Based on conditions overnight in Asia and during the London morning, the tone towards ‘risk’ appears as if it is set to end the week on a pretty low note. The focus is the pain being inflicted by Chinese reforms and ‘rebalancing’, with the main mitigating factor being that it is a ‘managed slowdown’. Given such low turnover this week and general uncertainty, activity in the majors was muted this morning. Conflicting forces in EURUSD and GBPUSD are also not helping matters: ‘risk-off’ should lead to declines in both pairs, but the continued downward pressure on long-term US yields from China and ‘lukewarm’ US data are weighing on the USD across the board.
We expect USDCAD price action to remain rather muted for the remainder of the day, barring any shocks to commodity prices or US yields. Recent ranges in the pair have probably strengthened support from 1.100-1.103, and then again from 1.105-1.1075. Given some of the aforementioned factors, we would avoid being long of USDCAD above 1.110, and expect layers of offers in the pair at 1.110-1.113, and then again in front of 1.115.
Our hunch is that part of the selling in USDCAD yesterday was driven in part by modest short CAD covering, particularly with commodity prices showing more stability following Wednesday’s losses. The fairly quick exit from new CAD shorts established between Monday and Wednesday also does suggest that FX investors are being a lot more cautious towards the short-CAD trade between 1.100 and 1.115 for now.
Read the full report: FX Daily
Scotiabank