EURUSD: Range trading with new dips - What’s going on with CAD?

EURUSD: Range trading with new dips – What’s going on with the CAD?

EUR/USD: Range trading with new dips

(Vasilis Tsaprounis – TopFX)

New twenty-year lows for the common European currency as it broke down and the 0,9900 level.

The European currency is under pressure after the announcement of new jobs in the US economy on Friday.

Once again we had trap behaviors for the pair since in the wake of the announcement the pair initially moved strongly upward , to come under intense pressure afterwards.

After hitting a new lows at 0.9880 some signs of a reaction have appeared again with the exchange rate retracing above the 0,9900 level.

Markets seem strongly affected by the energy crisis affecting Europe and the burdened psychology acts as a weight for the common currency.

At the moment several data are against the European currency such as the latest developments for a ceiling on Russian oil prices and Russia’s reaction to this development and also the expected aggressive policy from the Fed.

Nevertheless, the sensitivity to market surprises remain , like the possible increase in interest rates by 75 points on coming ECB meeting , but the possibility for this is low as the EU economy is under heavy questions.

In such environment there are favorable conditions for exploiting the range of variation of the pair , as the reactions of the European currency continue to exist with great fidelity after the dips.

Today is also market holiday in the United States which may limit large positions by traders but leaves open the possibility of executing stop loss orders due to calm market.

In general we expect pressures to be limited and reactions from Euro will remain in the game.

What’s going on with the CAD?

(Giles Coghlan LLB, Lth, MA – HYCM)

This week the BoC meets so it is a good time to see what’s been driving the CAD. Take a look at the CAD index and you can see that since the start of the year CAD has been steadily gaining.

Those gains have been mainly due to higher oil prices and aggressive interest rate hikes from the BoC.

Higher oil prices support the CAD

If you look at the same chart below, but with oil prices included in the green, then you can see that oil prices heavily influence the CAD. Rising oil supports the CAD and falling oil weakens the CAD.

Monetary policy

In July the Bank of Canada front-loaded interest rates by 100bps in a surprise move. At the time we recognised that a lot of the expectations for higher interest rates have already been priced in and we were not expecting much further upside in CAD. This turned out to be the case with CAD coming off its highs and drifting lower despite the 100bps hike.

What’s the opportunity for the BoC this week

The best opportunity for the BoC this week will be if the Bank starts to raise concerns about the medium-term growth outlook. Any expectations that growth is slowing in the US (Canada’s major trade partner) should weigh on the outlook for CAD. Any hint that the path of rates will have to slow whorl also weigh on the CAD. With so much aggressive policy tightening priced in the strongest reaction here is likely to come from a dovish response. A good currency pair to consider shorting on a dovish reaction could be the CADCHF pair.