The One Reason You Should Be Selling Canadian Dollar This Week

An overview of the week beginning 28th May and a look at why CAD could be a great short throughout the week.
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In this article, we will review this week’s most market-moving risk events. This will include US GDP, US employment and the BoC’s latest monetary policy decision.

We will also highlight a clear reason why Canadian dollar could be a great selling opportunity this week.

Last week, the market’s focus continued to revolve around concerns over Europe.

Concerns over Italy and its new government’s plans continue to weigh on EUR sentiment. However, reports of a is now adding further fuel to the fire.

According to Reuters, the latest EU political risks have not weakened the ECB’s resolve to end QE. However, they are more likely to signal caution over interest rate hikes.

Ongoing political concerns in Europe have continued to pressure EUR. Resulting in EURUSD falling to fresh 2018 lows.

ING expect EURUSD to remain under modest downside pressure this week. Although they believe that after a stream of bad EU news, clouds seem to be clearing.

This week, EU political developments will no doubt remain in focus. Although from a data perspective, US and Canada will be key for trading opportunities.

The most important things to note this week are as follows:

  • Falling oil prices could create a good selling opportunity on the Canadian Dollar. Positive Canadian data is unlikely to break the bearish bias. Weak data could exacerbate it.
  • US Preliminary GDP for Q1. This will be key for rate hike expectations and assessing the strength of the US economy.
  • BoC Monetary Policy Decision. This will be highly influential towards CAD’s fundamental outlook.
  • US Employment. This is a highly volatile event but can provide some great trading opportunities.

Tuesday, May 29

NZD – RBNZ Financial Stability Report

Twice per year, the RBNZ release their Financial Stability Report. This allows the market to gain a greater insight into the RBNZ’s view of the financial system in New Zealand.

The report will include the RBNZ’s current perspective of inflation and growth. This will allow the market to re-assess its fundamental outlook for NZD.

Any changes in the RBNZ’s current economic view could provide a trading opportunity.

A more hawkish/optimistic assessment of the economy would likely strengthen NZD. While a more dovish/cautious view would likely weaken NZD.

According to the RBNZ‘s latest monetary policy announcement, a future cut is as likely as a hike. Therefore, their Financial Stability Report could be pivotal to market expectations.

Wednesday, May 30

USD – ADP Non-Farm Employment

Automatic Data Processing, Inc., release their estimate for NFP two days before the official release. This often provides an indication for how the actual NFP release is likely to perform.

A positive report will often support USD as it suggests the bias to NFP on Friday is likely to the upside. Conversely, a miss will often see USD weaken into the official release.

Nevertheless, the market’s reaction to ADP Non-Farm Employment tends to be somewhat inconsistent. Therefore, we would advise caution and not trading a deviation in the data blindly.

The best way to trade this event is by confirming its importance with post-event research. Once it’s clear that any deviation is market moving, you can then plan your entry.

USD – Preliminary GDP

Gross Domestic Product is the primary measurement of economic growth and activity. So although not part of their mandate, it still plays an influential role in monetary policy.

Preliminary GDP is the US’s second estimate for Q1. This means it can lead to a revision from the Advanced estimate depending on the additional data.

Market consensus is for the Preliminary estimate to remain unrevised at 2.3%.

A significant upwards revision would likely support rate hike expectations. Strengthening USD and arguments for the Fed to hike four times this year.

A downward revision to GDP could weigh on USD and expectations for four hikes this year. Of course, if GDP remains unrevised, there will likely be no significant reaction.

CAD – BoC Monetary Policy Decision

For their May decision, the BoC is widely expected to leave rates unchanged. Although there are outside calls for a hike including from Standard Chartered.

CPI slowing to 2.2% Y/Y in April and no conclusion to NAFTA negotiations, a rate change seems unlikely at this point. Although the BoC do tend to catch markets off guard, according to ING.

If the BoC do catch markets off guard with a surprise hike, CAD will strengthen across the board. This will provide an excellent trading opportunity to buy CAD at market.

Of course, if they do remain on hold, we would expect no significant reaction to the policy decision. Instead, the focus will shift to the accompanying statement.

In the statement, the market will be looking as to how likely a July rate hike is. Current market pricing suggests the probability of a July hike stands at 60-65%.

A hawkish tone suggesting a July hike seems likely will be CAD positive. While a dovish tone which reduces expectations for a July hike will be CAD negative.

An unexpectedly hawkish release or statement is probably the only thing that could significantly break the bearish trend on CAD this week.

Thursday, May 21

CAD – Canadian GDP

Canadian GDP will be another key event which helps shape CAD’s fundamental outlook. It will consist of both the monthly release for March and quarterly release for Q1.

Of the two releases, the more important will be GDP for Q1. If this deviates substantially, it could significantly influence rate hike expectations.

A strong report will support CAD, potentially increasing expectations for a July hike. On the other hand, a disappointing report could weigh on CAD and rate hike expectations for July.

It will be worth considering GDP for March, especially if it too sees a significant deviation. The highest conviction opportunity will be if both deviate in the same direction.

If oil prices remain pressured through the week then even a positive GDP could only produce a temporary rally on CAD.

Friday, June 1

USD – US Employment Report

The US employment report consists of three major components. These are Non-Farm Employment Change (NFP), Average Hourly Earnings and the Unemployment Rate.

All three components have the potential to influence rate hike expectations. Therefore, this event is often highly volatile.

The market’s initial reaction typically results from NFP.  With USD strengthening on a positive deviation and weakening on a negative deviation.

Although the initial reaction will likely be from NFP, the more sustainable reaction will result from the Average Earnings numbers.

This is because the Fed’s primary concern is currently inflation. As Average Hourly Earnings has an underlying influence on inflation it’s key to future rate hikes.

A significant increase in Average Earnings could increase rate hike expectations. This would likely support USD and increase expectations for four hikes this year.

Finally, the market will turn its attention to the Unemployment Rate.

Another surprise drop to multi-year lows will be USD positive while a surprise increase will be USD negative.

Given the number of market-moving data points released at once, we would advise caution. This event tends to see prices whipsaw which catches many traders out.

The solution is only to enter once you’ve analysed all three components and are sure of the overall bias.

Summary

It should be clear that the best opportunities this week are likely to come from US and Canadian data.

We expect CAD to be a great shorting opportunity throughout the week because of the drop in oil prices.

Last week saw oil prices plunge from record yearly highs following reports from Russia and Saudi Arabia.

According to CNBC, a group of two dozen producer nations could soon begin easing production limits.

The decision followed declining output from Venezuela and renewed US sanctions on Iran.

As such, if oil prices continue to fall, any positive CAD data will struggle to maintain its momentum. On the other hand, negative CAD data will only exacerbate the current bearish bias.

This outlook is dependent on oil prices continuing to fall. This means it’s crucial to monitor both Canadian data and oil prices throughout the week.

Besides from CAD, with several key US data releases, USD could also provide some great trades. Especially if all data points deviate in the same direction.

For example, if ADP Non-Farm Employment and US GDP disappoint, a USD short into NFP could be a good trade.

Conversely, if both beat expectations, you could hold a USD long into NFP.

The goal of this article is to help you improve your understanding and ability to trade risk events.

If you would like to learn more about risk event trading, please type your question in the comments below.

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