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Oil Prices, Virus Concerns & Q4 GDP In Focus For CAD

February 24, 2020


– Hi, guys, and welcome to
another Week Ahead video. Now, in this upcoming week,
we’re gonna turn our attention to the Canadian dollar. We think there’s a couple
of events there that can really create some great
earning opportunities for the CAD. First one is the ongoing
concerns about the Coronavirus, and what type of impact that’ll
have on the global economy, and more specifically,
on global oil output. Remember that the Canadian
economy’s very oil dependent, so any major shift in terms
of oil demand, or oil prices will affect the CAD, so we’ll definitely be paying attention to that. Also, we have the modal. Basically, the ongoing rail
disruptions that we’ve seen in the Canadian economy. That can pose some additional
concerns, so if we get any further aggravation,
or deescalation of that, that can also provide an
opportunity for the CAD, and then, more specifically,
in the economic data, we also have Q4 GDP
coming up later this week, which will be a very,
very important release for the BoC’s upcoming
meeting in early March, so that is the event that
we’ll be paying attention to for the CAD in this
week, so join me now by jumping into the video to see
exactly how we can prepare for these events, and
hopefully, trade them in the upcoming week, as well. Okay then, looking at the
baseline for the Canadian dollar, now, currently, our
fundamental bias for the CAD remains bearish, and that is
due to a couple of reasons. Firstly, we saw the Bank of
Canada make a dovish tilt back in the January meeting
by keeping rates unchanged at 1.75%, but basically,
explaining that the door is now officially open
to a potential rate cut down the line. The reason for that was given
due to the recent slowdown that they’ve seen in economic growth. Now, even though the
economy has been resilient, some indicators like consumer
spending, and investment, business investment has
been unexpectedly soft. Now, according to the BoC,
the decision on whether they will go through
with a potential rate cut later this year hinges
on the incoming data, and the bank also lowered
its Q4 GDP projections from 1.3% to just 0.3%,
and then, also revised their Q1 2020 projections down
to 1.3 from prior of 1.7%. Now, Governor Poloz did
explain that they perceived the current slowdown in growth, that it might only be
temporary, but the incoming data will be the deciding factor. Now, looking at some of the
recent data in more detail, there has been a few improvements
in terms of economic data. The first example was the
most recent jobs report, which did show a decent
beat in headline jobs, which was mainly driven
by full-time employment, which was a positive. We also saw another jump
in wage growth, as well, which is a good sign for real wage growth, and should, at least, be
theoretically positive for consumer spending as
more people, as more money in people’s pockets should
lead to more excess cash, and that should lead to more
spending in the global economy. Now, apart from that, we
also saw a further move lower in the unemployment rate to
5.5% from a prior of 5.6%, also coming in below the
market’s minimum expectation. Now, even though headline
CPI for January came in hot at 2.4%, the CPI trim and
median remained above 2%, but we did see the CPI
Common, the more important one of the three inch edge back to 1.8%. Now, the drop in CPI Common
should be significant for the BoC because the BoC
calls that the base gauge of economic, of the
economy’s under-performance, and will garner more attention from them, compared to the higher headline number. Now, looking at GPD more specifically, it’s easy to see why the BoC
would be worried about growth. The Q3 GDP year over year print of 1.65% has more than halfed
from the high that we saw back in June 2017, coming in at almost 4%. Now, the more recent
negative developments were things like the
Coronavirus, as well as the railroad disruptions, poses
an additional uncertainty in the Canadian economy,
which is also something to keep in mind. Now, even though the fallout
from these complications are currently expected
to be more temporary, they do still tilt the
risks to growth further to the downside. Now, another consideration
for the Canadian dollar is oil prices. Oil prices have suffered
a massive downside in the wake of the virus,
and oil prices seem to have stabilized on hopes of more
possible OPEC outcuts lately, but an aggravation of the virus does pose a further threat to global
oil demand, and thus, to the Canadian economy, and could, thus, impact the Canadian dollar, as well. Now, with all the recent
developments, markets are still pricing in a 68% probability of a rate cut by the BoC as soon as June,
but these probabilities for a cut has decreased
from the levels seen directly after the BoC’s
January dovish tilt. Now, looking at the baseline
for the upcoming risk events, the main highlight for the
CAD this week will be Q4 GDP numbers, but we also need to pay very, very close attention
to further developments in the Coronavirus, as well as the railroad disruptions now. Oil prices has lost tremendous
ground in the past few weeks due to the expectations
that the demand outlook has substantially weakened as
a result of the Coronavirus. Now, the drop in demand stems
from the fact that China, the world’s largest oil
importer, has been on a basic lockdown due to
the virus, and according to ING investment bank, China’s
total oil consumption has increased to almost
14% in 2019 from just 7% back in 2003 during the SARS virus, so China, this time around,
does play a much bigger role in terms of global oil demand. Now, as an oil dependent
economy, this does pose a risk for the Canadian
economy, as well as the Canadian dollar, and
this week saw more attention being placed on places
like South Korea and Japan with regards to the virus,
compared to something like China. Now, where it comes down to
Q4 GDP, there are a couple of important considerations
to keep in mind, as well. The first one is that the current baseline for the event is currently
sitting at 0.3% for the quarter, the quarter print. Now, this is also the
projection given by the BoC at their January meeting,
so we definitely need to see whether that number comes
in way above, or way below that 0.3% target. With the next BoC meeting scheduled for the fourth of March, this
week’s events with in mind the GPD, as well as oil
