The Canadian dollar is the best performing major currency on the day
There are a couple of reasons to be a little bullish about the loonie as we start the year. Firstly, the technical break of the trendline support in USD/CAD is supportive of further downside pressure. Secondly, oil prices are looking to stabilise with price moving back closer towards $50. And lastly, markets are severely under-pricing any form of a hawkish tilt by the BOC tomorrow.
The two latter fundamental factors are only supporting the technical break of the trendline support since October and that presents a good case for further downside pressure in USD/CAD for the time being. Sellers will now be eyeing the September high @ 1.3226 as the next key level in the pair as it hits a session low of 1.3268.
The Bank of Canada isn't expected to hike rates in tomorrow's meeting decision but markets are not really considering any major hawkish tilt by Poloz & co. tomorrow just yet. That opens up an opportunity for a further upside surprise for the loonie. In a worst case scenario, the central bank just sticks to the status quo and the loonie is very much left where it is.
I reckon even acknowledgements of the risks faced by the global economy wouldn't be too harmful to the loonie at this point as that is very much well documented in the price of the currency, oil and markets in general already.
That said, the technical break of the trendline support is the major bullish factor in the loonie for me. Unless the dollar pulls off a stunning reversal to the losses sustained at the start of the year, a continued downside move in USD/CAD remains the way to play the pair for me.
In any case, watch out for pullbacks towards the broken trendline for further short opportunities. As mentioned yesterday, this pair is very much a good example of the trading principle "risk a little to make more than a little" to start the year.
