Outlook and forecast: USD/CAD
The major news event of the week is US CPI inflation data on Friday which we expect to come in above Forecast and push the USD higher and the best risk to reward trade set up in the majors is USD/CAD.
US Inflation Data A Surprise to the Upside?
We expect inflation to come in above forecast and you can read Our Summary From Last Week By Clicking Here We agree with Nordea’s view that core CPI could come in at +4% (3.4 at forecast) and headline inflation +6% (forecast at +4%) The Fed has said they think inflation is transitory but if we do get strong above forecast numbers they will have to act.
The market is simply not expecting any tapering of Fed stimulus and the market is heavily short the USD as we can see on the chart below. While we think the USD will have a broad based rally which is the best pair to trade?
Most Overbought Major Against the USD – The Canadian Dollar
The CAD is the most overbought major against the USD We think the risk to reward on longs is attractive. Our view of the fundamentals, sentiment, and technicals below.
COT Net Traders Positions
We have seen large speculators (Hedge Funds) build up their biggest long CAD position in over a year while commercial hedgers have sold the CAD heavily:
NOTE: When using the COT we are only looking for big divergences or ones that have built up quickly. The report is useful due to the fact that the commercials are hedgers and own the cash (so they lose no money) they will ONLY move their hedges when they feel prices have moved too far from fair value. They have a deep knowledge of the fundamentals and are not influenced by greed or fear, unlike the large speculators who tend to get caught heavily long at major market tops and short at major market bottoms.
When using the COT it’s not a timing tool because the commercials own the cash so can’t lose any money and prices can overshoot in the short term against them and their hedged – we as speculators are not so we need to time with our technicals and use good money management.
In terms of the USD, we have tested a major support level of 1.200 which we can place stops behind and the upside against risk taken is very attractive in our view.
USD/CAD Technical Analysis:
Monthly Daily Charts key Levels of Support and Resistance
The USD is holding monthly support at 1.200 and on the daily chart, we can see a double bottom which occurred on low volumes above the 1.200 level which we think points to exhaustion of selling. We have moved up to the 20 day MA and we are trading in low volatility which we expect to end with an upside breakout and strong follow through buying as the large number of speculators who are short are taken out on stop.
Research provided by LearnCurrencyTradingOnline.com
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