This is an update to last week's article with the foundation of the thesis for being long USD/CAD below. I will update with the 60 min, daily, and weekly charts each week and my thoughts on what has changed. The charts look like the uptrend I am expecting could take a breather here for a bit at the top of the recent channel and at resistance from late September of 2015. This does coincide with the dollar hitting some supply and needing a bit of a shakeout after a very impressive run. With that said, the OPEC Charlie Brown football game may be unwinding for the moment, allowing WTI to re-price at a more realistic level considering the dollar run and the oil supply issues globally. The chart below is a tactical look at what the upcoming trading looks like.
So what makes USD/CAD rising a good bet?
1. Room to maneuver - Unlike most of the developed world, Canada has not used QE, negative rates, or massive central bank balance sheet expansion, or the targeting of certain maturities etc. They have not fired many arrows from their quiver yet and look ready to start soon.
2. Housing bubble - The Canadians have a pretty epic housing bubble which threatens the currency if a recession bursts the bubble (in combo with the slowing of Chinese buying). It looks as though a recession could be imminent with some yield curve inversions and very poor economic data lately to include retail sales, real estate, and jobs.
3. Commodity exports - Canada made a lot of money exporting hard commodities to China in China's insane boom via historic credit expansion and building. As we know, this led to enormous overcapacity issues and a sizable commodity bubble. China is still flooring the credit peddle but they are getting less and less return thanks to debt levels being so high. So, the odds of a big rebound in commodity exports to China to help keep the currency high are very slim. In fact, if China hits the hard landing many expect, this could be a big headwind for Canada. Canadian central bankers decry export struggles in speeches as well as the level of CAD. I suspect they would love to boost exports with a lower loonie.
4. Strong dollar - I am firmly in the dollar bull camp so I see a natural move up in USD/CAD. There are a host of reasons to be bullish the greenback for the next couple of years, at least. Funding pressures and funding needs around the globe will work to keep the dollar high as demand for dollars grows. Short term policy divergence (Fed hiking or jawboning hikes while BOC cuts or even launches QE) will pressure the pair higher. The BOJ, BOE, and ECB all appear hell bent on pushing their currencies much lower. Not to mention the risk of EU members exiting and going back to their native currencies to promptly devalue. I see this risk as underappreciated over the next 5 years.
5. Oil - Oil continues to be in a historic global glut with no end in sight as global production stays much too high for current demand, much less demand in a recessionary environment it appears we are slowly walking into. Oil is the lifeblood of Canada and the price of the loonie. If oil struggles (it will in another large move up in the dollar), the loonie will suffer greatly.
If the dollar pushes above 100=104, Canadian real estate cracks, Canada enters recession, the BOC cuts rates and enters QE, the Fed raises rates, oil goes back to the 30s or even 20s, we are looking at an explosion in USD/CAD. If only a third of that happens the loonie is firmly in the 1.40s which would be a great return in the currency markets. This has the potential to become an explosive move and one that pays a positive carry to hold. The head of the BOC, Stephen Poloz has openly discussed NIRP, large scale asset purchases, funding for credit among tools he can use in the next crisis. Well that crisis may be knocking on his door soon. Besides, it is probably no fun sharing cocktails at Jackson Hole or Davos with no money printing war stories to tell your buddies. I have been holding a core position in spot forex and scaling in and out around technical levels, in addition to the core position. I also trade the futures contract on the loonie around the stronger technical levels to amplify returns. The risk/reward of this trade over the next year and probably longer, make it a trade to seriously consider. I will keep posting about this trade here and on twitter so keep an eye out. Happy trading.
Original article published on 10/21/2016 - USD/CAD 1.33331