18 Dec 2014
Recovering crude comes with a downside risk for CAD – TDS
FXStreet (Barcelona) - Shaun Osborne and Martin Schwerdtfeger, FX Strategists at TD Securities, explain that the tighter correlation between crude and oil might result in downside risks for CAD in the short run if crude continues its recovery.
Key Quotes
“It is not clear that USD-supportive spreads can offset a further rise in crude oil today and help keep USDCAD underpinned. Our FV model based on terms of trade and spread regressions has only signaled a moderation in the USDCAD’s estimated equilibrium based on these variables today (indicating a FV of 1.1835) relative to Wednesday.”
“Practically, however, the tighter correlation between CAD and crude (relative to CAD and spreads) suggests a little more downside risk to spot in the short run at least, especially if crude continues to recover.”
“There are no Canadian data releases today and so the CAD will move to the beat of the US data, flows, and technical signals. Short-term patterns suggest building downside risks for funds in the near-term after three failures to push on through the upper 1.16s this week; the intervening low at 1.1564 represents a triple top trigger and a break lower would target a measured move decline to 1.1457 over the next 3-5 days. Recall that the USD has stalled out at the ceiling of the three month bull trend channel this week, perhaps making a modest correction a little more likely.”
“One saving grace for USDCAD may be the fact that it is getting closer to the holidays, there are massive option expires in EUR and JPY through the end of the week, which may mitigate any movement in the big dollar overall and market participants seem less and less inclined to, well, participate.”
Key Quotes
“It is not clear that USD-supportive spreads can offset a further rise in crude oil today and help keep USDCAD underpinned. Our FV model based on terms of trade and spread regressions has only signaled a moderation in the USDCAD’s estimated equilibrium based on these variables today (indicating a FV of 1.1835) relative to Wednesday.”
“Practically, however, the tighter correlation between CAD and crude (relative to CAD and spreads) suggests a little more downside risk to spot in the short run at least, especially if crude continues to recover.”
“There are no Canadian data releases today and so the CAD will move to the beat of the US data, flows, and technical signals. Short-term patterns suggest building downside risks for funds in the near-term after three failures to push on through the upper 1.16s this week; the intervening low at 1.1564 represents a triple top trigger and a break lower would target a measured move decline to 1.1457 over the next 3-5 days. Recall that the USD has stalled out at the ceiling of the three month bull trend channel this week, perhaps making a modest correction a little more likely.”
“One saving grace for USDCAD may be the fact that it is getting closer to the holidays, there are massive option expires in EUR and JPY through the end of the week, which may mitigate any movement in the big dollar overall and market participants seem less and less inclined to, well, participate.”