USD/CAD Rally Looks Stretched, But CAD Bears Eye AUD and GBP

The USD/CAD rally is showing signs of exhaustion after five consecutive weeks of Canadian dollar weakness, despite deteriorating employment data and fading BoC rate hike expectations. Rising speculative CAD longs also suggest some traders are positioning for a recovery. Yet with the Australian dollar and British pound showing greater strength against the Loonie, CAD bears may find better opportunities elsewhere.

 

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USD/CAD Pullback Risks Build as AUD and GBP Target Further CAD Weakness

A weak Canadian employment report weighed further on BoC hike expectations, although they were already looking pretty bleak. The OIS curve peaked on September 11 as traders spent the preceding weeks pricing in 75bp of hikes over the following year. Since then, expectations have shifted firmly lower as markets increasingly expect the BoC to keep rates at 2.25% for longer and delay its tightening cycle further — assuming the case for additional hikes does not fade altogether.

The contrast with the US is becoming increasingly clear. The 3-month US OIS (blue) remains anchored near the Fed target, suggesting traders are not banking on an imminent hike, although the 6-month rate is curling higher to reveal a slight hawkish bias. Meanwhile, Canada’s 3- and 6-month OIS rates (green) are moving back towards the BoC cash rate as traders unwind previous hike bets. That relative shift should be supportive of USD/CAD, although its failure to extend the rally despite the widening policy divergence warrants a closer look.

Source: LSEG

 

Canadian Employment Falls for a Second Month

Employment contracted for a second month, with September’s 68.3k decline taking the two-month total to around 110k jobs lost. Just over half of the latest decline came from full-time employment, while the unemployment rate rose to 6.5%. That remains just below its long-term average of 6.58%, but is now comfortably above its five-year average of 6%.

 

 

 

USD/CAD Futures Positioning | COT Report

What makes the Canadian dollar futures selloff interesting over the past few weeks is that it has coincided with a sharp rise in gross longs. The combined bullish exposure of large speculators and asset managers is 189k contracts, although rising shorts have kept both groups net short overall.

However, note that a small doji formed on the CAD futures chart despite weak employment data and fading BoC hike expectations. If a market cannot fall on bad news, it stands a greater chance of rising on good news.

That said, there is little in the way of market-moving data on Canada’s economic calendar this week, so the next move may come down to US data, Kevin Warsh’s Fed speech or comments from BoC Governor Macklem on Friday.

Source: CFTC (COT), CME, LSEG

 

USD/CAD Drivers to Watch This Week

• Manufacturing/wholesale activity data for confirmation that domestic momentum is weakening further.
• Oil prices, because Canada is a major crude exporter and CAD can get conflicting signals from weaker domestic growth versus higher oil.
• US CPI and retail sales, because those can move USD/CAD heavily through the USD side and alter relative Fed/BoC pricing.
• Any comments from Governor Macklem that addresses whether the labour deterioration changes the Bank’s assessment of excess demand and inflation persistence.

 

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Canadian Dollar Mixed Against FX Majors

With a stretched US dollar and mixed performance across FX majors, two of the better opportunities for CAD traders may be against the Australian dollar and British pound.

Source: ICE, TradingView

 

• The weekly chart shows a small doji on CAD/USD after a five-week selloff. Given it closed flat despite weak data from Canada, it is a minor sign of strength. USD/CAD bulls may want to tread with caution, as the risk of a pullback could be building.
• The Australian dollar tested parity against the Canadian dollar last month, and it looks like it wants to have another go. The CAD/AUD chart shows a bearish consolidation within an established downtrend, and with a shooting star candle forming two weeks ago, perhaps we’ve seen the swing high — and a bearish breakout could be pending.
• The British pound is also performing well against the Loonie, with GBP/CAD having broken out of a bullish retracement channel two weeks ago.