Short USD/CAD Stopped Out For A 2.16 % Loss

The sell-off of the loonie continued yesterday as commodity prices plunged after a US commodities hedge fund was reportedly forced to liquidate positions at a wider scale: gold plummeted to a seven-month low and oil slipped close to USD3/bbl during the Wednesday afternoon sell-off. As a result, our short USD/CAD recommendation was stopped out in a blaze of glory at 1.0150, now actually trading close to the 1.0190 level.

As mentioned, some the previous carry darlings such as the commodity currencies led by AUD are currently falling out of favour as the euro continues its rise from the ashes. The general rush towards the euro combined with the Bank of Canada (BoC) adopting a somewhat less hawkish rhetoric lately have been the key factors weighing on the CAD.

Also, the Reserve Bank of New Zealand – the guard of another (on PPP measures) overvalued currency – warned speculators earlier this week that it would be ready to intervene if its currency (NZD) continues to surge. Markets have been reminded that at some point the commodity currencies will have to correct some of the present PPP misalignments. So far, however, BoC has stayed on the sidelines of the currency war and, if anything, has been supportive of the official G7/G20 stance on countries’ right to pursue their domestic policy target by means of aggressive monetary policy, thus not hinting at intervention as a route to go down. Indeed, Canada is not suffering the ‘Dutch disease’ to the same extent as e.g. Australia.

Although our short-term financial models now indicate that USD/CAD is increasingly overbought and speculative positioning in CAD have been reduced significantly of late, we would avoid the cross for now due to the heightened uncertainty on both US fiscal and monetary policy at present. As we get past the US sequester and threat of US government shutdown in late March, we would look for downside in USD/CAD as the US soft patch should then be behind us with notable spill-overs to Canada. Focus should return to the prospect of BoC rate hikes and Fed keeping quantitative easing in place throughout 2013.

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