FxWirePro: Quick glance at key snippets of Canadian fundamentals, loony looks momentarily superior, uphold directional hedge

The CAD is entering Thursday’s NA session just below a fresh 2019 high reached in early Asian trade. There are no domestic releases scheduled ahead of Friday’s employment data, and Thursday’s U.S. holiday has severely curtailed trading activity.

Fundamentals remain supportive for the CAD and the currency continues to trade well below our estimated equilibrium (1.2592) based on interest rate differentials and oil prices. Correlation studies offer no clear CAD driver at the moment, however, the outlook for relative central bank policy is likely to dominate as we approach next Wednesday’s Bank of Canada meeting (widely expected hold).

Global trade headwinds are suddenly gusting stronger and pose distinctly-negative risks to CAD. Despite the seminal shift in monetary policy, CA rate spreads have actually compressed somewhat since the BoC meeting, following concerns on US inflation and global trade. 

Furthermore, Canada remains distinct in that it not only faces adverse consequences from a US-China fallout but is exposed to trade risk on the North American front as well. We’ve long been documenting the risks surrounding USMCA / NAFTA 2.0 ratification, with a particular emphasis on bipartisan divide which risks triggering a NAFTA 1.0 pull-out.

Canada’s trade balance shifted to CAD 0.76 billion surplus in May 2019 from an upwardly revised CAD 1.08 billion in the previous month and compared with market expectations of a CAD 1.5 billion gaps. It was the second trade surplus since December 2016, as exports rose 4.6 percent to a record high driven by motor vehicles and imports increased at a slower 1 percent mainly due to aircraft. Exports to the US went up 3.7 percent to an all-time high of CAD 39.3 billion.

Trade tips: On hedging grounds, at spot reference: 1.3065 levels, contemplating above technical factors, we advocate initiating shorts in USDCAD futures contracts of near month tenors (i.e. July’19 delivery) as further downside risks are foreseen and simultaneously, longs in futures of August’19 delivery not disregarding the major uptrend amid the prevailing global geopolitical risks. Thereby, one can directionally position in their FX exposures. The directional implementation of the same trading theme by further allow for a correlation-induced discount in the options trading also if you choose strikes appropriately. Courtesy: Scotia & JPM

Currency Strength Index: FxWirePro's hourly CAD spot index is flashing at -81 (which is highly bearish), while hourly USD spot index was at -25 (mildly bearish) while articulating at 08:34 GMT. 

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