“God Save the CAD”

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The Canadian Dollar has fallen 23% against the US Dollar since Valentine’s Day of 2013. Is the worst over? Or is there more pain to come?


The Bull Case

There are a few reasons why the CAD might rise:

Regardless, the short thesis is more convincing…


The Bear Case

To Hike Or Not To Hike?

The market is pricing in a rate hike in just over 5 months:Implied Months to First FFR Hike - @MktOutperform - Jul 21, 2015
As a result, near-dated yields are rising…

The Yield Curve

The Treasury yield curve is flatter than it was about a year ago:
TSY Yield Curve - US Treasury - Jul 24, 2015
The short-end is convinced that the Fed will move in 2015…

…The long-end is worried about slowing growth and about deflation…

The USD

The US dollar is appreciating because of rising short term rates:
DXY - @sobata416 - Jul 27, 2015
This is not good for energy, metals, etc., which are priced in USD…

Commodity Prices

Dollar strength is translating into commodity weakness:
DJ Commodity Index vs. DXY - @sobata416 - Jul 27, 2015
Thus, resource exporters such as Canada are under pressure…

Weak Economy, Weak CAD

Falling energy prices are negatively affecting Canada’s economy:
Falling Commodity Prices vs. Economic Output - BOC - Q1, 2015Output Across Industries - BOC - Q1, 2015
Industries that are not based on commodities are doing alright. But will it last???


Technicals

USDCAD – Monthly Chart

USDCAD is trading at 1.30280; the highest it has been since March of 2009:
USDCAD - Monthly - @sobata416 - Jul 27, 2015
That said, it is still far away from 1.61840 (purple X); the all-time high set in January of 2002…

USDCAD – Weekly Chart

If USDCAD breaks up through trend line resistance at 1.30634 (blue X) then could rise to 1.38802 by the end of Q2, 2016:
USDCAD - Weekly - @sobata416 - Jul 27, 2015
On the other hand, if it breaks down through trend line support at 1.28313 (blue Y) then it could fall to 1.26215 by early-mid September…

Conclusion

There is a high probability that the CAD will continue to depreciate. In addition to everything we covered, Canada’s monetary policy is likely to remain loose. Moreover, a technical recession may lead the BOC to cut rates again this year. Finally, ask yourself one question: What will happen to the CAD if and when the Canadian housing market rolls over???

 


Disclaimer: This analysis should not be interpreted as investment advice.

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