Breaking News

USD/CAD Belongs Sub-Parity Despite A Less Hawkish BOC‏

By Danske MarketsForexJan 31, 2013 05:16AM ET
USD/CAD Belongs Sub-Parity Despite A Less Hawkish BOC‏
By Danske Markets   |  Jan 31, 2013 05:16AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
What stands out
Looking at the signals from our short-term financial models, we currently observe several misalignments between spot levels and model estimates. Most misalignments are related to the JPY sell-off and the recent EUR rally. The euro has been the best performing currency within the G10 so far this year and the common currency has especially gained support from the move higher in EONIA rates. While misalignments in most EUR crosses are currently high, we also notice that relative rates have been the main driver behind the moves higher in our short financial model estimates. Hence, if the euro money market rates continue to increase or at least stabilise, most model estimates would probably move even higher, all things being equal.

The biggest misalignment is currently seen in EUR/GBP, which trades 2.7 standard deviations above the model estimate. GBP/USD also trades with significant misalignment (currently 2.3 below estimate) and according to our short-term models there is a clear indication that the recent GBP sell-off currently looks overdone. The oversold signals from our short-term models are also evident in some technical indicators, such as the RSI index, which underlines that the risk of a temporary correction is high. However, from a fundamental perspective, there are some factors which we think justify the GBP sell-off. First of all, UK macro data has recently been weak and the risk of a new recession is high. Moreover, there is a real possibility that the new Bank of England governor, Mark Carney, might change the inflation target or even introduce a nominal GDP targeting policy. Hence, if the UK slips into recession once again, the possibility of significant monetary easing from the BoE and thus a weaker GBP is clearly present and we think that a long GBP position is a relatively risky bet at this stage.

The sell-off in the Norwegian krone also looks overdone as both EUR/NOK and NOK/SEK are currently trading with considerable misalignments relative to our short model estimates. However, from a technical point of view, neither of the currency pairs are in oversold/overbought territory, according to the RSI index and we prefer to look for more attractive levels to enter a long NOK position.

Trade idea: enter 1M USD/CAD 1.01/0.9995 risk reversal at zero cost
CAD has been under pressure since the less hawkish statement from the Bank of Canada last week and according to both our short-term model estimate and the RSI index, USD/CAD currently looks overbought. While we have to acknowledge that the increasing euro optimism among investors is weighing on some of the previously-favoured triple As such as CAD, we still look for CAD to profit from decent risk appetite in H1 and for the Canadian economy to benefit from the US recovery that we see underway. In our view, USD/CAD belongs below parity. Hence, we expect the USD/CAD upside potential to be limited from here and we suggest utilising the positive skew and entering a one-month risk reversal to position for a possible correction lower in USD/CAD. 1M USD/CAD risk reversal can be entered at zero costs by selling 1M 1.01 call option and buying 1M 0.9995 put (indicative, spot ref.: 1.0042).

To Read the Entire Report Please Click on the pdf File Below.
USD/CAD Belongs Sub-Parity Despite A Less Hawkish BOC‏

Related Articles

USD/CAD Belongs Sub-Parity Despite A Less Hawkish BOC‏

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Are you sure you want to delete this chart?
Write your thoughts here
Replace the attached chart with a new chart ?
Post also to:
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Post 1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email