Will Positive Data Mean a Top for USD/CAD?

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Will Positive Data Mean a Top for USD/CAD?

As there are no U.S. economic reports on the calendar today, it should be a relatively quiet in the foreign exchange market. After this week’s strong gains, the U.S. dollar is trading flat or lower against most of the major currencies. While the greenback received a large part of the focus this week, big moves have been seen in USD/CAD, which rose to its strongest level since July 2009 before pulling back sharply today. Its initial strength was due in part to the rise in the U.S. dollar but Canada has no shortages of problems. The country’s anemic economic performance drove the Canadian dollar to its weakest levels in 4 years and the finally broke down when Central Bank Governor Poloz bit the bullet and admitted that they may have to cut interest rates again.

Today the Canadian dollar is enjoying a nice recovery on the back of stronger retail sales and consumer prices. Consumer spending jumped 1.3% in the month of January, nearly 2 times more than expected. Excluding auto sales, demand was still strong, rising 1.0% from the previous month. Inflationary pressures also seem to be improving with consumer prices rising 0.8% in February. However on an annualized basis, CPI growth slowed to 1.1% from 1.5%. These latest economic reports may ease the central bank’s worries and will provide support for a further recovery in the Canadian dollar but the data is from January and February. Governor Poloz’s recent views may reflect a more updated assessment of the economy.

The central bank’s concerns center on low inflation and weak U.S. / Chinese growth. In the past the weakness of the Canadian dollar helped to support exports but Poloz has “not seen anything that suggests we’ve actually had a reaction to that.” All of their hope rests in a stronger U.S. recovery and while U.S. data has been improving, tapering by the Fed will keep the economy growing at a steady but slow pace. Canada was also rocked by the surprise resignation of Finance Minister Jim Flaherty this week, one of the most respected and powerful members of the Canadian government. Jim Oliver, a former Natural Resources Minister who is a fiscal conservative and champion of the energy sector has been appointed as his replacement.

According to last week’s CFTC IMM report, long USD/CAD positions are at extreme levels. Today’s positive economic surprises could encourage profit taking near 4-year highs. If USD/CAD drops below its former breakout level of 1.1150, we could see a deeper correction down to 1.10. If it holds this level, it could still revisit the highs.

Kathy Lien
Managing Director

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