of the declining trend line resistance.
• A confluence of the 1.3230/50s, trendline resistance and 78.6% Fibo of the Dec swing highs to YTD lows is the target. 

USD/CAD is trading below the highs of the day at 1.3179 having travelled between a high of 1.3205 and a low of 1.3171. Technically, 'funds' (USD/CAD) seems overstretched although there is a firm case for a continuation to trendline resistance so long as 1.3150/60 holds (eventual target to the downside (monitoring Canadian Gross Domestic Produce)).

USD/CAD has been extending its rally, taking out stops through prior resistance levels despite an environment where buy-side institutions have been increasing their net CAD longs. The move was instigated in an environment of a dominant US dollar as well with a dovish one from the Bank of Canada. 

Asset managers are hedging their long exposure to commodity-FX

However, the fuel on the fire, set alight by the BoC, has been more to do with the concerns over the spreading coronavirus which has weighed on risk assets and provided a tailwind to safe havens, such as the USD and JPY.

What is interesting about last week's COT data is that the markets are becoming more cautious about the reflation trade and the commodity market's outlook. We can see that Asset managers were overall sellers of commodity currencies. They cut their net CAD longs byUSD0.3bn to USD3.4bn, raised their net AUD shorts by USD0.4bn to USD1.4bn, while keeping their net long NZD position broadly unchanged at USD0.1bn. Asset managers are hedging their exposure to their buy-side long positions. Hence, the Loonie might face further downside pressure in the near term, especially as the threat of the coronavirus intensifies.  

The threat of the coronavirus intensifies and spreads to Canada

The latest reports are that the number of known cases of the new virus rose by nearly 60% overnight. A shortage of test kits has led experts to warn that the real number may be higher. Germany, Japan and Taiwan report first coronavirus patients who didn’t visit China. There has also been a run on surgical face masks in the panic-struck USA. However, in the session, US benchmarks are in positive territories so its business as usual on Wall Street, for now. 

Closer to home,  health officials in Toronto on Monday confirmed a second presumptive case of the new coronavirus. Today, Quebec’s health ministry investigating 3 potential new coronavirus cases.

BoC in focus, GDP next up and Dep Gov speech to be scrutinised for clues

Meanwhile, should the threat of coronavirus subside, it will be back to good old fashioned economics again following a BoC caught markets off guard with a dovish tone at the January meeting. What got traders on edge was the deliberation put to rate cuts, but there should be some relief in the consensus that cuts are not warranted at this time. 

This week's Gross Domestic Product will be critical for the loonie where a large surprise, one way or the other, will be marketing moving. It will follow recent data in a positive surprise in retail sales and a slightly below consensus Consumer Price Index, with both headline and core measure continuing to sit above 2%. However, Core CPI remains slightly above target at 2.1% on average, although further deterioration in the labour market or GDP tracking will test the BoC'sresolve.

"We look for a flat print on GDP due to weakness across goods and services," analysts at TD Securities explained.

"Transitory factors will have offsetting impacts, reflecting a rebound in auto production and a headwind from cold weather and the CN strikes. A sharp pullback in wholesale trade is also expected to weigh on growth. Unchanged GDP would leave Q4 tracking near the BoC's latest projections (0.3%)."

Also, we have the Deputy Governor Beaudry speaking on monetary policy and financial vulnerabilities at 15:30 ET on Thursday, January 30th. "Markets will look for any clarity on how the Bank views the trade-off between supporting the economy and managing financial stability risks," analysts at  Securities noted, explaining that while "the Bank cited financial vulnerabilities as a factor that held them back from providing insurance cuts in October, recent communications suggest less of a trade-off after a deterioration in domestic economic data."

USD/CAD levels

USD/CAD has run through stop territories in the 1.3160s and offers little signs of an imminent pullback, with bulls set on a test of the declining trend line resistance at 1.3230/50s which has a confluence of the 78.6% Fibo of the Dec swing highs to YTD lows. The immediate support to target is 1.3150. A run below there opens risk back to 1.3070/80 support structure.