Commodity Currencies are Leading the Pack into the Week Ahead
Eric Furstenberg • 5 min read
Last week the Canadian dollar fought back and recovered some of its recent losses against the US dollar. The US dollar has been very strong lately, and if you look at its performance last week, it is quite impressive that the Canadian dollar was able to gain about 55 pips against the Buck. This doesn’t seem like anything significant, but if you consider the losses of some of the other major currencies against the dollar, it is definitely something to take note of. For example, the Euro lost about 210 pips against the US dollar last week and the Japanese Yen gave back more than 130 pips. The pound lost about 215 pips, and the Swiss Franc about 115 pips.
The oil price rose moderately last week which probably contributed to the Canadian dollar’s gains. This week we have some very important event risks that could move the Canadian dollar, and perhaps market players have already started to price in some more Canadian dollar strength which could result from these events in the week ahead. We will cover all of these events, but before we go there let’s look at some technical aspects of the USD/CAD first:
USD/CAD Daily Chart
If you take a close look at this chart, you’ll notice that the pair traded above the 200-day moving average for a couple of days, but it was unable to gain traction above this very important technical indicator. On Friday the pair closed firmly below this moving average again, and also below my favorite short term moving average, the 20-day exponential moving average. This firm close below the 20-EMA conveys the idea that it would probably require a lot of buying strength from the bulls to once again gain the upper hand, over the short-term. If you keep this in mind, it looks like the path of least resistance may in fact be to the downside when we look at the week ahead. Let’s look at an hourly chart of the USD/CAD:
USD/CAD Hourly Chart
It is easy to see the bearish momentum on this short-term chart. Let’s look at the same chart with only the 20-EMA plotted on it:
USD/CAD Hourly Chart
Here the 20-EMA has turned into resistance, and the price has rejected off of it several times in the last two trading days. Notice how these retracements to the 20-EMA have offered some great opportunities to short-sell the pair. I like retracements like these because they offer high probability trade setups and can be traded using pretty tight stop losses.
On Wednesday the BOC (Bank of Canada) have their interest rate decision and monetary policy report at 14:00 GMT. On Friday at 12:30 GMT we have Canadian retail sales and CPI (consumer price index) numbers. Market players will keep an eye on all these events, but especially on the interest rate decision and the monetary policy report. This might give us some hints as to how well the Canadian economy is faring, and what to expect in terms of future interest rates. The BOC is expected to keep their interest rate unchanged at 0.5%. I’m sure the Canadian economy is feeling the relief of the recent rise in the oil price. Remember that Canada is a very large producer of oil, and a low oil price can really hurt the Canadian economy. Let’s look at an oil chart:
US Oil Weekly Chart
This is what we call an inverse head and shoulders pattern which is a reversal pattern. The idea is, that a break of the neckline would trigger the pattern which means the oil price could advance even further. The Canadian dollar is highly correlated to the oil price, and a rise in the price of this hard commodity would definitely be supportive to the Canadian dollar.
Traders who are interested in engaging in short positions on the USD/CAD might want to wait for the price to form a retracement first. When we look at the recent decline on a small timeframe like an hourly chart, it is evident that this recent bearish move is somewhat extended. I don’t like selling a financial instrument when its price is far below the 20-EMA like it is on the USD/CAD at the moment (on an hourly chart).
The Canadian dollar wasn’t the only major currency to gain against the US dollar last week. The Australian dollar managed to close the week with a gain of about 14 pips against the US dollar. Now as I mentioned earlier in this article, the US dollar was pretty strong last week. So to have been stronger than the US dollar took a lot from the Aussie last week, even though it was only slightly stronger than the US dollar. Let’s look at a daily chart:
AUD/USD Daily Chart
Here you can see that the 200-day moving average is below the current price, which means that the pair can be considered to be in an uptrend. At the moment this pair is not easy to trade because it is moving sideways. Nevertheless, traders who like position trading (long term trading) could find some good opportunities to open long trades in the next week or two. There is a beautiful trend line all the way back from the beginning of the year that has been supporting the price very well. If this support holds, we could expect further upside on this pair, especially if the fundamentals start to look more positive for the region. Look at the following chart:
USD/CAD Daily Chart
What I like about these technicals, is that the 200-day moving average and the green trendline are aligned. This could add to the solidity of this support zone.
At the moment, the retail sentiment on this pair is quite flat, which means that we could perhaps see some more range-bound price action on it in the next few weeks. On the other hand, the currency market can change in the wink of an eye. There are some important events that could possibly move the Aussie this week. The first is a speech by the new RBA governor Mr. Philip Lowe on Monday evening at 21:10 GMT. Then the RBA meeting minutes will be in focus early on Tuesday morning at 00:30. Some other events that could move the Aussie this week are the Australian employment change and their unemployment rate that are to be released on Thursday morning at 00:30.
EUR/USD Daily Chart
This pair has sold off quite aggressively in the last week. The move is somewhat overextended at the moment, so although I like the short side of this pair, I would like to see a decent pullback first before I enter any new short positions on it. Be warned that Thursday could be a very volatile day for the Euro. The ECB (European Central Bank) have their interest rate decision at 11:45 GMT as well as a press conference at 12:30 GMT.
GBP/USD Daily Chart
We’ve seen some inside price action these last few days. At the moment we can only be bearish on this pair if we look at the technicals. Perhaps we could get some kind of a retracement in the days ahead which could offer a better level to sell the pair at. This pair has been extremely volatile these last couple of days, so be careful when trading it, or any pair that involves the British pound.
The BOE (Bank of England) has lately been concerned about possibly overshooting their inflation target. Their concern is a result of the aggressive devaluation of the pound. Because of this concern, the BOE might be careful to further reduce their benchmark interest rate and to increase economic stimulus measures. This could be pound positive, but the economic risks that surround the Brexit would probably outweigh its effect on the pound. Hence the fundamental picture of the pound remains bearish, and although the price might be quite oversold at the moment, the currency could still lose a lot of its value over the short to medium term.
On Tuesday we have UK CPI numbers out at 08:30 GMT.
On Wednesday there are UK employment numbers to be released at 08:30.
Thursday brings us retail sales numbers out of the region which is also released at 08:30.
All of these are important events to watch as they can give us a glimpse of the UK economy’s health.
Furthermore, there are quite a few speeches by FOMC members this week.
Early on Monday morning, the BOJ governor Kuroda will also deliver a speech.
Have an excellent trading week!