Strong Weak FX: US Dollar Shows Strength, CAD Weakens on BoC Caution

Key Highlights:

  • USD rose earlier in session, could test #1 spot shorts as UST 2Yr Yields hit 9-year high
  • Loonie likely to weaken from #2 spot as BoC’s Poloz favors caution in future hikes
  • EUR is sliding down SW rankings as bearish signals build
  • IGCS favors not fighting bounce in USD/CAD as short positions climb 26% w/w

Strong Weak Analysis is a way to identify momentum in the FX market. Trend traders rely on spotting and riding momentum as it develops and looks to benefit from trends extending, as many do. It’s also worth noting when the strength of a trend is waning, which Strong Weak analysis can also benefit.

Each day will bring you an index of strong and weak currencies as identified via the methodology in our article, ‘How to Create a «Trading Edge»: Know the Strong and the Weak Currencies.’ I will also share with you sentiment developments via IG Client Sentiment that can provide additional insight to help you decide what trends could extend.

Strong/ Weak Index: September 27, 2017

Highlights:

-The US Dollar’s gains continued on Wednesday as the US Treasury 2-Year Note Yield was at the highest level in nine years. Global bond yields were higher, but given the concentrated short position in the USD, the unwind looks set to continue as economic surprises look set to continue after Fed Chair Yellen recently said the Fed should not delay on further hikes despite inflation prints being below expectations. DXY has moved higher by over 1% this week. Details of President Donald Trump’s tax plan also helped to provide a push to sell bonds, pushing yields and the USD higher.

-The Canadian Dollar seemed ripe to continue the strong gains it has experienced since early May. With only 45% of a Bank of Canada rate hike probability priced into the market, and with WTI Crude Oil in a renewed Bull market, and Canadian terms of trade near the top of a 34-month range a hawkish Poloz seemed probable, but such did not play out. Instead, Governor Poloz warned of caution going forward that gave way to a 1% drop in the CAD against USD

-In Europe, news emerged that the conservative German Finance Minister Wolfgang Schäuble is set to exit the country’s finance ministry after an embarrassing performance in the weekend’s election that cut heavily into the Christian Democratic Union of Germany’s majority while giving a voice to aggressive right-wing voices that have clouded Germany’s past. This development seems to further encourage the rough month that EUR bulls have had as EUR is expected to end the month lower for the first time in seven months.

-The New Zealand Dollar gave up some of its gains later in the session after the RBNZ rate announcement kept rates at 1.75%. The headline was the continual talking down of the currency when the RBNZ reiterated the uncertainties on the horizon and the view that a weaker NZD would help the economy. The statement was provided by acting governor Grant Spencer.

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IGCS Highlight: USD/CAD sentiment showing further upside favored

USDCAD: Retail trader data shows 58.7% of traders are net-long with the ratio of traders long to short at 1.42 to 1. In fact, traders have remained net-long since Jun 07 when USDCAD traded near 1.35095; price has moved 7.8% lower since then. The percentage of traders net-long is now its lowest since May 28 when USDCAD traded near 1.34477. The number of traders net-long is 3.6% lower than yesterday and 23.0% lower from last week, while the number of traders net-short is 7.3% higher than yesterday and 25.3% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDCAD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current USDCAD price trend may soon reverse higher despite the fact traders remain net-long (emphasis added.)

For a deeper explanation on what’s been shared above, please join the FX Closing Bell Webinar with Tyler Yell

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