Published: Tue, 17 Feb 2009 20:40:34 +0100

USD/CAD Heading for 1.30 as Risk Aversion Swells, Strategists Say

(CEP News) - The recent fall in the Canadian dollar has many strategists suggesting that USD/CAD could test the 1.30 level in the short-term.

USD/CAD was trading up 1.93 cents to 1.2618 as the plunge in stock markets worldwide has ignited a flight-to-quality trade.

"The avalanche of bad news globally continues to pummel oil and stock markets worldwide, boosting the greenback at the expense of other majors," said strategists at CIBC.

"The loonie stays on track to our 1.30 target by end of quarter," they added.

Shaun Osborne from TD said the recent push through low- to mid-1.25s exposes the 1.27-1.30 range. The pair pushed through the 1.25 level in the overnight session as equity futures markets started to fall.

Canada's TSX was down 268 points, or 3.10%, to 8405.39 as U.S. indexes test November lows. The S&P500 index is down 32.97 points, or 4%, to 793.87 and the Dow Jones Industrial Average is down 263 points, or 3.35%, or 7581.20.

"CAD finally weakened through the 1.2500 level in USDCAD and we look at 1.3000 as the next key resistance for that pair," said strategists at Saxo Bank. "As we have long mentioned, the idea that the side of least resistance is to the upside while the pair has remained mysteriously rangebound."

Strategists at Caylon said that although the Canadian dollar looks "very vulnerable" in the short term and that further losses are likely, the medium term - meaning beyond one month - looks more promising.

"We look for the USD eventually to turn around as risk appetite improves and growth concerns ease," they said.

CIBC strategists noted overall USD strength, which started in the overnight session, caused the recent rally in USD/CAD. "A Dutch bank was cited as an aggressive USD buyer during the London session, while one domestic name had solid USD selling interest," they wrote in an early research note to clients.

The U.S. dollar is firmer across the board with the euro setting a new low for the year. EUR/USD was last trading down 2.08 cents to 1.2595.

"Warnings from Moody's about Western European bank exposure to Eastern European countries, including banks in Sweden as well as the core euro zone countries, Austria and Belgium, has weighed on the euro as well as the Scandis," said strategists at BBH.

Canada's economic data has come out on the downside as the economy plays catch-up to its largest trading partners.

Last month, Statistics Canada reported that 129,000 were lost in January, while the country also posted its first trade deficit in 33 years.

"The fact that Canada's long-envied twin surpluses have transformed into twin deficits is not in itself a surprise. This had seemed rather likely ever since markets and economies took a turn for the worse in 2008," said a report from TD Bank.

"But the speed with which it all came together was still rather blinding, as the Department of Finance had maintained its forecast for a slight federal surplus as recently as the late fall, and the trade balance itself only surged into the red in last week's report," they added.

Jacqueline Douglas at TD Securities noted that broad USD strength and M&A outflows from Canada have combined to drag USD/CAD decisively higher.

"With the market well above the recent short term range peaks in the low 1.25 area (now support zone), we would look for funds to push on towards the mid/upper 1.27s at least in the near term," she said.

Technically speaking, BMO strategists say the charts show that USD/CAD may be ready to retest the 1.30 level it tested in October, November and December of last year.

"We had a bullish weekly outside reversal last week and reaction has been swift in early trade this week with USD/CAD up 300 points from Friday's closing levels," they said, noting that the pair is currently trading above "daily pennant top" at 1.2618.

"Topside risks remain in place with a break of the January 1.2763 highs opening up a retest of the 1.3008/19 key triple top (Oct/Nov/Dec '08)," they concluded.

Despite the overall optimism in the direction of the pair, TD bank released a report saying that although their models support a "generally softer tone" in the CAD, their recent U.S. model suggests a general USD over-valuation.

"USD/CAD gains are liable to remain limited overall in the near term...we forecast an end Q1 USD/CAD rate of 1.25 or 80 US cents," the report says.

Traders now turn their attention to any possible comments by Bank of Canada governor Mark Carney when he appears live on BNN on Tuesday afternoon.

In terms of economic data, the next major release comes out on Friday when Statistics Canada releases the latest Consumer Price Index report. Economists expect a 0.2% drop month-over-month in the headline rate and a 0.10% drop in the core rate.

All data taken at 2 p.m. EST.

By CEP Newswire, news@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca