Canadian Dollar Crossfire

Two events in the day ahead could make for a volatile day of trading in the Canadian dollar. As the quarter began to wind down on Monday, the US dollar was in heavy demand to lead the way while the Australian dollar lagged. Japanese labor cash earnings and Australian private sector credit are due up next.  New Premium trades for the week will released on Tuesday.

USD/CAD rallied for a second day on Monday but it was largely driven by broad US dollar strength. What happens in the day ahead will be critical for the loonie.

The major geopolitical event takes place in Switzerland where negotiations about curbing Iran's nuclear program face a self-imposed deadline on Tuesday. A US State Dept spokeswoman said the chance of a deal is 50/50 but murmurs from other corners suggest the likelihood is higher.

The details or the agreement will matter over time but it's basically a question of 'deal or no deal' for Tuesday oil trading. A positive resolution, even one that doesn't bring Iranian oil fully back into the market for more than a year, will spark immediate crude oil selling. In turn, that will pressure the Canadian dollar and boost USD/CAD toward 1.2800.

The other factor is the January GDP report. Canada is one of the few countries to report on GDP monthly. It's not always a big market mover because it lags but the BOC has been warning about soft growth. On Monday, Poloz said the first quarter of 2015 will look 'atrocious' in the third such warning from the BOC in the past week. Maybe they're trying to prepare markets for a soft reading Tuesday.

In the event of a soft report and a nuclear deal, the level to watch in USD/CAD is 1.2835, which was the cycle high set earlier this month.

In the shorter-term, we urge traders to be careful of a thin market with Japan's fiscal year wrapping up and the quarter coming to a close. The first highlight on the calendar is Fed vice chairman Fischer speaking at 2115 GMT but the topic is shadow banking so it could be low key.

AUD traders show focus on Feb private sector credit numbers due at 0030 GMT. The consensus is for a 0.5% m/m rise. An hour later, wage inflation numbers from Japan are due; labor cash earnings are expected to rise 0.7% y/y. A higher reading would add to the case for tentative JPY longs.