Monday, October 1, 2018

Loonie: unchained and unleashed


The Canadian Dollar is setting up for a strong ending to the year amid the vanishing of the predominant factor behind the currency’s year-to-date weakness. Since the beginning of the year, the NAFTA negotiations have been the greatest obstacle for the Loonie to rally due to the continuous failure to reach an agreement between Canada and the U.S and the worries that the U.S will force a trade war on Canada. However, the negotiators surprised everyone with a deal agreed upon during Sunday’s meeting. With a new name in place, the United States-Mexico-Canada Agreement, both the U.S and Canada came out as winners in this deal as the US will gain better access to Canada's dairy market and Canada will benefit from the U.S not imposing future auto tariffs on the country.

Now that the trade negotiations are behind us, the Canadian Dollar can start benefiting from the series of positive fundamental drivers it has been seeing lately. Last Thursday, BOC Governor Poloz gave a hawkish speech informing the market about his panel’s willingness to carry on gradually hiking rates given that the Canadian economy continues to perform well and the core inflation remains around the 2% target. With the removal of the major risk of a potential trade war with the U.S, the BOC has all the reasons to start sounding hawkish and continue to hike rates in parallel with the U.S Federal Reserve. Add to that the most recent Canadian GDP figures which printed better than expected and came in a percentage point above the BOC’s annual estimate of 1.5%. Finally, the Loonie can also start enjoying the rise in crude oil prices given that the currency’s performance is strongly tied to the widely recognized commodity.

Things are looking good for the Loonie from a technical standpoint as well. The USD/CAD pair has recently broken below the support line of the bearish descending triangle pattern confirming the pattern's interpretation as a hint for a drop in prices. Moreover, the break comes three weeks after the pair initially moved back up towards the key 0.618 Fibonacci level - from the July highs to September's lows. Adding to the bearish momentum, the pair also broke below the 200-period moving average signaling a broad shift in the long-term trend. All these factors are paving the way for a projected year-end price of 1.2550 for USD/CAD. This level is situated around a major price action support area and represents a 1.618 Fibonacci extension of the previous gains.