As we approach the keenly anticipated December FOMC rate decision, with CME group pricing an 83% probability of lift off, USDCAD appears to be the best vehicle through which to express USD bullishness. Aside the from the Dollar strength which, although fairly extended in anticipation of a rate rise, is expected to increase atleast in immediate response to a lift off, a long USDCAD trade also takes advantage of the further deterioration in the Canadian economic outlook driven by the continued decline in Oil prices.
The Bank of Canada were forced to cut rates twice this year as lower Oil prices weighed upon the inflation outlook. Since the BOC’s last rate cut in July, Crude Oil has fallen almost another $20 and the outlook is for further weakness as OPEC were rcently unable to agree terms to address the oversupply in Oil markets. despite the BOC’s recent optimism in remaining on hold, expectations of a further rate cut are building. Remember, before each of the BOC’s rate cuts this year the central Bank were resolutely optimistic about the resilience of the Canadian economy. COT positioning data shows that CAD shorts are still well of their recent 2013 lows with plenty of room for increase.
- The break above the recent key 1.34 resistance level paves the way for a test of the 1.40 2004 high.
- Look to set longs on a retest of the 1.34 break out level targeting 1.40 in line with Bullish Order Flow sentiment supported by VWAP