USDCAD Analysis (July, 2021) USD Inflation Trade
The US economy is creating a turbulent market. The Federal reserve which is the United States Central Bank has hinted on potential hawkish interest rate hikes. Forex traders should have alarm bells ringing.
Interest rate hikes and a hawkish outlook potentially means that the United States economy is starting to overheat. Inflation rates hit as high as 5% in May show that prices are growing quickly and the central authority is starting to react.[1]
This has created interesting trading opportunities for traders around the world... one that we have a keen eye on is USD/CAD.
Logikfx Fundamental Summary
The Logikfx technology summary is the tool used to create a quick snapshot of the major fundamental indicators in the markets. This summary helps trader gauge whether you should have a bearish or bullish view of the markets helping filter out market noise.
What we've seen is that USD has started to show overall a bearish stance in the markets.
Macro Currency Strength Meter
The macro currency strength meter is our go to tool for creating our market outlook, it gathers and calculates strength from hundreds of economic reports.
What we can see on the currency strength meter is that in the past three weeks specifically there's been a breakthrough. USD currency strength went from a strong positive strength to now down trending into a negative weak strength. On the flip side, CAD has gone from a negative strength to a strong strength this week.
Overall, this has created a bearish outlook on USD/CAD.
GDP Differential Indicator
The GDP differential indicator is one of our tools to show current and future output of economies. Interestingly, the United States is expected this year to outpace Canada in growth. However, in 2022 there's an expected dip in output falling by an expected ~2%.
This long-term sign potentially means that USDCAD might see a longer term down trend all the way to 2022.
Trade Analysis (Imports/Exports)
The United States is one of Canada's largest trading partners in the world. United States and Canada are large oil exporters in the world which is why we've chosen to include WTI and Exxon Mobil in the analysis.
What we can see over the past ten years with Exxon Mobil against USD/CAD is that a strong negative correlation has maintained.
The strong drop in Exxon prices during 2020 saw USDCAD initial spike upwards. However, now that Exxon prices are recovering we can see that USDCAD is starting a downwards trend.
The most recent data has been bullish on Exxon which creates a bearish outlook on USDCAD.
West Texas Intermediate (WTI) is a barometer of crude oil prices, a major commodity that both Canada and United States export and import. Similar to Exxon, WTI prices have had a huge bullish run over the past 6 months... USDCAD saw prices drop in the exact same period.
Interest Rate Differential
The interest rate differentials overall are neutral.
The United States and Canada have maintained interest rates the past year with no changes, however, if US interest rates increase we may see a bullish spike on USD.
Stock Market Analysis - S&P500(CAD)
One of the only indicators which is currently looking bearish is the stock market analysis. The S&P500 (CAD) has grown significantly since March over 20%. This growth in a global pandemic since the dip is a potentially dangerous inflationary sign so it's a weaker bullish conviction.
The central authority will tend to react to market conditions by raising interest rates or lowering money supply which isn't being done as the central bank continues quantitative easing.
COT Report Analysis
The hedge fund open interest on the COT indicator shows that the markets are in a bearish sentiment. The only worrying signs are that USD hedge fund sentiment is increasing on the long side but is still overall bearish.
This is a great indicator for the short position as it shows that the idea is with the market and not against it.
Price action
The price action on the USDCAD charts are showing that earlier last year markets hit a huge bearish level from 2016. USDCAD has since been on a downtrend the past year. The inflationary pressure from quantitative easing and low interest rates can be seen in this down trend as the central authority tries to stimulate the economy during the pandemic.
What we can expect is this down trend to continue with potential pullbacks from here.
Article sources:
Rizvi, S., Rizvi, S. and Amin, M., 2021. Fed’s Hawkish Shift and the US Economic Outlook. [online] Modern Diplomacy. Available at: <https://moderndiplomacy.eu/2021/06/25/feds-hawkish-shift-and-the-us-economic-outlook/> [Accessed 10 July 2021].
