Risk Sentiment Leads to Bullish USDCAD

USD/CAD Fundamental Analysis

In the face of flagging global economic growth highlighted by the recent World Economic Outlook report by the International Monetary Fund, the US dollar is deemed to sustain its hike over the Canadian currency on risk aversion. As the third quarter results season begins, global equities are on a decline with investors being cautious with their investments.

Anxiety in the markets continues to spur the demand for safety assets such as the Greenback, as traders weigh whether Spain will ask for a bailout. Spanish Prime Minister Mariano Rajoy pushed back expectations of a bailout last week, telling reporters that there was no imminent request for assistance. His deputy, Soraya Saenz de Santamaria, said the government needs to ensure a request for help from the European Stability Mechanism would be granted before it can call for aid. A bid to the ESM is needed to trigger support from the European Central Bank.

In Greece, German Chancellor Angela Merkel maintained pressure on Athens to meet its austerity pledges. Though she continued to proclaim her desire to keep the nation in the Euro, she was met by more than 25,000 protesters outside Parliament to air their objection towards the German-led budget cuts that have deepened a recession heading into its sixth year.

Moreover, the IMF has singled out the Euro Zone’s debt crisis as a key threat to global growth. In a report released on Wednesday, the IMF said that inaction in the Euro Zone exposed the region to “capital flight, breakup fears and economic decline.” The Fund will hold its semi-annual meeting in Tokyo later this week.

Meanwhile, crude prices in New York declined to $91.98 a barrel after climbing to the highest close in a week yesterday on increased tensions in the Middle East. Brent oil slipped 0.4 percent to $114.06 a barrel. The spread between the two contracts reached $22.49 on Oct. 8, the widest since October 2011. The price depreciation of crude oil, being Canada’s primary export, bears down on the Loonie.

Taking into consideration the risk sentiment of the markets today, as well as the decline in crude prices, traders are likely to shun the Loonie for the Greenback. As such, a buy position is advised for the USD/CAD. Technical price corrections are still probable though.

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Why should risk aversion take place in the markets? Mabe Spain will ask for a bailout and/or Moody’s that are expected to publish their review on Spain in any time from now until the end of October will downgrade their rating? China is also considering further easing measures aside the huge operation that took place on Monday (if i remember correctly). This could avert the risk aversion mode and may result in big declines in USD/CAD. What’s your view on China and Moody’s?