The USD/CAD continues to find itself in a well defined wide range between 1.0600 and 1.1100 despite setting a new yearly low of 1.0589. There the pair ran into Fibo support from the 61.8% extension of the 0.9061-1.3016 advance. Risk sentiment and crude prices which go hand in hand continue to have the greatest influence on price action.
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[B][U]USD/CAD[/U][/B]
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The USD/CAD continues to find itself in a well defined wide range between 1.0600 and 1.1100 despite setting a new yearly low of 1.0589. There the pair ran into Fibo support from the 61.8% extension of the 0.9061-1.3016 advance. Risk sentiment and crude prices which go hand in hand continue to have the greatest influence on price action. Oil is currently explaining 63% of bullish “loonie” sentiment with equity markets holding a higher correlation at 71%. Additionally, we are also seeing Canadian interest rate expectations start to have a moderate influence on price action. However, the relationship isn’t seeing its traditional relationship as lower expectations have weighed on the pair. Pledges from global policy makers to keep rates low and continue stimulus efforts until a recovery has taken root has helped spur risk appetite which has been supportive for the Canadian Dollar.
[B][U]CAD Interest Rate Expectations[/U][/B]
BoC interest rate expectations have fallen sharply since the beginning of August where we saw a larger than expected drop in employment give teeth to the central banks pledge to keep rates on hold until mid-2010. Indeed, the policy makers left their benchmark rate at 0.25% last week and reaffirmed its commitment to maintaining it at current levels until next year. Furthermore, Governor Carney warned that the strength of the local currency could hinder the prospects of a recovery which raised concerns that they would consider intervention. This may limit bullish “loonie” sentiment going forward but surging oil and equities continue to override any possible actions from the MPC.
[B][U]FOMC Interest Rate Expectations[/U][/B]
Like the BoC the Fed has forecasted that rates will remain at low levels for a prolonged period of time. Fed funds futures are currently pricing in a 4.6% chance of a rate hike by the end of the year. The dollar has continued to trade on risk sentiment without the threat of tightening from the FOMC. This has added to the influence that equity markets have on the pair which should make it the primary focus for traders. Markets are expecting interest rates to remain unchanged at next week’s policy meeting, but the subsequent statements could alter the outlook for future decisions.
[B][U]Crude Prices[/U][/B]
Oil prices have consolidated over the past two months similar to the USD/CAD as questions remain over the scope of a global recovery. Looking at the daily chart it appears that a wedge is forming which typically signals a potential breakout. Traders should look for a rise above the 8/25 high of $75.00 bbl as a bullish sign for the Canadian dollar with a drop below $65.00 bbl signaling bearish momentum. OPEC recently left their world oil demand forecast unchanged but saw signs that demand could begin to rise in 2010 which may give greater credibility to an upside move.
[I]To discuss this report contact John Rivera, Currency Analyst: <[email protected]>[/I][B][/B]