Logikfx Macro Currency Strength Meter
Welcome back to the August analysis and we’ve brought to you today some analysis on CADCHF just because of some interest signs on the currency strength meter. You can see throughout July the Canadian dollar has been hovering around a strong score whereas the CHF has been in and out of the negative weak region. This is a potential sign that CADCHF could be an upcoming long as this week data shows CHF scores on the strength meter drop to 0 and CAD scores increase to 15. You can see the crossover happen between 08/08/2020 and 15/08/2020. This gives us the get go on what to focus on and if the idea is a potential trade or not.
Gross Domestic Product Relative Analysis
After we identified the early fundamental signs on the strength meter we went towards comparing CAD and CHF against each other. We used the GDP differentials to get a gauge of what’s happening right now and what may happen in the future. Currently the differentials have been falling since about the 2000s with CADCHF following suit. The predictions for 2021 however are looking quite promising with a positive differential being predicted by the IMF. What this potential could mean in the future is that the CADCHF exchange rate may appreciate coming up to 2021.
Crude Oil WTI Analysis vs CADCHF
Most of you will understand why Oil is included in the analysis with Canada being a major exporter of crude oil. Therefore it just makes sense to include the Western Texas Intermediate one of the world’s largest gauges on oil prices. Here we concluded that there was a -27% correlation between WTI and CADCHF which ins interesting so we must score it inversely when considering it in our system. Oil prices have started to recover gaining 6% since last month which means that we have a potentially bearish outlook on CADCHF at the same time.
Since we want to be longing CADCHF based on the currency strength meter we’d like to wait for Oil prices to fall which would give us greater confidence as right now the trade idea is not ready. If markets continue to get hit by COVID19 uncertainty then oil prices may tank again.
Gold Correlation Analysis vs CADCHF
Gold the safe haven asset of the world is always a commodity we consider when analysing the CHF. It’s also important to consider due to the CAD being a risk currency so when things go bad in the world investors normally flock to gold and sell off risk assets. There’s no surprise then that there’s a negative correlation of -64% with gold and CADCHF!
Since gold has fallen by about 1% since last month we’d like this trend to continue for our CADCHF long idea. It’s not a great confirmation but it’s in our favour, ideally if Gold is met with resistance after breaking new highs and retraces/ down trends then this is a really positive signal on our CADCHF idea.
ROG Equity Analysis vs CADCHF
Finally in our commodity/ equity analysis we’ve actually included Roche Holding AG which is a swiss company focusing on pharmaceutical goods. The main reason we included this was because medical imports were a huge factor between Canada and Switzerland and with ROG being a major medicinal company it makes sense to include it within the analysis.
Overall, we’ve seen that in the past 30 years there’s been a 67% negative correlation with ROG and CADCHF! Even more negative than the correlation with gold. This means as ROG goes down, CADCHF goes up and vice versa. Recent data shows that ROG has increased in value by about 2% recently so we want to be waiting on their performance to drop to be extra certain on our trade idea.
Interest Rate Differentials Analysis
Moving onto interest rates Switzerland is always an interesting topic due to their negative interest rate environment. Meaning generally compared to other economies their bonds and assets aren’t as attractive because of the negative rates. Currently interest rate differentials are in favour of CADCHF which is good for our long idea and adds a few extra points in our system. However, we want the differentials to be rising, so if in the next interest rate decision CHF chooses to further lower their rates or CAD increases theirs it’ll be super beneficial for the idea so keep an eye out.
S&P/TSX Stock Market Analysis
Finally we’re going to be comparing the S&P/TSX composite index against CADCHF and determine whether the returns are showing inflationary or deflationary pressures on investors. The S&P/TSX represents about 70% of Canadas major stock market and covers about 250 companies.
Very recently new highs have been made by about 1% which is a great potential sign for our long idea on CADCHF as this means that potentially investors will be seeking to hedge their wealth by longing the Canadian dollar. As long as this continues to grow we’ll be on a great start for our CADCHF idea.
Commitment of Traders Report Analysis (COT REPORT)
After scanning over the sentiment on both the CAD and the CHF we’ve realised that on a market basis the market is not ready and we really need to wait on the positioning of hedge funds to agree on the idea. This is actually good because we’re still waiting fundamentally on some signs to long the exchange rate.
Overall the trade idea is not ready, we need to be keeping it on our watch list and keeping an eye on the economic factors I’ve outlined. Once these signs are ready we can start deciding with a traffic light system whether we want to scrap the trade or go ahead with it.
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