CAD on a Cliff Edge, USD in Demand

The Canadian dollar hit a six-year low on Friday but that could turn to a 10-year low this week. The US dollar and pound were easily the best performers last week while the euro and kiwi lagged. CFTC positioning showed a jump in US dollar longs except in one conspicuous spot.

Bank of Canada Governor Stephen Poloz came to the bank of Canada from Export Development Canada. He's really should have valuable contacts with exporters. Yet he's consistently over-estimated how much Canada could sell abroad.

The takeaway from recent Canadian trade data and the BOC press conference was how disappointing exporters have performed despite a 22% rise in USD/CAD year-over-year.  That might just be a lag but USD/CAD first struck 1.28 in January and the early returns aren't encouraging.

The level to watch in the days ahead is the crisis high of 1.3065 (spot at 1.2972). If it breaks, there is very little resistance to slow the march of the pair. It could come in tandem with a break in oil prices. On Friday, WTI crude fell below the July low and is flirting with $50/barrel.

It's beginning to look like the perfect storm.

China is the x-factor at the moment. Shanghai stocks gained 1.6% last week in a less-volatile week of trading but they could erupt or break down any moment. Otherwise, the week will begin with a quiet tone because Japan is on holiday and the calendar is light.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR -108K vs -99K prior JPY -47K vs -64K prior GBP -24K vs -23K prior AUD -34K vs -22K prior  CAD -41K vs -32K prior CHF +3K vs +6K prior

It's no surprise that USD longs are rising and we expect them to continue rising. What stands out is the failing conviction in USD/JPY longs.  The market may have been wrong-footed by the recent correction and is searching for a quicker trade in euros or commodity FX. That may prove to be a mistake.