USDCAD: Buckle up & get long - TDS

Mazen Issa, Senior FX Strategist at TDS, suggests to enter a long USDCAD position; enter at 1.3150, target of 1.3650, stop-loss of 1.2900.

Key Quotes

“Since USDCAD failed to sustain a break above 1.3600 (~50% Fibo level from 2016 high/lows) on Nov 15th, price action has been notably heavy. We have long viewed the risks around USDCAD tilt higher from a fundamental perspective, but augured for patience despite attractive valuations. We think that turning point is near.”

“The 1.3100/50 area has acted as a key pivot zone for USDCAD. We think a re-test of this area offers a cleaner and more attractive technical entry point reinforced with solid trend-line support to re-establish firm USDCAD longs. While the CAD has been one of the better contained currencies within the G10 complex since the US election—a point that should not be dismissed—we think it will be difficult for the CAD to detether itself from a firm USD backdrop.”

“While not our base case, we think that another BoC cut remains a non-trivial risk in 2017, and one that could receive consideration by mid-year. Currently, the OIS market is pricing in a modest probability of a rate hike by Q3 next year (~7bps), which we strongly lean against, though we note a near-term catalyst to change front-end dynamics remains elusive for now. Indeed, our economists apply a subjective probability of ~30-40% of a cut next year as the risks to the growth outlook remain titled to the downside: the export rotation has been uneven, business investment remains a disappointment, housing market imbalances persist and we judge the fiscal multiplier assumed by the BoC as too high.”

“The recent BoC statement noted that economic slack is wide in Canada compared to the US. To us, this explicit acknowledgement by the BoC cements the idea that policy will diverge for some time.”

“Oil prices are expected to grind towards $60/bbl over 2017. We think a lot of ‘good news’ post-OPEC deal is already in the price and that a Trump Presidency should keep UST yields elevated. Against this backdrop, we expect G10FX to show greater deference to rate spreads. USDCAD is no exception though a slightly higher profile for oil should limit the overshoot implied by rates.”

“The upcoming Fed meeting is expected to reveal a cautious tone/dovish hike. We would use this as an opportunity to scale into a USDCAD long as January nears, which tends to be the best performing month (even when the January 2015 surprise hike is excluded).”