Updated: Mar 28, 2021
Throughout the news you'll be hearing about local lockdowns, Christmas being cancelled and new strains of the virus which could impact the economy. It wasn't long about 2 months ago that the Eurozone had a bounce back in economic activity growing at 12.7%.
Now heading into the new year we have banks and central authorities scrambling to put together further stimulus to help support individual economies. One of them being the ECB which has put a considerable amount of money into the economy.
Our trade idea for EURCAD will discuss the potential impact moving forwards in this risky environment and what it potentially means for the long term.
EURCAD High Level Summary
Overall on a high level we're looking at long bias for EURCAD, just about anyway. 4/7 the parameters we're keeping an eye on are signally a long position, meaning potentially in the future we could be looking to get into a bullish position. There are a few contradictory indicators in the decision so we'll need to account for this too which is why currently we're amber in the traffic light system meaning we're not totally confident in the current data to long but it's close and we need to monitor some indicators before trading!
Let's take a deeper look into a bullish outlook on EURCAD starting off with our forex currency strength meter.
Currency Strength Meter - Logikfx
The Logikfx currency strength meter is one of the strongest drivers in our consensus for looking at longing EURCAR. Our regular readers and traders will know that we're very keen on spotting crossovers which trend in the strength meter. One of the happening last week 12/12/2020 and continuing to diverge this week.
This is a great macro economic signal to be longing EURCAD because on a domestic level both Europe is strengthening but Canada is weakening.
EURCAD vs Volkswagen Import/Export Analysis
One of the bullish import/export indicators was Volkswagen the car manufacturing company. VW is one of the longest lasting and well established car manufacturers in the EU, parent company of many well known brands which are exported to all parts of the world!
We can see from the analysis over the past 10 years worth of data we've found a 22% positive correlation between VW and EURCAD. This means around 1/5 times as VW goes up so does EURCAD because of the impact the exports can have on the exchange rates. VW slipped during covid but in the last couple months we've seen a huge surge in price confirming our currency strength meter outlook towards the upside.
EURCAD vs Gold
Overall we've included to include Gold as part of the analysis for EURCAD. Although none of the countries above are a major gold exporter, gold is one of the safe haven commodities in the world. In the current market climate with COVID spreading around the world, tracking the price of gold against EURCAD will be an interesting relationship. Especially considering CAD is considered a commodity floating currency and more volatile in nature.
However, after assessing the data we didn't find any conclusive measures. The overall relationship in the past 10 years was just negative at -9% which is quite negligible and the growth of gold has been really slow this month at 0.5%. Overall, the commodity is in a neutral point and as of this moment neither agrees or disagrees with the currency strength meter.
EURCAD vs Crude Oil WTI
Oil and petroleum products are one of Canada's main exports as a country rich in oil there's no reason why it wouldn't be. Oil over the past 10 year hasn't been great. Prices at the start of 2010 were over $100 a barrel, how about now? Under 50.
Prices of oil have slashed by 50%, this has a huge impact on the value of the Canadian Dollar (CAD). What we've concluded in the past 10 years is that there's been a negative correlation of 60% meaning generally EURCAD moves in the opposite way to oil.
European countries are also a huge holiday destination, with holidays being cancelled and no plane travel allowed we have limited demand on specific petroleum products which will impact the long term value of oil. Even today with the news that the UK was to be in tier 4 in certain locations where no travel is allowed an airports must shut created a dip in oil prices of over 4%. Overall, oil prices aren't looking great which is good for our EURCAD idea but from last month it has gained some speed, we'll have to keep track of WTI in the coming weeks if it dips, we'll have the green light on our import/ export analysis. If not, it will stay red/amber.
Interest Rate Differentials EURCAD Analysis
The interest rates are always a major driver of currency value so there's no surprise what we're seeing here. The blue line is the interest rate differentials and the orange line is the price of EURCAD. When the interest rate differentials started to drop during 2017 we saw a lag in EURCAD but the EURCAD exchange rates dropped between 2018 and 2020. It wasn't until 2020 where interest rate differentials increase that EURCAD went up in value!
What we're seeing is a great confirmation from the interest rate side as interest rate differentials have been increasing we're seeing the value of the EUR increase as CAD value drops when their interest rates dropped during COVID. That's why it's green on our high level summary!
Domestic Stock Market Analysis
Overall, the stock market is a great barometer or indicator of wealth in an economy. It tells us whether the people living in that country are getting poorer or richer! Why is that? Well when people invest in a pension for example they invest partially in the stock markets so a lot of peoples wealth is invested in the stock market itself. Overall if the Euro STOXX 600 fell priced in CAD we'd see a short bias on EURCAD especially since they're a positive correlation.
That's why currently the stock market analysis is not agreeing with the currency strength meter. However, we have been seeing a rise recently in EURO STOXX600(CAD) which could be an early sign for agreeing, only time will tell.
Hedge Fund Sentiment (COT Reports)
Currently the COT report sentiment is actually looking great! The net open interest (aggregate positioning) is showing that overall hedge funds are longing the EURO and shorting the CAD! What does that mean? EURCAD LONG bias on a sentiment basis, the market is agreeing with us and we won't be trading against the market.
Price Trends - EURCAD Bullish Trend
The price trends are looking great for EURCAD, we've seen a consistent uptrend the past 5 years and this is likely to continue if we're heading into another strain of the virus with vaccines potentially having a limited effect. If this does happen we'll get a spike in volatility similar to what happened in march!
Currently, on a personal view is see this as a 50/50 trade. On one hand it could go great and turn into a breakout trend. On the other hand we could be conservative and wait on fundamental data to be more confident. - Matt C. Logikfx
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