Time For The Loonie To Pick Up The Dollar Baton

As London traders bask in the mini spring heat wave, financial markets are also enjoying a little quiet. The S&P 500 is still banging on the door of the record highs set earlier in the year, but there is no sense of urgency right now.

S&P 500 Weekly chart

The same can be said of the US Dollar. The second half of 2014 saw a near relentless rise in the Greenback, but now the dollar index isn’t sure where to go. The US is still likely to be one of the first Western nations to raise interest rates, but expectations are now edging further into 2016 for this to happen. Below par US unemployment claims, flash manufacturing PMI and new home sales on Thursday all added to the dollar’s heavy burden.

US Dollar Index

During this time, the euro has steadfastly refused to collapse despite the precarious satiation in Greece. At the same time, oil prices have steadily climbed off the March lows just above $40 barrel.

The latter has been of particular significance as collapsing oil prices (as measured in US dollars) have been a significant factor in the dollar inflation of 2014.

Oil weekly chart

Oil prices still have some way to go to recover the highs of June 2014 of over $105 a barrel, but the recovery has been consistent over the past six weeks.

This recovery has been a balm for the beleaguered Canadian dollar, which relies heavily on oil prices as part of its export portfolio. In fact, the Canadian dollar is the best performing dollar pair over the last 20 trading days.

USD/CAD

It’s been a long, hard climb for the USD/CAD since reaching parity back in 2012. The pair peaked at around 1.27500 just a month ago, but since then there has been a rapid decline in favour of the Canadian dollar.

This month we’ve seen a string of mostly positive Canadian economic releases starting with a smaller than expected trade balance on the 2nd. Since then we’ve had employment increase by 28.7k and the unemployment rate drop to 6.8%. The icing on the cake has been Core month on month CPI hitting 0.6% for the second month in a row.

Canada is not without its own problems, but if the dollar continues to fumble for direction, there could be more downside ahead for the USD/CAD .

A good way to play this is a LOWER trade predicting that the USD/ CAD will close below 1.2100 in 21 days time for a potential return of 116%. Put another way, betting that the USD/ CAD will close below 1.2100 on May 14th could return £21.62 for every £10 put at risk.

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