A surge in oil and better GDP turned the technical picture.
USD/CAD bulls were poised for victory yesterday as Iran negotiations looked to be headed toward success, oil prices were stumbling and Poloz had warned about 'atrocious' first quarter GDP.
Instead, Iran negotiations have hit some kind of roadblock and oil prices are up 5%. The trigger in the turnaround, however, was GDP as it fell just 0.1% compared to the 0.2% consensus contraction and far better than the atrocious reading that fast money traders were looking for.
Technically, the GDP news couldn't have hit at a worse time. The pair was at the highs of the day and testing a firm line of resistance from 1.2795 to 1.2835.
USDCAD daily chart with 55-dma
The downside is now focused on support around 1.2500. The key level is the 55-day moving average. It has been an important level throughout the USD/CAD rally. In the second half of 2014 it was repeatedly tested and held. It was tested again last week but there hasn't been a close below it since July.
What's the trade?
From where I stand, the trade hasn't changed. The US dollar is one of the best bull markets over the past 5 years and unless the Fed abandons its easing bias, it won't end soon.
The kind of consolidation in USD/CAD that we're seeing after a major rally is normal. It's no surprise that oil is in the midst of a similar consolidation phase.
Fundamentally, the Canadian dollar is still damaged. Just because a single month of GDP numbers were strong, doesn't mean the Canadian economy will avoid a shock from the collapse in oil prices (if not housing prices). Layoffs are coming and some extremely soft data from a harsh winter is still in the pipeline.
The new quarter is still sorting itself out but once it does, the US dollar will resume its climb and USD/CAD will as well. Look to buy closer to the 55-dma with a stop below 1.2352.
