All eyes around the world are stuck on the current conflict between Ukraine and Russia. The impacts on the markets have been turbulent with volatility increasing. The general consensus has seen investors take a risk off sentiment, which simply means they pull their money out of riskier assets and put them into safer ones.
Europe has seen various indices fall by over 1-2% over this period of uncertainty while" government bonds increased significantly". - Financial times
Overall, traders need to watch out for such events as it any analysis conducted may be ignored with simple monetary/ fiscal snap decisions. The world is uncertain right now so being cautious moving forward would be wise...
Logikfx Technology Summary
Although there's uncertainty in the markets there are potential opportunities. However, that being said we must always consider that currently investors are RISK OFF meaning they prefer not to hold riskier assets due to the potential downside of the on-going conflict.
When we compare the Euro against the CAD this can be seen as Euro being a slightly safer asset over CAD due to Canada's reliance on Oil exports.
Overall, there's been a potential sign that bulls could be joining the market at some point with the fundamental indicators pointing upwards.
Macro Currency Strength Meter
The macro currency strength meter is showing promising signs of an upwards movement in the Euro. We can see the fundamental strength increase from -30 now reaching about +5 on the currency strength meter. CAD on the other hand fell over the past 2 months, it has slightly risen over the past couple weeks but it will be interesting to see if this holds true.
Currently this creates a bias to be bullish EUR/CAD.
Overall throughout this analysis we need to highlight the importance of the over arching risk the Ukraine vs Russia war will have on the markets. Investor sentiment and liquidity can change at any moment, especially if further sanctions are made or something more severe like the start of an extended war past Ukraine.
Gross Domestic Product Differentials
The GDP differentials are a long term economic indicator suggesting currently that Europe is slowing down but at a slower rate than Canada once was. This has caused the differential to slightly increase as the gap tightens.
Overall, if this trend was to continue then Europe may see stronger economic growth than Canada in the coming years... agreeing with the fundamental bias from the currency strength meter.
Trade Analysis (Imports/Exports)
WTI Crude oil is a major export across the world, but more importantly it's a major export for the commodity currency CAD. This is because Canada sells a lot of oil across the world and is quite reliant on these exports for their trade.
What we've found is a negative correlation between WTI And EURCAD as oil prices rise the price of EURCAD falls...
In this case our trade analysis is actually disagreeing with the fundamental bias we had earlier.
An interesting contradiction and one to keep an eye on as ideally we want the trade analysis to agree with our fundamental bias.
Volkswagen is a company we've chosen to analyse as it's one of Germany's largest car exports, supplying vehicles to every inch of the world. The overall impact of the pandemic seemed to have recovered since the pandemic however the heightened risk of the war has caused VW prices to plunge.
In this case there's a positive relationship between EURCAD and VW but in this case VW prices are going down and EURCAD prices are following...
This means majority of our trade analysis is going against our original idea, a sign to wait and assess the trade especially with the high risk environment.
A final confirmation to the trade analysis is Gold, we've taken the prices of Gold against EURCAD and found a negative correlation between the two assets. Gold prices have risen significantly whereas EURCAD has dipped during times of uncertainty.
If this trend continues we may see EURCAD dip further before any potential bullish movements.
Ideally, as a trader we should keep an eye on the trade analysis, identify any bullish signs here before considering EURCAD.
Interest Rate Differentials
The interest rate differentials are overall stale, it's currently negative suggesting a downwards movement. However, central banks have yet to move interest rates in years, however with inflation concerns this may change in the coming months.
Hedge Fund Positions
What we're seeing at the sentiment level is the open interest of CAD positions decrease, this means hedge funds are adding more sell positions against the CAD. On the flip side we're seeing the open interest for EUR increase slightly but in a negative region.
This crossover has created an overall positive differential which is a bullish sentiment sign.
However, to be confident ideally we'd like the EUR line to be above 0 which would signal that hedge funds have committed to buying the EUR over selling it.
Overall, the price trends are not looking very bullish at all....
Bears have been in control this past year with prices now reaching a yearly low.
The question is here whether the new low prices will continue to downwards trend or will the market support levels hold and buyers come into play.
One to keep an eye on and see if those buying signals occur.