prices, as well as Coronavirus, and the railroad disruptions,
will be very important for markets to make up their
mind about whether the next, the BoC’s next monetary
policy move might be in March, or maybe pushing it out
to later in the year. Now, some possible dovish sentiment shifts that we can expect from the CAD this week, now, apart from a possible
big mess in the Q4 GDP, the potential impact of the Coronavirus and rail disruptions
does pose another risk to the Canadian economy,
as well as the CAD. Now, if we see further
massively negative developments with more widespread impact on oil demand, that could lead to further
pressure on oil prices, and thus, the Canadian
dollar, especially with the failure from OPEC+ to agree
on further output cuts over the last two weeks. Now, this upcoming week,
the market will turn their attention more to South Korea, and Japan, away from China, with
regards to the virus, as both countries are
experiencing a drastic rise in numbers of confirmed virus cases. Expect any drastic negative
escalations to cause a further risk of sentiment in the market, which should be a negative
for the Canadian dollar in the short-term. Now, with the market and the BoC expecting a much lower GDP print
rating, the big question for this week’s Q4 GDP will
be by how much the actual print deviates to the
up, or to the down side from that expected 0.3%. Now, the BoC made it very, very clear that they will be closely watching to see whether the recent slowdown
in growth is more severe than they expected before they
pull the trigger on rates. That’s if we do see a miss
well below the current BoC’s 0.3% projection,
and especially a potential contraction below the
market’s minimum expectation of 0.0%, that would
probably increase rate cut expectations in the
short-term for the BoC, and see a short-term
opportunity to sell the CAD. Now, with the highest
conviction trading opportunity for the CAD this week
should arise from a miss in GDP, and we would also
want to see an overall risk-off tone in the
markets, or a potential move lower in oil prices to
provide an additional tailwind to the downside for the Canadian dollar. Then, looking at the possible
hawkish sentiment shifts, the biggest focus for possible
hawkish sentiment shifts will fall on oil prices, the Coronavirus, as well as GDP data if we
see any positive development with regards to OPEC+ reaching consensus on implementing any additional output cuts that can see further
upside for oil prices, and would be a positive
development for the CAD in the short-term. Also, with the Coronavirus
attention now tilting back, or tilting towards South Korea and China, any positive changes
showing lower numbers, or big breakthroughs,
positive breakthroughs with containing the virus
should also be a positive sign for markets, and that
should put the markets in an overall risk-on
tone, which should provide support for the CAD in the short-term. Then, also turning to the
GDP data, we would need to see a print well above
the BoC’s 0.3% projection to see a significant repricing
in rate cut expectations. Now, a bigger than expected
print will feed into the more positive data we’ve
seen in the labor market, and might suggest the BoC is right in the current expectations
that the current slowdown they’ve seen in growth
is, maybe, more temporary. Now, for the highest
conviction trading opportunity on a beat in GDP data,
we would want to see an overall risk-on tone
in markets, or a potential move higher in oil prices
to provide an additional tailwind to the upside, if we have that beat in GDP, as well. Now, how we can look to
trade the CAD this week, now, in the case of a
dovish sentiment shift, we could look to pair
the CAD against something like the Kiwi dollar, which has
a fundamentally bullish bias due to the RBNZ’s recent neutral tilt towards monetary policy. Now, a very important
consideration here is that we need to pay very close attention to the overall risk tone. Recent price action in
something like the Aussie CAD, and in this example, the
Kiwi CAD, saw that the CAD did outperform the two
antipodeans by quite a big margin, and the reason for this is because Canada relies far less on exports
to China when compared to a place like New Zealand,
as well as Australia. Thus, if we do see any
significant risk of sentiment, that’ll be more supportive for the CAD, compared to something
like the Kiwi dollar, and if we then see a
dovish shift in the CAD, we could rather much look
to pay the Canadian dollar against something like
the U.S. dollar, which has been well-supported in the
short-term due to a string of positive data points. Now, in the case of a
hawkish sentiment shift, we could look to pair
the CAD against the Euro, which was pressured in the last two weeks due to a stronger U.S. dollar,
as well as a reawakening of fears about EU growth
prospects, and also, remember guys, that these
trade recommendations are based on the current fundamental bias for each of these currencies
at the time of writing, and can, obviously,
change through the week, so do make sure to re-evaluate whether the short-term sentiment is still valid for these currencies
before taking any trades. Now, the type of trades
that we would look to trade with a dovish, or a
hawkish sentiment shift is called phase one trades,
and if you want to learn how phase one trades
work, you can check out our news trading strategy
playlist on our YouTube channel, where we post weekly trade examples of how these type of trades play out. After a phase one move,
we can also look for a possible phase two pullback
of that initial move, and we do post updates on
these inside our tradable sentiment shift reports inside
the Forex Source Terminal under the market insights
tab, and you can see each day which sentiment
shifts are still in play, and which ones are still valid for trading any phase two pullbacks. You can also learn about
how these setups work during our live analysis webinars each day inside the Forex Source Terminal.

3 Comments

  • Reply naleen j February 23, 2020 at 2:25 pm

    Great ๐Ÿ‘

  • Reply Cap II February 23, 2020 at 5:04 pm

    Thank you soo much sir..

    I have this question, based on GBP since data came out positively so what can be expected on its bias or we need to wait for next meeting? Or brexit trade deal will be a concern?

  • Reply zohaa zafar February 23, 2020 at 8:11 pm

    Very educational thanks!

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