USD/CAD Breaks Out, USD Longs Hit High

Soft data on Friday added another reason for the Bank of Canada to cut rates sooner rather than later. The loonie was the weakest performer last week while the kiwi led the way. Japanese trade data kicks off the new week. A new note on USD will be issued to Premium subscribers ahead of the Asian session.

Click To Enlarge

The surprise from the BoC last week was that it actively discussed an immediate rate cut. The market had priced in just a 2.5% of a move so it would have come as a shock. Even the chance of a cut this year on in Q1 2017 was priced as a longshot so the market is doing a complete re-thinking on Poloz.

Now, there is a 13% chance of a cut priced in for December and 25% by the end of Q1. That may rise higher if economic data continues to disappoint. On Friday, Canadian retail sales fell 0.1% compared to +0.3% expected. The September CPI report was also low at 1.3% y/y vs 1.5% expected.

To compound it all, the Canada-EU trade deal looked to have broken down Friday but a new deadline was set for late Monday as a holdout Belgian region threatens a deal that took seven years to negotiate and was scheduled to be signed this week.

The inability of the EU to get the deal done is another black eye for the region and the European project. EUR/USD broke down below the June lows on Friday to the worst levels since March. The market is increasingly confident that QE will be extended and that the US is headed for a December rate hike. At some point, the risks of those ideas unwinding may be higher than the rewards of betting on them, but we're not there yet.

Commitments of Traders

EUR -93K vs -93K prior JPY +37K vs +46K prior GBP -91K vs -95K prior CHF -16K vs -9K prior AUD +30K vs +26K prior CAD -14K vs -12K prior NZD 0K vs -8K prior

The overall US dollar net long is at the most extreme since January as the market piles into euro shorts and continues to quickly pare back wages or yen strength.

Even though euro shorts are now in triple-digits, it's still a long way from the -190K extremes from last December.