Impetus Needed For Next Move In CAD: April 24, 2012

The Canadian dollar has had a better time of it recently compared to the Australian and New Zealand dollar – its commodity currency counterparts. The reason being that the Canadian economy has played off the strength of the US economy in the 1Q as well as higher well prices. Recently, the CAD has seen some strong fundamentals in the form of better-than-expected employment data for March and a Bank of Canada statement that showed a central bank which improved its outlook for the economy and sees inflation perkier than expected.

Countering those positive fundamentals, we do however see that the there is a slowing in the US macro data, and Friday’s Canada inflation release softened some of the fundamental bias as both core and headline CPI in annual terms came in below 2%. The CAD will certainly remain driven by sentiment flows and risk appetite/risk aversion but its important to know which way the fundamentals swing the next few weeks, and therefore we are looking at the Canadian data-stream for the next catalyst to sway us one way or another.

Do we focus on the BOC statement which was bullish for the CAD or do we look at inflation data which would argue for a neutral to bearish outlook on the CAD? In the Tuesday New York session we get the latest reading on retail sales for Canada for the February period. This could be used as a clue as to where the the Canadian dollar heads next.

The USD/CAD pair has traded mainly within a range over the last two months and doesn’t seem ready for a breakout. Therefore, we could continue to play support add resistance within ranging trading conditions, but if we are looking at more trending markets we may want to focus on the AUD/CAD as well as the EUR/CAD. Here I want to focus on the EUR/CAD which could be an interesting pair considering the euro has come under renewed pressure as we begin this week’s trading.

While I don’t hold out too much hope that the Australian and New Zealand dollars can gain on the euro as flight from those currencies in regards to carry trade actually bolster the euro, when it comes to the EUR/CAD, the technical set up seems more prone for a downside test of our recent lows, if not a break of those lows. The pair continues to trade below its 200 daily moving average and has held below the 55 daily EMA throughout April. If concerns around Europe begin to pick-up and we see that translated into a weaker euro, the Canadian dollar could be one of the currencies poised to gain if it can show that it’s fundamental outlook is improving. A strong retail sales report would go some way towards that and could see the pair target the 1.2930 lows from last week as an initial target the downside.

Beyond that we would need further weakness for the euro to provide us a chance to test the 1.2892 low we saw in the middle of March. A break there could open up further downside risks but that would require further factors to move in favor of the Canadian dollar and against the euro so we won’t get to them until we compete our initial anticipated moves.