USDCAD reversal in focus

Positive news for the China complex yesterday with data showing Chinese FX reserves rising by $U.S. 5.82 billion to $U.S. 3.118 trillion in July, defying economist’s expectation for a fall due to ongoing U.S.- China trade tensions and a falling Yuan.

The rise in reserves is an indication that Chinese authorities have not needed to, nor wanted to step in to support the Yuan during its recent falls to stem potential capital outflows. One of the benefits of range trading markets is the valuation effects on the Reserves data which had minimal impact in July with the EUR, CAD and JPY experiencing only limited net changes from the previous month.

In response, China equity markets posted strong gains with the China A50 leading the way to post a gain of 3.34% on the day and the Shanghai composite index finishing 2.74% higher. The AUDUSD which is a useful proxy for all things China, traded up to .7440, aided by an RBA meeting which left interest rates on hold as expected for the 22^nd month in a row and delivered a broadly positive message.

Also strengthening was another commodity currency, the Canadian dollar with USDCAD hitting a low of 1.2962 overnight, a move that has since reversed with USDCAD rallying 100 pips from earlier lows to close the session above 1.3050. USDCAD’s price action is in line with a piece we wrote back in mid-July that contained an idea to buy USDCAD on a dip to 1.3000/1.2970 https://www.cityindex.com.au/market-analysis/crude-oil-and-usdcad/

The catalyst for the sharp overnight turnaround in the Canadian Dollars fortunes appears to be linked to Canadian Foreign Minister Chrystia Freeland who called last week for the immediate release of civil society and women’s right activists currently detained in Saudi Arabia. In retaliation, Saudi Arabia announced overnight it would expel the Canadian Ambassador and place an embargo on all trade and investment with Canada.

Total trade between the two countries is estimated at approximately U.S. $4 billion dollars annually and therefore is not big enough to materially impact the Canadian economy. Nor is the suspension of the 5000 students who visit from Saudi Arabia each year to study in Canada. I am surprised and a little suspicious that USDCAD has bounced so far on this news. Although it is possible that the weaker than expected Ivey PMI data last night also played a part in USDCAD’s rebound.

From a technical perspective, to increase confidence that USDCAD can build on its overnight gains, a daily close above 1.3100 would be a positive development. Should this occur, I would consider adding to USDCAD longs. Upside targets are a retest of the July 1.3290 high and then follows 1.3386. The stop loss can now be raised to 1.2949 which is below the overnight swing low and wave equality and also below trendline support. 

Source Tradingview. The figures stated are as of the 8th of August 2018.  Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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