USD/CAD risk shifted back toward further gains - Scotiabank

USD/CAD has yet to break from its tight congestion range around the 100 day MA at 1.2925, with limited near-term movement beyond 1.2900 and 1.2950, said Eric Theoret, Strategist at Scotiabank. He noted that despite neutral technicals, the recent rejection of the 61.8% Fibo (1.2764) of the May-July rally suggests a decisive shift in the balance of risk back toward further gains. 

Key Quotes

“CAD is quiet, consolidating at the lower end of its two week range with limited movement ahead of Friday’s Jackson Hole speech from Fed Chair Yellen. Recent CAD weakness has been driven by the renewed decline in oil prices and a widening in the 2Y U.S.-Canada yield spread—the latter primarily responding to last Friday’s disappointing domestic retail sales and CPI.”

“Short-term measures of implied volatility are now well off their lows, and the one month risk reversal suggests a modest increase in the premium for protection against CAD weakness. Event risk is elevated into the weekend, as we consider the potential for positioning adjustments into and through Fed Chair Yellen’s speech. CAD’s risk profile leaves it vulnerable to weakness in periods of risk aversion.” 

“USDCAD short-term technicals: bullish—USDCAD has yet to break from its tight congestion range around the 100 day MA at 1.2925, with limited near-term movement beyond 1.2900 and 1.2950. The broader picture is muted with near neutral momentum signals and a trendless ADX. However, the recent rejection of the 61.8% Fibo (1.2764) of the May-July rally suggests a decisive shift in the balance of risk back toward further gains. We look to a sustained break above the 38.2% Fibo at 1.2950.”