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The FX market continues to be driven by the US-Chinese trade war. Yesterday was dominated by risk-on after fears of a further escalation of the conflict eased somewhat. In this context, market participants seem to mainly rest their hopes on continued negotiations between Washington and Beijing.
Last week, we adjusted our long USDCAD stop higher on account of the range-break higher following the BoC’s abandonment of its hiking bias. The new stop could not withstand the torrid drop in US short-end rates that ensued in the wake of two poor US inflation prints leading into the FOMC, even despite Canada printing its fourth monthly contractionary GDP print in the last half year.
Yet with the FOMC pouring cold water on any market hope of an insurance cut, USDCAD has resumed its climb higher and back out of the range in which it was encapsulated since early March. And, with Canada's manufacturing PMI contracting for the first time in three years, we are still biased towards further topside on the pair as the 2Q recovery that the BoC anticipates is already off to a tepid start.
Elsewhere, positive (if misunderstood) headlines this week surrounding USMCA passage prospects appeared to cause a quick but notable knee-jerk move lower in the pair. This would affirm our belief that the market should be increasingly sensitive to news surrounding the fate of the trade pact (and should theoretically be more sensitive to negative news in particular, which we anticipate based on current political signals).
Thus, volatility surrounding USMCA looks set to feature more prominently in the coming weeks and which we feel is biased towards pushing USDCAD higher, leaving us well-positioned with our one-touch USDCAD call option.
Trade tips:
Bought USDCAD at 1.3364 on March 5th. Squared off at 1.3390 to book a profit of 0.31%.
Activated longs in a 3m USDCAD 1.40 one-touch call. Paid 16.70% as part of a calendar spread. Marked at 16.72%. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly CAD spot index is flashing at -2 (which is absolutely neutral), while hourly USD spot index was at 120 (highly bullish) while articulating at 07:56 GMT.
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
